DO INTERNATIONAL INVESTMENT AGREEMENTS PROTECT INVESTMENT?
Petroleum Evidence
Srividya Jandhyala*
srividya@gwu.edu
Robert Weiner*
rweiner@gwu.edu
International Business Department
George Washington University
2201 G Street NW, Funger Hall 401
Washington, DC 20052
26 August 2012
Abstract:
Do international institutions – institutions that transcend country borders– reduce MNEs’ political risk?
We examine whether the presence of International Investment Agreements (IIAs), negotiated among
countries for increased foreign investor protection, lowers political risk for MNEs. We argue that IIAs
limit the ability of host governments to make discriminatory policy changes that adversely affect the
value of firms’ investments. However, the need for IIA protection, and the ability to benefit from it, vary
with firm characteristics, specifically financial resources and ownership. Using detailed transaction-level
data for sale of petroleum reserves in 45 countries, we find that MNEs pay significantly higher amounts
for assets protected by IIAs than similar unprotected assets, an effect moderated by the firm’s financial
resources and state ownership.
*We are grateful to JS Herold for data access, and the George Washington University CIBER for research support.
We would also like to thank Heather Berry, Witold Henisz, Steve Kobrin, Noel Maurer, Jordan Siegel, Jennifer
Spencer, and the seminar/conference participants at the Indian School of Business, The Fletcher School, Atlanta
Competitive Advantage Conference, Academy of International Business, Academy of Management and the
International Political Economy Society Annual Conferences for comments on earlier drafts of this paper. Paper
contents are our sole responsibility.
Introduction
In April 2012 Argentina nationalized YPF, the local subsidiary of Spanish oil company Repsol, despite the
fact that Spain and Argentina have an International Investment Agreement (IIA), designed to protect
each country’s investment in the other. This paper examines IIAs empirically, asking whether MNEs act
as if they protect foreign investment. Such agreements are potentially especially important in natural
resources, because many resource-rich countries domestic institutions do not protect property rights.
Petroleum is of particular interest, as one of the largest industries for international trade and
investment (Weiner, 2005). Historically, MNEs have accounted for the vast majority of investment in
exploration, refining, and distribution. The industry is also especially vulnerable to property rights
violations. Foreign firms make large, upfront investments for licenses, resources, and transportation and
refining infrastructure. The upfront investments make them particularly vulnerable to the classical
“obsolescing bargaining” problem (Vernon, 1980). Once an investment is sunk, bargaining power shifts
from the foreign investor to the host country and the interests of the two parties diverge. When the
initial advantages of the MNEs erode, host country governments seek to renegotiate their initial
concession agreement to appropriate greater returns from the bargain (Vernon, 1971).
Natural resources are also particularly vulnerable as many countries viewed foreign control as
compromising their sovereignty (UNCTAD, 2004). The peak period of nationalization was the 1970s:
there was growing dissatisfaction with oil concessions signed prior to World War II, viewed as heavily
favoring the investors (Stevens, 2008). As in other industries, the outright nationalization of petroleum
FDI of the 1970s (Kobrin, 1987; Minor, 1994; Dunning, 1998) has largely been replaced by redistributive
policies, wherein countries have unilaterally shifted taxation and contract terms in their favor (Wint,
2005; Henisz & Zelner, 2010). Redistributive policies are often perceived as ‘creeping expropriation’ by
1
foreign investors, whereas host-country governments and their constituents perceive them to be
legitimate public policy choices by a sovereign actor.
The oil-price boom of the last decade has seen increased concern over both outright and creeping
expropriation, o which the 2012 YPF nationalization is but one example. For example, in the year 2000,
ground was broken for the Chad-Cameroon oil pipeline – a collaborative endeavor involving three
multinational oil corporations (Exxon/Mobil, Petronas Malaysia, and Chevron), the governments of the
two countries as well as the World Bank. Once oil began to flow through the pipeline, the Chad
government unilaterally declared its intention to renegotiate the agreement by creating a national oil
company and expelling Chevron & Petronas (Gould & Winters, 2007; Click & Weiner, 2010).
In a similar vein, in 2006, Bolivia nationalized its oil and gas industry, while Ecuador used its troops to
take over Occidental Petroleum’s holdings and turn them over to state-owned Petroecuador (Click &
Weiner, 2010). Using forced contract renegotiations, Russia turned over BP and Shell’s petroleum
operations to local state owned companies (Economist, 2007). Venezuela mandated the sale of foreignowned assets, eventually leading Exxon and ConocoPhillips to exit the country.
Thus, property-rights protection is a central issue in the petroleum industry. Facing expropriation or
renegotiation, foreign investors could attempt to use the host country institutional system to protect
their assets. However, domestic institutions may be biased against foreign investors, or be viewed as
corrupt and inefficient. IIAs, however, may provide alternate mechanisms by which investors can protect
their assets or seek appropriate compensation in the event of adverse state action.
Host- and home-country institutions have long been shown to influence the strategic behavior of
multinational enterprises (MNEs) (Hoskisson et al, 2000; Garcia-Canal & Guillen, 2008; Meyer et al,
2009; Holburn & Zelner, 2010). Of particular importance are institutions that shape property rights,
2
because they influence political risk and resource allocation in foreign investment (Kobrin, 1976; Murtha
& Lenway, 1994; North, 1990; Henisz & Delios, 2001; Loree & Guisinger, 1995).
By focusing on domestic institutions of home and host countries, the literature has largely ignored the
proliferation of international institutions – institutions that themselves transcend national borders –
governing foreign direct investment (FDI). International institutions are part of a broader, evolving
global environment; an additional level of analysis beyond the individual-country level. This
environment presents new challenges for global strategy (Ricart et al, 2004; Westney, 2011).
In this paper, we examine the effects of international institutions on foreign investment, focusing on
International Investment Agreements (IIAs). Since the mid-twentieth century, governments have signed
nearly 3000 IIAs, either bilaterally or multilaterally (UNCTAD, 2010). IIAs are aimed at altering the rules
governing FDI by providing extensive rights and protection for MNEs, while restricting host
governments’ actions (Neumayer & Spess, 2005; Buthe & Milner, 2009), and providing alternatives to
domestic courts to settle disputes (UNCTAD, 2004). However, some authors are skeptical of the
enhanced property-rights protection claimed for IIAs, arguing that they may be redundant (Yackee,
2009) or ineffective, because of the difficulty in enforcing claims against sovereign states (RoseAckerman, 2009).
