International Law, Territorial Disputes, and Foreign Direct Investment

Although contentious interstate disputes are widely known to depress foreign direct investment (FDI), we identify and explain variation in investor responses even to territorial disputes, known to be slow to resolve and prone to militarization. Forward-looking and profit-seeking investors have incentives to increase FDI when the characteristics of a dispute point toward peace. These incentives drive them to increase investment even prior to an actual settlement. Given that legal focal points - when international law identifies one side in the dispute as having a clear legal advantage - promote peace, countries in disputes with legal focal points should receive more FDI. To support this argument, we use new data on international law and territorial disputes from 1980 to 2010 to explain variation in FDI across countries, as well as variation in the timing of within-country FDI accumulation. While a growing body of work demonstrates how international law influences state behavior, we show that it also profoundly influences the investment patterns of firms.