Heterogeneity in Investor Response to Investment Disputes: New data on greenfield investment with Erica Owen and Yoo Sun Jung. Forthcoming. Journal of Politics.

Do investment disputes lead to lower foreign direct investment (FDI)? Recent studies argue that disputes make potential investors view the host country as riskier. Yet, a dispute, which reflects economic harm to the disputing firm, may signal new economic opportunities to firms hoping to enter the same industry. The competing pressures of risk and reward mean that the impact of disputes on FDI is ex ante unclear. However, we argue that the balance of risk and reward varies across industries. Specifically, we expect that rewards are increasing as a function of industry fixed costs. We test our hypothesis using new data on industry-level greenfield FDI between countries from 2003 to 2015. We find that a co-industrial dispute reduces investment in industries with low fixed asset intensity but not high fixed asset intensity. Overall, the results highlight the importance of theory and data that allow for heterogeneity of investors.


"The Effect of Norm Dynamics on the Relationship between Foreign Direct Investment and Environmental Regulation." with Jeonghun Min. 2019. 세계지역학회논총 (The Korean Journal of Area Studies). 37 (3): 343-363

The relationship between foreign direct investment (FDI) and host country environmental regulation has been controversial. The Pollution Haven Hypothesis assumes that countries are more likely to keep lax environmental standards to attract FDI. In contrast, the Pollution Halo Hypothesis states that more stringent environmental regulation is more attractive to multinational corporations (MNCs) which applies global environmental standards. This study seeks to provide a new bridge to fill the gap between two theories by focussing on how the normative context interacts with the behavior of MNCs. Environmental norms of a home country shape MNCs' belief about appropriate behavior. I argue that stringent environment regulations of home countries motivate corporations to act as a norm entrepreneur in host countries, while MNCs also seek for the cost-efficient way of transborder production. Hence, the stringency level of environmental standards in home countries moderates the effect of FDI on the environmental regulation of host countries. The empirical evidence from the FDI flows of 1765 country-dyads from 2005 to 2012 supports the argument. FDI from a country with higher environmental standards contributes to more stringent environmental regulation in host countries. In addition, technology level of home countries is also positively associated with the stringency level of host country environmental regulation.

"Preventive Restriction of FDI Outflow: The Relative Gains Problem in FDI Dyads."

with Jeonghun Min. 2018. 국제관계연구 (Journal of International Politics). 23 (1): 127-154

Previous studies of foreign direct investment (FDI) concentrate on favorable investment environments to foreign investors such as political stability and economic performance of a host country. However, they fail to explain the reduction of FDI flows to a host country despite its investor-friendly conditions. This paper addresses the relative gains problem that hinders stable international cooperation due to concerns regarding the amount of which others gain. We argue that home countries adjust the amount of FDI flows as their trading partners grow powerful enough to challenge them. We examine 2744 FDI dyads from 1985 to 2012. The results of the analysis show that when the economic power gap between a FDI dyad becomes narrower, the home country reduces the amount of FDI outflows to the host country. Trade openness of the home country moderates the effect of relative gains concerns by increasing the cost of protective foreign economic policy.

Working Papers
"The Location of Extractive FDI and Armed Conflicts"

Foreign direct investments (FDI) in mining industries play a key role in the development strategies of many countries. Yet, mines are vulnerable to insurgent attacks, and it has been argued that these investments may promote civil conflict. Using georeferenced data of armed conflicts between 1998 and 2010 near 6,222 mining facilities, this paper investigates the probability of extractive FDI affected by armed conflict. This paper claims that foreign ownership has a prevention effect on armed conflicts in regions where mining facilities are located. Armed groups increase the risk of international military intervention after seizing foreign-owned facilities. This expectation of foreign intervention in conflicts discourages both insurgents and national governments in fighting near regions where foreign-owned mines are located. Using a difference-in-differences design with kernel-based propensity score matching, this paper shows that the fear of military intervention outweighs incentives of attacking foreign-owned mines. In addition, the prevention effect of foreign ownership is strengthened by the military capability of foreign miners' home country.

"Corporate Lobbying and Investor-State Disputes"

Why do some firms use investor-state dispute settlements (ISDS) more frequently than others? This paper provides a mechanism to account for the origin of such disputes. It argues that firms with political clouts with the US government are more likely to initiate an ISDS, as they expect the US to intervene in their favor. This article uses lobbying activity as a measure of influence with the US government, and the arrival of the Honest Leadership and Open Government Act of 2007 as an intervention that changed the ability of host governments to identify politically influential firms, and adequately adapt their policies to avoid disputes. Therefore, the number of ISDS decreases if the lobbying information becomes publicly available. However, the number of non-lobbying firms' ISDS does not significantly increase after the change because their probability of winning remains unchanged. The theoretical arguments of this research are tested by a difference-in-difference design using the original dataset of lobbying and ISDS of 2,395 billionaire firms around the world. The finding holds across different measures of corporate lobbying.

"The Logic of Mixed Results: Domestic Institutions, International Investment Agreements, and Foreign Direct Investment"

Although extant studies have revealed the positive influence of IIAs in increasing FDI flows, there has been less attention to the mixed findings in the literature on whether IIAs bring greater FDI flows to countries desperate to improve the credibility of their property rights institutions, or to countries which already have credible institutions. By using a game theoretic model, this article provides a novel explanation accounting for these two mixed findings. The model suggests that the maximum level of risks that a firm will accept is determined by the size of ex post costs and compensation awards. As a result, an IIA benefits countries with strong institutions more, if compensation awards are limited and ex post costs are too small for a host with poor institutions to improve its credibility. Second, an IIA is substitutive for poor quality property rights regimes if the IIA promises (1) over-compensation but not with too high ex post costs, or (2) sufficiently large ex post costs with limited compensation. Third, there will be no relationship if the IIA pledges large ex post costs with over-compensation, or full compensation.

Politics of Stringency: Two Bargaining Tables in the Design of Investment Treaties

Why do some countries join IIAs with more stringent provisions, while others do not? Although the credibility-based literature is useful to understand countries' incentives to join highly stringent IIAs, its explanatory power is limited in accounting for lax IIAs. In this article, I present a bargaining game in designing a bilateral investment treaty (BIT) combining Rubinstein's alternating-offer bargaining game (1982) with the logic of Putnam's two-level game (1988) metaphor. The model provides novel explanations to account for the variation in IIAs stringency by capturing how domestic politics of both negotiating countries interact with international bargaining. First, developing countries have more incentive to join more stringent IIAs than developed countries, since their discount rate over the delay in bargaining periods is higher than that of developed counter partners. Second, domestic political constraints of countries in bargaining limit the stringency of IIAs. Third, leaders who are sensitive to the loss of policy autonomy are less likely to join IIAs. This paper validates these empirical implications with the comprehensive measure for the stringency of IIAs between 2004 and 2016.

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© 2015 by Gyu Sang Shim


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