Our understanding of IIAs’ influence on investment, primarily drawn from literature in political science,
economics, and law, is limited. Empirical work is limited to aggregate country-level data. Recent studies
examining changes in FDI flows in response to IIAs cannot capture influence of IIAs on firm-level
decisions (Salacuse & Sullivan, 2005; Kerner, 2009; Hallward-Driemeyer, 2003, 2009; Tobin & RoseAckerman, 2003). Moreover, these studies yield mixed empirical results, which could be due to countrylevel aggregation, or because the benefits of IIAs apply only under specific circumstances. The
3
effectiveness of IIAs as an institutional solution to political hazards faced by MNEs thus remains an open
question.
In contrast to the aggregate approach followed in the literature, we examine transaction-level
investment data in a single salient industry – petroleum. This is not only the single largest industry for
international trade and FDI (Weiner, 2005), but also one with large upfront capital costs and high
political salience making it especially prone to political risk (Kobrin, 1987). Drawing on the recent
strategy literature on firms’ varying abilities to operate under a given institutional environment (see, for
example, Capron & Guillen, 2009; Macher et al, 2011), we develop theory that suggests that the need
for IIA protection, as well as MNEs’ ability to benefit from such protection, should vary systematically
with firm characteristics. We explore two dimensions that theory suggests may be important, and for
which we have firm-level evidence –financial resources and ownership.
Our study makes three contributions to the strategy literature. First, we introduce and highlight the role
of international institutions in multinational investment, in contrast to the prior focus on domestic
institutions of home and host countries. Work on international institutions has focused narrowly on
corruption regulations (Cuervo-Cazurra, 2008; Jeong & Weiner, 2012) or coercive pressure of
multilateral agencies (Henisz, Zelner & Guillen, 2005). We broaden the discussion by examining property
rights, responding to Westney’s (2011: 379) call to examine “the global environment beyond the focus
on industry competition and other MNCs that has long dominated strategy models.”
Second, we provide direct tests of the effectiveness of international institutions in ameliorating political
risk using an asset valuation model. Although political risk arising from weak institutions’ inability to
limit the policy discretion of the host government has long been argued to be an important factor
limiting firms’ international expansion (Vernon, 1971; Kobrin, 1976; Boddewyn, 1988; Tallman, 1988;
Ring, Lenway & Govekar, 1990; Henisz, 2000a), its influence has largely been inferred from indirect
4
outcomes such as capital flow, location choice, and entry mode. We examine transaction values – the
amount paid by firms buying petroleum reserves that are routinely traded on world markets.
Transaction value should be a cleaner and more accurate reflection of political risk than ex post
accounting measures, such as income or return on assets.1 By examining prices paid by firms in reserve
acquisitions, we are able to provide a direct estimate of estimate the value, if any, of political risk
protection offered by IIAs.
Finally, our analysis also contributes to the growing literature on organizational capabilities for assessing
and managing non-market risks (see, for example, Henisz, 2000b; Capron & Guillen, 2009; Holburn &
Zelner, 2010; Garcia-Canal & Guillen, 2008). While prior studies have shown that firms differ in their
ability to operate effectively under a given domestic institutional arrangement, our work examines how
firm characteristics allow for differential benefits from international institutions.
Political risk and foreign investment
International expansion strategy is influenced not just by market conditions but also by political factors
(Kobrin et al, 1980). Firms typically undertake large upfront investments in licenses, resources, and
infrastructure, making them vulnerable to the classical “obsolescing bargaining” problem. Once an
investment is sunk, bargaining power shifts from the foreign investor to the host country and the
interests of the two parties diverge. When the initial advantages of the MNEs erode, host-country
governments seek to renegotiate initial agreements to appropriate greater returns from the bargain
(Vernon, 1971). Governments can alter the profitability of foreign investment through outright
expropriation, or by altering contracts, regulations, taxes, tariffs, entry and exit rules, pricing, etc
(Henisz, 2000a; Garcia-Canal & Guillen, 2008; Holburn & Zelner, 2010).
1
Accounting measures are not consistently reported (or not reported at all) at a country level (Tallman 1991; Healy
et al 2011), and may also reflect realizations (or the absence thereof) of political hazards.
5
Since the 1970s, creeping expropriations –unilateral changes in taxation or other contract terms in favor
of the host government – have largely replaced outright expropriations (Wint, 2005; Henisz & Zelner,
2010). Regulated industries such as petroleum, telecommunications, electricity, water, and banking,
however, continue to be especially sensitive to such risks (Garcia-Canal & Guillen, 2008). For example,
the Chad government nationalized the Chad-Cameroon pipeline once oil began to flow through it and
expelled the multinational companies responsible for commissioning it (Gould & Winters, 2007; Click &
Weiner, 2010). Similarly, Russia turned over BP and Shell’s petroleum operations to local state owned
companies using forced contract negotiations (Economist, 2007).
In addressing the question of how firms can protect themselves against post-investment policy changes,
the strategic management literature has identified the importance of political constraints on the
policymaking process (Henisz & Delios, 2001). Prior work has emphasized the role of strong domestic
institutions, such as constraints on the executive branch by other branches of government, and
independence of the courts and judiciary (Henisz, 2000b; Knack & Keefer, 1995). However, domestic
institutions may be biased against foreign investors. IIAs provide an alternative, international
mechanism by which host governments are constrained, and firms can protect their assets against
adverse policy changes.
International Investment Agreements: Theory
We refer to international institutions as those rules or principles that are negotiated between the home
and host countries either bilaterally or multilaterally (Ramamurti, 2001). Such principles establish
institutions that define the “rules of the game” (North, 1990:3), but are not confined to the boundaries
of any one country. Rather, their implementation either requires coordination among the members or
the establishment of a multilateral body, while resting on the foundations of national laws and
regulations. Examples include inter-governmental organizations (IGOs), international standard setting
6
organizations, and cross-border associations of various types. Some observers have argued that these
have transformed the international business environment such that firms and nations are no longer the
only relevant levels of analysis, and that research should consider a model of global environment
populated by international institutions (Ricart et al, 2004; Westney, 2011).
