How can firms in foreign direct investment (FDI) best protect their assets from host government contract beach? FDI is the largest and most stable form of external financing to less developed countries (LDCs). It increases job growth, technological development, and efficiency in the host country, subsequently increasing economic development. Companies prefer to invest in countries that are less prone to contract breach. I propose that credibility of commitments can help explain variation in contract breach. I propose that firms are most likely to avoid contract breach when they are involved in supply chains and when the host country has a preferential trade agreement (PTA). I measure this relationship using a difference of means test and logistic regression. Using data from 1992-2008 from the International Centre for Settlement of Investment Disputes (ICSID), I find that on average, the least amount of cases filed involved supply chains and PTAs. Only 4% of cases involved supply chains and PTAs, suggesting a protective force in FDI. The interaction between supply chains and PTAs has a significantly positive effect on investors winning their cases in the ICSID. My results suggest that in the event of a contract breach, my interaction variable of membership in supply chains and PTA's help investors protect their assets. The implications of these findings are twofold. To safeguard their FDI, firms can ensure better protection from contract breach through supply chains. Furthermore, host countries can attract more FDI from PTAs. For future research, I suggest case study analysis as well as interviews with representatives from foreign firms that have dealt with contract breach.
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Master of Arts (M.A.)
College of Sciences
School of Politics, Security, and International Affairs
Length of Campus-only Access
Masters Thesis (Open Access)
Sullivan, Kathleen, "Commitment and Credibility in FDI" (2019). Electronic Theses and Dissertations. 6760.