Investment Agreements and the Fragmentation of Firms across Countries

Investment agreements extend valuable privileges to firms invested abroad. They often allow firms to sue host governments and gain compensation when their rights are violated. 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 in- vestment 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 structure 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.