We focus on IIAs – international agreements that establish rules governing property rights protection for
FDI. Typical agreements have clauses on ‘fair and equitable’ treatment, including ‘national treatment’
and ‘most favored nation’ treatment of foreign investment in the host country. These clauses entitle
foreign firms to be treated in a fair manner and on par with domestic firms, as well as firms from other
similarly protected countries. IIAs may protect contractual rights, guarantee the right to transfer profits
in hard currency to the home country, and prohibit or restrict the use of performance requirements
(Elkins, Guzman & Simmons, 2006). They also impose restrictions on discriminatory expropriation, and
policy changes that are not for a public purpose. In all cases, the foreign investor is guaranteed prompt,
adequate, and just compensation in accordance with the due process of law (Hallward-Driemeier, 2003).
Finally, and perhaps most importantly, IIAs provide the MNEs the right to take the host government to
international arbitration (UNCTAD, 2004) as alternative to local courts. International arbitration typically
occurs through the International Center for Settlement of Investment Disputes (ICSID) or the UN
Commission on International Trade Law (UNCITRAL). In this way, IIAs are sometimes seen as a
commitment mechanism by which host country governments signal their attitude towards protecting
foreign firms’ property rights. Appendix A provides a brief historical account of IIA evolution.
The most prominent of the IIAs are Bilateral Investment Treaties (BITs), signed between pairs of
countries (henceforth, dyads), establishing reciprocal terms and conditions for FDI. Since the first BIT
signed between Pakistan and Germany in 1959, over 2700 additional treaties have been signed involving
7
almost every country in the world (Figure 1).2 BITs are also the most common instruments used by
foreign firms to file claims against host countries, with about 80 percent of known treaty-based investorstate dispute-settlement cases initiated using a BIT (UNCTAD, 2009).3
In contrast to most FDI, the petroleum sector also has a multilateral treaty – Energy Charter Treaty (ECT)
– governing foreign investments. The ECT aims to create a level playing field for energy sector
investments, create a stable interface between the foreign investor and the host government, and
reduce the non-commercial risks of such investments to a minimum. Although it was initiated as an
effort to help secure Eastern European energy supplies for Western Europe (Konoplyanik & Walde,
2006), its membership in 2010 had grown to fifty-one states including non-European countries such as
Japan, Australia, and Mongolia.
ECT FDI-protection provisions are similar to modern BITs including clauses for investor-state dispute
settlement through international arbitration (Konoplyanik & Walde, 2006). Unlike BITs (where at least
one party in each dyad is almost always a developing country), the ECT also protects investments from
one industrialized country into another. This is potentially important, as firms have experienced adverse
changes in regulation even in countries where domestic policy constraints are relatively high. Examples
include the UK and Israeli governments changing tax rates on oil production (Manzano & Monaldi, 2008,
Levinson & Chazan, 2010), or oil-exporting provinces of Canada and the US raising royalties after
investment has been sunk.
Hypotheses
We hypothesize that IIAs, where present, allow MNEs to better manage political risk through three types
of assurances, thereby influencing the firm’s assessment of asset value.
2
3
As of 2008 about 13% of all home-host dyads had a BIT protecting foreign investment (UNCTAD, 2009)
Some cases are private; neither their filing nor resolution is public information.
8
First, IIAs take effort to negotiate; successfully agreeing and signing an IIA can help build trust between
nations, reducing the likelihood of actions by host governments against MNEs based in signatory
countries (Rangan and Sengul, 2009), even when actions may lie outside the formal scope of the IIA.
Second, IIAs specifically outline the restrictions on host government’s actions towards property-rights
protection. Clearly specifying these rules may itself provide foreign investors with greater bargaining
leverage in negotiations with host country governments. For example, in mid-2010, UK-based Cairn
Energy agreed to sell its majority stake in an oilfield in Rajasthan, India, to Vedanta Resources, an Indian
company. The sale was stalled due to a dispute over oil royalties which were being paid in full by Cairn’s
equity partner – state-owned ONGC (Oil and Natural Gas Corporation) (Financial Times, 2011). Although
ONGC wanted the tax liability to be changed as a condition for state approval of the sale, Cairn disputed
the imposition of the extra financial burden. The presence of a UK-India BIT provided Cairn with an
additional negotiating tool. The Indian Ministry of External Affairs recognized that attempts to impose a
settlement in the dispute between Cairn and state-run ONGC would be considered as a denial of “fair
and equitable treatment” under the treaty, exposing the country to potential arbitration claims
(Economic Times, 2011).
Finally, IIAs allow foreign firms to seek international arbitration. If the MNE believes that a host
government has unfairly expropriated its assets, the firm can initiate international arbitration
proceedings at a neutral body such as ICSID without approval or support of home governments. Host
countries cannot prevent such proceedings from going forward; this is also an expansion of investor
rights. Unlike domestic courts, host governments have little control over the process or final decision of
the international arbitration tribunal (Elkins, Guzman & Simmons, 2006). Decisions have limited avenues
for appeal and cannot be amended by the domestic court system or legislation.
9
By raising the host governments’ costs of expropriation or other policy changes that redistribute returns
from foreign investment, IIAs may act as an institutional mechanism by which firms can protect foreign
assets. These guarantees may provide a more favorable institutional context for foreign investment – it
provides greater certainty about the future treatment of assets by the state (Henisz, 2000a), reduces
transaction, search, and production costs (Akerlof, 1970; Khanna & Rivkin, 2001), and allows firms to
better specify property rights, monitor and enforce contracts, and appropriate higher returns from their
foreign assets (Levy & Spiller, 1994; Oxley, 1999).
Since assets protected by an IIA face reduced risks and a potentially higher rate of return, investors
should value those assets higher than similar but unprotected ones. Thus,
Hypothesis 1: Transaction value of foreign assets will be higher in the presence of an International
Investment Agreement.
