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DO INTERNATIONAL INVESTMENT AGREEMENTS PROTECT INVESTMENT? Petroleum Evidence
Srividya Jandhyala* email@example.com
Robert Weiner* firstname.lastname@example.org
International Business Department George Washington University
2201 G Street NW, Funger Hall 401 Washington, DC 20052
26 August 2012
Do international institutions institutions that transcend country borders reduce MNEs political risk?
We examine whether the presence of International Investment Agreements (IIAs), negotiated among
countries for increased foreign investor protection, lowers political risk for MNEs. We argue that IIAs
limit the ability of host governments to make discriminatory policy changes that adversely affect the
value of firms investments. However, the need for IIA protection, and the ability to benefit from it, vary
with firm characteristics, specifically financial resources and ownership. Using detailed transaction-level
data for sale of petroleum reserves in 45 countries, we find that MNEs pay significantly higher amounts
for assets protected by IIAs than similar unprotected assets, an effect moderated by the firms financial
resources and state ownership.
*We are grateful to JS Herold for data access, and the George Washington University CIBER for research support.
We would also like to thank Heather Berry, Witold Henisz, Steve Kobrin, Noel Maurer, Jordan Siegel, Jennifer
Spencer, and the seminar/conference participants at the Indian School of Business, The Fletcher School, Atlanta
Competitive Advantage Conference, Academy of International Business, Academy of Management and the
International Political Economy Society Annual Conferences for comments on earlier drafts of this paper. Paper
contents are our sole responsibility.
In April 2012 Argentina nationalized YPF, the local subsidiary of Spanish oil company Repsol, despite the
fact that Spain and Argentina have an International Investment Agreement (IIA), designed to protect
each countrys investment in the other. This paper examines IIAs empirically, asking whether MNEs act
as if they protect foreign investment. Such agreements are potentially especially important in natural
resources, because many resource-rich countries domestic institutions do not protect property rights.
Petroleum is of particular interest, as one of the largest industries for international trade and
investment (Weiner, 2005). Historically, MNEs have accounted for the vast majority of investment in
exploration, refining, and distribution. The industry is also especially vulnerable to property rights
violations. Foreign firms make large, upfront investments for licenses, resources, and transportation and
refining infrastructure. The upfront investments make them particularly vulnerable to the classical
obsolescing bargaining problem (Vernon, 1980). Once an investment is sunk, bargaining power shifts
from the foreign investor to the host country and the interests of the two parties diverge. When the
initial advantages of the MNEs erode, host country governments seek to renegotiate their initial
concession agreement to appropriate greater returns from the bargain (Vernon, 1971).
Natural resources are also particularly vulnerable as many countries viewed foreign control as
compromising their sovereignty (UNCTAD, 2004). The peak period of nationalization was the 1970s:
there was growing dissatisfaction with oil concessions signed prior to World War II, viewed as heavily
favoring the investors (Stevens, 2008). As in other industries, the outright nationalization of petroleum
FDI of the 1970s (Kobrin, 1987; Minor, 1994; Dunning, 1998) has largely been replaced by redistributive
policies, wherein countries have unilaterally shifted taxation and contract terms in their favor (Wint,
2005; Henisz & Zelner, 2010). Redistributive policies are often perceived as creeping expropriation by
foreign investors, whereas host-country governments and their constituents perceive them to be
legitimate public policy choices by a sovereign actor.
The oil-price boom of the last decade has seen increased concern over both outright and creeping
expropriation, o which the 2012 YPF nationalization is but one example. For example, in the year 2000,
ground was broken for the Chad-Cameroon oil pipeline a collaborative endeavor involving three
multinational oil corporations (Exxon/Mobil, Petronas Malaysia, and Chevron), the governments of the
two countries as well as the World Bank. Once oil began to flow through the pipeline, the Chad
government unilaterally declared its intention to renegotiate the agreement by creating a national oil
company and expelling Chevron & Petronas (Gould & Winters, 2007; Click & Weiner, 2010).
In a similar vein, in 2006, Bolivia nationalized its oil and gas industry, while Ecuador used its troops to
take over Occidental Petroleums holdings and turn them over to state-owned Petroecuador (Click &
Weiner, 2010). Using forced contract renegotiations, Russia turned over BP and Shells petroleum
operations to local state owned companies (Economist, 2007). Venezuela mandated the sale of foreign-
owned assets, eventually leading Exxon and ConocoPhillips to exit the country.
Thus, property-rights protection is a central issue in the petroleum industry. Facing expropriation or
renegotiation, foreign investors could attempt to use the host country institutional system to protect
their assets. However, domestic institutions may be biased against foreign investors, or be viewed as
corrupt and inefficient. IIAs, however, may provide alternate mechanisms by which investors can protect
their assets or seek appropriate compensation in the event of adverse state action.
Host- and home-country institutions have long been shown to influence the strategic behavior of
multinational enterprises (MNEs) (Hoskisson et al, 2000; Garcia-Canal & Guillen, 2008; Meyer et al,
2009; Holburn & Zelner, 2010). Of particular importance are institutions that shape property rights,
because they influence political risk and resource allocation in foreign investment (Kobrin, 1976; Murtha
& Lenway, 1994; North, 1990; Henisz & Delios, 2001; Loree & Guisinger, 1995).
By focusing on domestic institutions of home and host countries, the literature has largely ignored the
proliferation of international institutions institutions that themselves transcend national borders
governing foreign direct investment (FDI). International institutions are part of a broader, evolving
global environment; an additional level of analysis beyond the individual-country level. This
environment presents new challenges for global strategy (Ricart et al, 2004; Westney, 2011).
In this paper, we examine the effects of international institutions on foreign investment, focusing on
International Investment Agreements (IIAs). Since the mid-twentieth century, governments have signed
nearly 3000 IIAs, either bilaterally or multilaterally (UNCTAD, 2010). IIAs are aimed at altering the rules
governing FDI by providing extensive rights and protection for MNEs, while restricting host
governments actions (Neumayer & Spess, 2005; Buthe & Milner, 2009), and providing alternatives to
domestic courts to settle disputes (UNCTAD, 2004). However, some authors are skeptical of the
enhanced property-rights protection claimed for IIAs, arguing that they may be redundant (Yackee,
2009) or ineffective, because of the difficulty in enforcing claims against sovereign states (Rose-
Our understanding of IIAs influence on investment, primarily drawn from literature in political science,
economics, and law, is limited. Empirical work is limited to aggregate country-level data. Recent studies
examining changes in FDI flows in response to IIAs cannot capture influence of IIAs on firm-level
decisions (Salacuse & Sullivan, 2005; Kerner, 2009; Hallward-Driemeyer, 2003, 2009; Tobin & Rose-
Ackerman, 2003). Moreover, these studies yield mixed empirical results, which could be due to country-
level aggregation, or because the benefits of IIAs apply only under specific circumstances. The
effectiveness of IIAs as an institutional solution to political hazards faced by MNEs thus remains an open
In contrast to the aggregate approach followed in the literature, we examine transaction-level
investment data in a single salient industry petroleum. This is not only the single largest industry for
international trade and FDI (Weiner, 2005), but also one with large upfront capital costs and high
political salience making it especially prone to political risk (Kobrin, 1987). Drawing on the recent
strategy literature on firms varying abilities to operate under a given institutional environment (see, for
example, Capron & Guillen, 2009; Macher et al, 2011), we develop theory that suggests that the need
for IIA protection, as well as MNEs ability to benefit from such protection, should vary systematically
with firm characteristics. We explore two dimensions that theory suggests may be important, and for
which we have firm-level evidence financial resources and ownership.
Our study makes three contribution