The Importance of Defining Property Rights in Free Trade Agreements on Foreign Direct Investment

Martínez Trigueros Lorenza and Romero Hidalgo Roberto

No 2004-02, Working Papers from Banco de México

Abstract: This paper analyzes the negative effect of a weak property rights enforcement on Foreign Direct Investment (FDI), as well as the role of bilateral agreements as an alternative to counteract this effect. This positive contribution takes place not only by its effect on commercial flows but also because these agreements can improve the property rights enforcement. In this context, we propose the hypothesis that multilateral free trade agreements have a greater impact on the flow of FDI to countries with a poor enforcement of property rights. When these agreements include a chapter on dispute settlements with an arbitrage panel, they help to mitigate some deficiencies of the national institutions by allowing some conflicts to be solved in a panel of international members. The empirical results using a panel of 38 countries from 1980 to 2001 and including 203 agreements corroborate the proposed theory.

JEL-codes: F13 F15 F21 F53 (search for similar items in EconPapers)
Date: 2004-06
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