Firm-level factors
Firms differ in their ability to operate effectively under a given institutional arrangement. Scholars have
described how a firm’s experience with a particular activity (see, for example, Capron & Guillen, 2009;
Xia, Baol & Delios, 2009; Henisz & Delios, 2001) or ownership structure (Garcia-Canal & Guillen, 2008)
moderates the influence of national level institutions. We extend this analysis to examine whether firm
characteristics also moderate the effect of international institutions.
Financial Resources: Strategy scholars have long debated the strategic advantages and disadvantages of
large firm size (see, for example, Gale 1972; Woo & Cooper, 1981; Chen & Hambrick, 1995). A central
tenant in this stream of work is that firm size is a proxy for resources available (Schuler & Rehbein, 1996)
10
which in turn influence its capabilities, economic power, and strategic choices (Dean, Brown & Bamford,
1998).
In the upstream petroleum industry, reserves – underground discovered and commercially recoverable
quantities of oil and gas – are a key measure of financial resources. Reserves are a firm’s inventory of
future production, and hence closely related to firm valuation (Arnott, 2004; Osmunden, 2010). Bank
loans are also collateralized against reserves (Muñoz, 2009). Academic studies have established
significant relationships between petroleum firms’ borrowing capacity and their reserves (Chung, Ghicas
& Pastena, 1993), and between reserves and firm value (Misund et al, 2005).
Thus, we propose that firms with large petroleum reserves – which we categorize as firms with greater
financial resources – behave differently than those with fewer resources in examining the effectiveness
of IIAs. In particular, limited resources provide substantial disadvantages in effectively utilizing IIAs. An
IIA is effective only when an MNE’s ability and willingness to impose reputational and financial costs on
the host government in case of unfair treatment remains credible. A financially resource-constrained
firm may be less willing or able to undertake the costs involved in utilizing IIAs, for two reasons.
First, international arbitration is an expensive process and requires specialized intermediaries. UNCTAD,
(2009) estimated claimants’ arbitration costs and legal fees at $5-12 million (equal to 5-10% of our
median sample investment of $114 million); in comparison, the median equity-market value of publiclytraded firms on the Toronto Stock Exchange (the exchange with the largest number of petroleum
listings) is about $19 million (as of 2nd quarter, 2012). Further, the burden of selection of arbitrators
itself falls on the parties to the arbitration, and in some cases, so does the choice of arbitration rules and
venue for arbitration. We argue that firms with larger reserves should be better able to absorb financial
costs associated with the use of IIAs and also have better access to specialized intermediaries, and thus
should be able to take better advantage of IIAs.
11
Second, enforcement of arbitral awards by winning firms may also depend on their resources. In the
absence of supranational law enforcement, the jurisprudence and enforceability of awards is
questionable (Yackee, 2008). In the event that a host government does not pay, firms must rely on their
home governments for assistance, which can include diplomatic, political, or economic pressure, or
other forms of peaceful dispute settlement. Empirical studies have shown that ability to influence the
home government varies with firm size and financial resources (Macher et al, 2011; Chong & Gradstein,
2010). Greater resources allow the firm to become politically engaged (Schuler & Rehbein, 1997).
Thus if IIAs are effective, the positive effect on valuation of foreign assets will be higher for firms with
greater financial resources.
Hypothesis 2: Firm financial resources moderate the relationship between International Investment
Agreements and the transaction value of foreign assets, such that the relationship is stronger for firms
with greater resources.
Ownership: When a government owns a stake in a firm, the firm is less likely to need IIAs in protecting
its resources abroad. Rather, state ownership gives the firm a more tolerant risk attitude (Garcia-Canal
& Guillen, 2008; Megginson & Netter, 2001) and greater access to diplomatic mechanisms of dispute
resolution. Further, the home government may also put additional pressure on the host to resolve the
dispute by linking various issues in the state’s foreign policy to the dispute on hand. While it does not
preclude the use of international arbitration, this option gives state-owned firms a potentially less
expensive and more effective mechanism of dispute resolution. Non-state owned firms are less likely to
utilize this alternative mechanism and will thus value the protection offered by IIAs to a greater extent.
Thus, we propose that
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Hypothesis 3: State ownership moderates the relationship between International Investment
Agreements and the transaction value of foreign assets, such that the relationship is stronger for nonstate owned firms.
Empirical analysis
We test our hypotheses using worldwide transactions for petroleum reserves. As noted above, reserves
are simply inventory to be produced in the future; they are thus more homogenous and hence
comparable across firms than assets such as banks or organizational divisions. In addition, commonly
used metrics account for cost variations that affect reserve value, and widely quoted petroleum prices
serve to establish discounted-cash flows, allowing ready valuation of each asset. Finally, unlike most
other assets, petroleum reserves are actively traded in a global market, allowing us to exploit a database
of reserve-transaction announcements that include reported prices and reserve size.
Because reserves are central to firm valuation and borrowing capacity (Arnott, 2004; Muñoz, 2009),
considerable care is taken in the industry to determine reserve size. Specialist firms with expertise in
engineering and geology are used to audit reserves. Reserves are reported accordance with accounting
standards set out by inter alia, the US Securities and Exchange Commission, Canadian Securities
Administrators, State Commission for Reserves of the Russian Federation, Norwegian Petroleum
Directorate, and Society of Petroleum Engineers.
The exact size of each reserve, however, is unobservable; instead the industry employs probabilistic
definitions. Reserves are typically characterized as ‘proved’ (1P) or ‘proved + probable’ (2P). Proved
reserves refer to the quantity of oil and gas in the ground that is economically extractable at current
prices and costs with 90 percent probability. Probable reserves are similarly defined, but with 50 percent
13
probability. All else equal, 1P transactions are more valuable; and we control for which figure is reported
in each transaction.
We use publicly-announced-transaction data collected and maintained by the US firm John S. Herold
Incorporated (JSH) for the period 2000-2007.4 During this time period, there were 2176 reserve deals of
at least $10 million, our threshold for analysis. We consider only transactions in which all reserves were
located in a single host-country, and the buyer (or buyer consortium) came from a single home-country
– resulting in 1954 transactions. After dropping deals with missing values, we retain 1592 observations.
