Investment agreements and the fragmentation of firms across countries
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Investment agreements and the fragmentation of firms across countries Timm Betz1
· Amy Pond1 · Weiwen Yin2
Accepted: 29 September 2020 © The Author(s) 2020
Abstract We examine the global ownership structure of firms in the context of the investment regime. Investment agreements extend valuable privileges to firms invested abroad. But, these privileges only apply to firms whose assets are owned in a country that has signed an agreement with their host market; firms lack protections under investment agreements for many of their target markets. We argue that, by strategically locating subsidiaries in ‘transit’ countries, firms systematically expand their access to investment agreements. This firm-specific access to investment agreements through transit countries also has implications for investment flows: Transit countries receive more inflows and outflows of investment. Moreover, the impact of agreements declines over time and treaty partners, as seemingly newly protected firms have previously gained coverage through subsidiaries. Drawing on subsidiary location choices of the world’s largest firms, as well as data on firm ownership structures and aggregate investment flows, we present systematic evidence consistent with this argument. The paper highlights the importance of the global ownership structure of firms in an environment of heterogeneous international rules and discusses new distributional consequences of the investment regime. Keywords Bilateral investment treaty · Foreign direct investment · Ownership structure · Investor-state dispute settlement · MNCs · Regulatory chill JEL Classification F21 · F53 · F59 · K33 · L22 · M16 · O19
Electronic supplementary material The online version of this article (https://doi.org/10.1007/s11558-020-09402-0) contains supplementary material, which is available to authorized users. Timm Betz
[email protected]
Extended author information available on the last page of the article.
T. Betz et al.
In September 2007, Exxon Mobil initiated a US$7 billion claim for compensation against the government of Venezuela at the International Centre for Settlement of Investment Disputes (ICSID).1 The company alleged that Venezuela expropriated its assets, leading to a decline in revenue. Because Venezuela and the United States have no investment agreement in place, Exxon Mobil, which is headquartered in the U.S., lacks direct access to ICSID. Instead, Exxon Mobil advanced the claim on the basis of an investment agreement between Venezuela and the Netherlands using a subsidiary, Venezuela Holdings, located in the Netherlands. The fragmentation of Exxon Mobil’s financial interests across several countries, through the creation of subsidiaries abroad, allowed it to overcome the fragmentation of the predominantly bilateral investment regime. Anecdotally, similar high-profile cases are well-documented: firms not covered by the investment agreements of their home country gain cover, and access to arbitration mechanisms such as ICSID, by locating subsidiaries in third countries that have i
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