Foreign Direct Investment (FDI) Promotion and Arbitration

Prof. Dr. Paniagua discussed the effects of international arbitration reform on a country’s foreign direct investment (FDI) and trade. He said that international commercial arbitration is a system of private commercial law that enables firms to more effectively enforce contracts by allowing them to avoid inefficiencies that arise from domestic courts. As a result, access to international arbitration should foster FDI. To explain the effect of international arbitration on FDI, Myburgh and Paniagua (Journal of Law and Economics, 2016) developed a model to explain the use and effect on FDI of resolving international disputes through arbitration. The predictions of the model are tested empirically in a gravity framework with a large panel of contries during the last decade. The results of this analysis suggest that access to arbitration through the New York Convention on arbitration leads to an increase in new FDI flows. This increase largely occurs through a change in volume of investment with a much smaller effect on the number of investment projects. The effect of arbitration is greater for countries with transitioning institutions and for larger investment projects.