Approximately three-fourths of these transaction are of assets located in the US or Canada. This
distribution is in part due to national regulations (some of the largest oil-producing countries like Saudi
Arabia, Kuwait, Iraq, Iran, and Mexico are not represented in the data because reserve ownership is a
state monopoly), and in part due to geology. Outside the US and Canada, much of the worldwide oil
reserves are offshore, where substantial scale economies result in large transaction sizes and fewer
transactions. With the exception of parts of the Gulf of Mexico, Alaska, California, and Newfoundland,
offshore drilling is prohibited in North America; and most transactions are for onshore reserves, which
can be economic on a smaller scale.5 In order to avoid our results being dominated by North American
transactions, we exclude them from our statistical analysis.
Our final sample consists of 409 observations. Table 1 shows the distribution of transactions by host
country (country wherein reserves are located) in the sample.
We follow the asset pricing model developed by Click & Weiner (2010), and model the value of a
petroleum reserve as
(1)
4
5
We are grateful to JSH (now a part of IHS Inc.) for permission to use the data.
Median deal size in North America is roughly $77 million, vs. $114 million outside North America.
14
Where
refers to the reserve value, R is the size of the reserve, and
and
are respectively
expected petroleum prices and costs over the life of the reserve. Costs are often estimated as
proportional to prices, both because the main component of cost is output taxes and royalties, and
because production costs tend to rise with prices.6 Thus, our specification for conventional reserves
transforms to
(2)
Rewriting in logarithmic form, and introducing international agreements, political risk, and other control
variables, we arrive at the equation that we estimate:
(3)
Dependent variable: Our dependent variable is the value of petroleum reserves in the ground on a per
barrel basis for each transaction. Following industry practice, we aggregate reserves of crude oil and
natural gas based on thermal energy equivalence – the energy in 1 barrel of oil is on average equal to
the energy in 6000 cubic feet of gas (Berry, Hasan & O’Bryan, 1998). Thus our dependent variable is
measured in equivalent barrels of oil.
Using the value per barrel of oil at the transaction level, rather than aggregate FDI flows as the
dependent variable allows us to mitigate potential endogeneity issues in estimation. Some authors have
argued that increased FDI flows in a host country may cause an IIA to be signed with the home country
as investors seek additional protection for their investment (Swenson, 2009; Aisbett, 2009; Kerner,
6
Petroleum production is heavily taxed worldwide, through a variety of fiscal structures. While complex and nonlinear in output, they are effectively linear in prices (Van Benthem and Stroebel 2010), motivating (2).
15
2009). The possibility that IIAs are an effect, rather than a cause of FDI decisions, is unlikely to arise
here, as it would require that country level decisions regarding IIA partners are driven by transaction
values. The two-stage Heckman procedure described in the robustness tests supports this view.
Independent variables: Our independent variable of primary interest is the presence of an International
Investment Agreement (IIA). For every transaction, we create a dummy, IIA, coded 1 if the transaction is
protected by an international investment agreement, and 0 otherwise. Roughly 31 percent of our
sample transactions are covered by IIAs. We code the variable IIA to be 1 if the home and host countries
of a transaction either have a BIT (87%) or are signatories to the ECT (13%).
Our second variable of interest is a firm’s financial resources. As discussed above, we proxy for financial
resources using the size of a firm’s worldwide petroleum reserves. We use JSH’s classification of a firm’s
reserves as large, medium, or small, and create a dummy variable, Financial Resources, that is equal to 1
for firms with large reserves and zero otherwise.
The third variable in our analysis captures whether a firm undertaking FDI is state-owned. The dummy
variable Foreign State Ownership is coded 1 for foreign government ownership.
Control variables: We also include a number of control variables, broadly classified under three
categories – host country, transaction, and reserve.
Host country controls: We first control for the host country’s political risk. Political risk has been shown
to impact asset values (Click & Weiner, 2010); the greater the political risk in the host country, the lower
is the reserve value. Thus, we control for the extent of host country political risk using the political
16
constraints (Polcon) measure (Henisz, 2000b).7 We also include a set of host country dummies to
capture other factors that vary by country and may impact the asset value (e.g: royalty and tax rates,
other cost factors, geographic distance, infrastructure quality).
Transaction level controls: We introduce a set of four controls at the transaction level. We differentiate
between asset purchases by domestic and foreign investors. Domestic investors may have access to
superior local information or different risk perceptions when compared to their foreign rivals which may
influence their assessment of asset value. To control for this, we include an indicator variable, coded 1
for all transactions in which the home country of the buyer is different from the host country where the
reserves are located, and 0 otherwise.
We control for whether the transaction involved a Merger or Acquisition (M&A), or a pure asset sale.
M&A entails purchase of an entire firm with all its assets and liabilities, or a fraction of the target firm’s
equity. Asset sales refer to specific reserve assets, and entail no claim on the seller’s equity8. Asset sales
are typically smaller in size and value than mergers and acquisitions; the sign of their effect on value per
barrel of oil is unclear.
Since the value of the petroleum in the ground should depend on its expected market price once
extracted, we follow Click & Weiner (2010) and include the expected future price of petroleum,
measured by futures strip prices (the average of futures prices of the nearest 36 months ahead) for
crude oil and natural gas on the New York Mercantile Exchange (NYMEX).
We consider the source of the transaction announcement (buyer or seller). Although reserves are
typically assessed by outside consultants, buyers may be systematically more optimistic in interpreting
reserve data and advice than sellers, and thus report larger reserves (Click & Weiner 2010). Thus, we
7
8
Our results are robust to using the alternate International Country Risk Guide (ICRG) measure of risk
Asset sales account for approximately 69% of all reserve transactions in our data
17
include a dummy variable that takes the value 1 for those transactions in which data are reported by the
buyer; we expect the coefficient to be negative.
Oil and reserve level controls: We include a series of controls for the quality of oil and the type of
reserve. These variables are expected to capture the physical characteristics of the reserve.
