Domestic arbitral institutions and foreign direct investment

Abstract

Existing literature focuses on how domestic and international institutions address investor–state disputes and attract foreign direct investment (FDI). However, contractual disputes between foreign and domestic firms are largely neglected. For foreign investors, dispute resolution mechanisms that can effectively resolve contractual disputes are very important as well. In this article, I examine the effect of institutions that conduct arbitrations for disputes between foreign and domestic firms on FDI inflows. Focusing on the within-country variation of China, I find that provinces with CIETAC (China International Economic and Trade Arbitration Commission) agencies receive a higher level of FDI. These agencies attract FDI because they can credibly signal that local governments are truly willing to treat foreign investors fairly when they have disputes with local firms. In sum, this article highlights an institutional variable that has received little attention in the literature on the politics of FDI.