Since some transactions report proved (1P), while others report proved + probable (2P) reserve
volumes, we include an indicator for reserve-reporting type (Proved + Probable dummy). Reserves
estimated with lower probability are less valuable; and we expect this dummy variable to have a
negative coefficient.
Next, we include two variables to control for the quality of oil. First, we include a dummy variable for
heavy crude (Heavy Oil) because it fetches less in world markets than other types of oil; thus we expect
the coefficient of this dummy to be negative. Second, we construct a variable that represents the
percentage of natural gas in each reserve9. If oil and gas are identically priced based on their energy
equivalence, we would expect the coefficient of this term to be equal to 0.
Finally, we control for differences in extraction costs and technology employed to recover and process
the petroleum using a series of dummy variables. Excluding the onshore conventional process, we
include dummy variables for each of the following categories: coalbed methane, liquefied natural gas
(LNG), offshore shallow water, offshore deep water, frontier, and enhanced recovery production, and
diversified. Except for the last category, each of the other categories is costlier than conventional
extraction. Diversified refers to reserves with diverse characteristics; its effect on reserve value is
unclear.
9
Although our dependent variable is measured in equivalent barrels of oil, some authors have argued that the
ratio of the market values of oil and gas need not be equal to their energy ratios (Adelman & Watkins, 1995).
18
In addition to all the above controls, we finally include year dummies to account for any time specific
effects beyond oil price changes, as discussed above.
Results
We present the summary statistics for our sample and the correlations among the main variables in
Table 2. The mean value of petroleum in the ground (i.e., asset value) is exp(1.49) = $4.47/barrel of oil
equivalent and the mean market value is exp(3.77) = $43.69/barrel of oil equivalent.
Our main results using OLS models with robust standard errors are presented in Table 3. Model 1 of
Table3 includes all the control variables discussed above. Model 2 introduces the main IIA variable while
Models 3-5 show the interaction effects of IIA with Firm Resources and Foreign State Ownership.
Across the models, we observe that the host country political risk variables are not significant. We do
not interpret this as the lack of an effect of political risk; rather we contend that the effect of political
risk may be absorbed in the host country and year dummies. Turning to the transaction level controls,
we find that cross-border transactions are not valued higher than domestic ones while M&A
transactions are typically associated with higher value compared to pure asset sales. We also observe
that as the futures strip price of petroleum increases, the value of the petroleum reserve increases.
Consistent with our expectation, we find that the coefficient of the Proved + Probable dummy is
negative and significant. This suggests that investors value reserves estimated with a lower probability
to have a lower value. In addition, we find that the coefficient on the dummy for information being
provided by the buyer to be negative and significant, suggesting a discounting of such information.
We next examine the control variables capturing the physical properties of the asset. Looking at the
variables capturing the quality of petroleum reserves – Heavy Oil and % gas of proved reserves – we find
19
that the coefficient of the first term is not significant, while that of the second is negative and
significant. In an all-gas transaction, value per barrel of oil equivalent is 0.6% lower than an otherwise
similar all-oil transaction. Finally, we examine the variation in extraction costs as compared to
conventional reserves, and find that although some of the dummies are not significant, those that are
have the expected sign.
In Model 2, we introduce our main independent variable of interest – the IIA dummy. We find the
coefficient of this dummy to be positive and significant. We interpret this coefficient to suggest that the
presence of an IIA increases investors’ valuation of a foreign petroleum asset by approximately 27%.
Thus, we find support for first hypothesis.
The next two models (Models 3-4) include the two interaction terms of IIA with Financial Resources and
Foreign State Ownership respectively. In interpreting these interaction effects, we follow Brambor, Clark
& Golder (2006) who argue that we cannot infer whether a variable has a meaningful conditional effect
on the dependent variable simply by looking at the magnitude and significance of the coefficient on the
interaction term alone. In order to examine conditional hypotheses (such as the interaction effects
presented here), we need to perform conditional tests that take into account the coefficients of the
main and interaction terms together, and calculate the relevant standard errors (in addition to the ones
reported in the traditional regression table). In other words, the effect of IIA on the dependent variable
depends on the value of the conditioning variables (firm characteristics).
In order to assess the interaction terms in our models, we calculate the marginal effects of IIA under (1)
large and small conditions of the firm’s financial resources, and (2) state-owned and non-state owned
conditions of the firm’s ownership. These effects are presented, along with their corresponding
standard errors, in Table 4. We find that firms with large and small financial resources differ significantly
– for firms with large financial resources, the presence of an IIA increases their willingness to pay for
20
foreign petroleum assets by 43%. For firms with small financial resources however, there is a small but
insignificant negative effect. In Figure 2a, we plot this interaction effect. We interpret this finding to
suggest that financial resources interact with international institutions, and thus provide support for
hypothesis 2.
Similarly, we find that firms with and without state ownership differ significantly. For firms without state
ownership, the presence of an IIA significantly increases mean value of foreign petroleum assets by 30%.
For firms with foreign state ownership, this effect is insignificant. In Figure 2b, we plot this interaction
effect. We interpret this finding to provide support for hypothesis 3. This pattern of results is also
observed in the full model where we include both interaction terms simultaneously.
Robustness checks
We undertake a series of robustness checks to assess both competing explanations for our results, and
the validity of our empirical approach. We address theoretical issues first; statistical considerations,
including potential endogeneity and selection bias, follow.
Theoretical issues:
Strategy researchers have argued that the extent of vertical integration could have an important effect
on a firm’s performance (see, for example, Rothaermel, Hitt & Jobe, 2006), and hence its financial
resources. In the petroleum industry firms with the largest resources tend to be vertically integrated.
Thus, our results on firms’ financial resources may instead be due to vertical integration .We consider
this possibility by examining the effect of vertical integration both theoretically and empirically.
Although correlated with financial resources, the theoretical relationship between vertical integration
and political risk (and hence the value of IIA protection) depends on the role played by integration in a
firm’s strategy. Transaction-cost economics (which views integration as moving the supply chain inside
21
the firm to substitute for poorly functioning intermediate markets) predicts that political risk will impact
horizontal FDI and vertical FDI differently. Aizenman and Marion (2004) show that when FDI is vertical,
host countries have more bargaining power in renegotiating post-entry terms with MNEs, because of
potential costly disruption to the supply chain. Under horizontal FDI (where the MNE undertakes similar
activities across countries), in contrast, MNEs have more leverage from their ability to shift production
to other countries. Thus, vertical FDI is more vulnerable to political hazards than horizontal FDI, and
should value IIAs more. Hence, the transaction-cost view predicts that vertical integration moderates
the relationship between IIAs and asset value, such that the relationship is stronger for vertical FDI.
An alternative view is that integration can add value by leveraging firms’ intangible assets across vertical
stages, rather than internalizing the supply chain. Ramondo et al’s (2012) finding that vertical
integration in US MNEs is not associated with higher intra-firm flow of goods is consistent with this view.
Moreover, active trading by intermediaries is prevalent in crude oil markets (but not in natural gas), on
which integrated firms often rely (Smith 2009; Weiner 2006). In this view, the relationship between IIAs
and asset value would not differ between horizontal and vertical FDI.
In Table 5, we report the regression results that include the dummy variable Integrated (=1 for vertically
integrated firms, 0 otherwise). Model 1 weakly supports the view that the effect of vertical integration is
similar to that of financial resources – i.e. vertically integrated firms value IIAs but their non-integrated
counterparts do not. However, adding the vertical integration terms to our baseline model does not
alter the effects of financial resources reported earlier, while the effect of vertical integration is no
longer significant (Model 2).
Empirical issues:
22
Our empirical specifications above assume take IIAs as exogenous. Yet a literature in political economy
explains likelihood of signing an IIA by characteristics of the countries involved (Elkins, Guzman &
Simmons, 2006; Jandhyala, Henisz & Mansfield, 2011). IIAs as a policy response to underlying conditions
raise the possibility of endogeneity bias, e.g., if these conditions include lobbying by firms engaging in
FDI that wish to raise the value of their investments. Indeed, endogeneity has been shown to bias
estimate results of relationships between FDI flows and BITs, and may explain some of the mixed results
in the literature (Aisbett, 2009; Kerner, 2009).
We address endogeneity through a Heckman (1979) two-stage procedure. The first stage is a probit
model to estimate the likelihood of two countries’ signing an IIA. Table 6 reports results from our firststage-model, based on Jandhyala, Henisz & Mansfield (2011). The model’s explanatory variables are
proxies for vertical FDI potential (dyad per capita income difference), horizontal FDI potential (size of
dyad economies), diffusion of IIAs (total number of BITs and ECT members), geographic distance
between dyad countries, and dyad political risk (average dyad POLCON score)10.
Table 7 reports the second stage regression of transaction value on the variables in Table 3, augmented
by the Inverse Mills Ratio (IMR) as an indicator of endogeneity bias. The IMR coefficient is insignificant,
however, indicating the absence of such bias. Further, the coefficients of the IIA variable and its
interaction with firm size and foreign state ownership remain similar to those reported in the main
results.
A second concern is that non-IIA transactions are under-sampled. If IIAs add value by protecting FDI,
then selection bias may occur if observations not protected by IIAs (“non-IIA transactions”) fall just
below our threshold for sample inclusion. We address this potential selection bias by lowering the
threshold for non-IIA transactions. To be conservative (and hence err in the opposite direction of
10
The results reported in this table use all potential home-host dyads worldwide. We also estimated this model on
the countries in our sample, with similar results.
23
oversampling non-IIA transactions), we chose $8 million as the threshold value for non-IIA transactions
(compared to $10 million for IIA-transactions)11. Lowering the threshold adds 7 non-IIA transactions to
the sample; but does not affect our empirical results above (Model 1, Table 8).
Next, we explore the different effects of IIAs for firms with greater and lesser financial resources by
undertaking a sub-sample analysis. Models 2 and 3 in Table 8 include only firms with large and small
financial resources respectively. In Model 2 (large financial resources sub-sample), we observe that the
coefficient of IIA is positive and significant. However, in Model 3 (small financial resources sub-sample),
the coefficient of IIA is not significant.
We explore a similar sub-sample analysis with foreign state ownership in Models 4-5 in Table 8. In
Model 4 (firms with foreign state ownership), the coefficient of IIA is not significant, while it is positive
and significant in Model 5 (firms without foreign state ownership).
A fourth concern may be that our results are confounded by including both BITs and ECT in the coding of
IIAs. While a BIT and the ECT provide similar protection for foreign investors, they also differ in some
ways. As the name suggests, BITs are bilateral in nature, signed between one home and host country.
They are also specifically designed to protect foreign investment. However, the ECT is a multilateral
agreement with a much broader scope, governing both trade and investment in the energy sector. In
our sample, the vast majority of transactions are protected by a BIT (87%). Thus, we restrict the next
model to only protection from BITs and include its interaction with Financial Resources and Foreign
State Ownership. In Model 6, we observe a pattern of results similar to that reported using the IIA
dummy although the results are significant only at the 10% level.
Another concern might be that our results are reflecting some differences between domestic and crossborder transactions as we compare IIA protected cross-border transactions against both non-IIA
11
This effectively allows for IIAs to enhance asset value by up to 25 percent ($10 million/$8 million = 1.25)
24
protected cross-border as well as domestic transactions in our primary specifications. Since IIAs may
provide little or no protection for domestic transactions,12 we may be confounding the comparison set.
Thus, we restrict our sample to only cross-border transactions (those in which the buyer’s home country
is different from the country in which reserves are located). We find that the results are substantively
similar to those reported above, although the Foreign State Ownership interaction is no longer
significant.
Finally, we consider that some of the countries in our sample have very few transactions. With one or
two transactions per country, our results may be driven by cross-national differences rather than the
difference in IIA protection. Thus, in Model 5, we restrict our sample to those countries in which five or
more transactions are reported. This reduces the number of host countries in our sample from 45 to 18.
However, the results are consistent with those reported for the full sample. The presence of an IIA
increases willingness to pay for foreign assets by 45% for firms with large financial resources while this
effect is not significant for those with small resources. Similarly, IIAs increase the willingness to pay by
non-foreign sate owned firms by 33% while the effect is not significant for foreign state owned firms.
Taken together, our results support the argument that IIAs provide investor protection, but this effect is
moderated by a firm’s financial resources and foreign state ownership; IIA protection enhances value
only for firms with large financial resources, and those not owned by a foreign state.
Discussion
Political-risk considerations in foreign investment decisions have prompted many strategy scholars to
examine host-government policies and domestic institutional arrangements that may reduce the risks
12
BITs provide no protection for domestic investment. The ECT is less clear; e.g., foreign shareholders brought a
claim under ECT against the Russian government after it expropriated domestic company Yukos.
25
for foreign investors. For example, prior literature has examined the strategic actions of developing
countries (Murtha & Lenway, 1994), legal policies (La Porta, Lopez-de-Silanes, Shleifer & Vishny, 1998),
political institutional arrangements (Henisz, 2000a), and electoral cycles (Vaaler, 2008) on the likelihood
of increased foreign investment.
However, there has been a scarcity of work examining the role of international institutional
arrangements as safeguards for investors. Yet international institutions for trade and investment are
rapidly proliferating; the World Trade Organization, Regional Trade Agreements, and Bilateral
Investment Treaties are all examples of international institutions that have significantly altered the rules
of international commercial transactions. As noted by Westney (2011: 380), we are witnessing “a
profound transformation of regulatory patterns, involving the decline of the state-centered regulation
that MNCs have become so adept at managing, in favor of an array of new regulatory modes” shaped by
states, international organizations, and civil society. Thus, in studying MNE strategy, we need to extend
our analysis beyond country-specific institutions (Ramamurti, 2001; Chan, Isobe & Makino, 2008).
Our analysis takes a step down this path. This study offers an empirical test of the effectiveness of IIAs in
protecting international investment. We demonstrate that MNEs value assets protected by IIAs higher
than similar unprotected assets; an effect that is moderated by a firm’s financial resources and
ownership. As discussed above, IIAs alter risk perception by providing extensive rights and protection for
MNEs, while restricting host governments’ discriminatory policy changes that expropriate the firm’s
assets. Thus, they provide an alternate, international mechanism by which host country political risk
may be lowered.
Our results also have implications for MNE managers evaluating their institutional environments.
Managers evaluating risk considerations in a potential host country need to take into account their
firm’s own characteristics in evaluating the benefits, if any, of institutional arrangements. Our empirical
26
analysis focuses on the petroleum sector. While studies of a single sector offer researchers a powerful
arena for testing propositions, they also raise the issue of generalizability of findings. Investments in
natural resources or regulated industries with large, upfront capital costs and high political salience are
especially prone to political risks. Thus, managers in these industries may be particularly sensitive to
national and international institutional arrangements. Exploring the role of IIAs across multiple
industries remains open for future research.
In addition, we need to explore how alternate mechanisms of property rights protection interact with
international institutional arrangements. International arbitration is an expensive process, and usually a
last resort for MNEs, as it severely restricts their ability to continue operating in the host country. Since
exploration and production of natural resources is a long term commitment, MNEs, especially small
firms, may seek alternate strategic mechanisms such as equity participation by the host government or
the involvement of other stakeholders for managing these risks (Maniruzzaman, 2009-10). For example,
a joint venture by a foreign investing firm has been shown to be a strategic tool in countries where
public expropriation hazards are high (Delios & Henisz, 2000). These mechanisms may substitute for IIAs.
Data limitations prevent us from exploring this, however, and it remains an open question.
While our analysis highlights the mechanisms by which IIAs can support foreign investors’ property
rights, some concerns have also been raised about the effectiveness of the protective dispute resolution
system. Although the number of investment-treaty disputes have risen in the last decade to over 300
(UNCTAD, 2009), the jurisprudence and enforceability of resulting awards is still in its infancy (Yackee,
2008). Managers may be particularly concerned that host governments may be unwilling or unable to
honor the arbitral decisions that go against them (Rose-Ackerman, 2009). Thus, uncertainty with regards
to implementation of IIAs and post-award behavior may reduce their value to investors. In future work,
27
we would like to explore how a country’s history and reputation in international arbitration influences
investors’ expectations of property rights protection.
Finally, we acknowledge that our explanations rely, in part, on inference. We attribute the positive and
significant effects of IIAs we find in the econometric analysis to increased property rights protection for
foreign investors without directly observing property rights mechanisms. Thus, a more granular
approach – examining specific motivations of asset valuation coupled with qualitative analysis – would
greatly enhance our understanding of the micro-processes and mechanisms that influence the strategic
choices of foreign investors.
28
Appendix A – Historical context of International Investment Agreements
Prior to World War II, investors’ recourse to nationalization of assets abroad was restricted to vague
customary international law and extra-legal enforcement mechanisms, including military force and
diplomacy. Following the war, many newly independent countries and the socialist-bloc countries chose
to close their economies to foreign investment and began to expropriate existing investment
(Vandevelde, 2009). Developing countries worked within the United Nations (UN) General Assembly to
pass the 1962 resolution declaring the right of nations to permanent sovereignty over their natural
wealth, which would be exercised for the well-being of the people of the state concerned, and the right
to expropriate foreign investment with limited or inadequate compensation (Newcombe & Paradell,
2009).
In response to the threat of uncompensated expropriation, developed countries began to establish IIAs
that guaranteed the rights of investors. The US, for example, built investment protection clauses into its
traditional Friendship, Commerce and Navigation treaties (Newcombe & Paradell, 2009). Led by the
Germans, the European countries began to sign BITs from the 1960s to promote and protect foreign
direct investment (Vandevelde, 2009). These treaties combined similar (and sometimes identical
standards) on the admission and establishment conditions for investment, and the protection of foreign
investment (Newcombe & Paradell, 2009). In addition, investors are given assurances regarding their
property rights through clauses that provide the right to take the host government to international
arbitration if its actions are deemed to substantially expropriate the business of the firm (UNCTAD,
2004) without the requirement to use that country’s domestic courts.
The rise of economic liberalism and the Washington Consensus (Williamson, 1990) coupled with scarce
private capital due to the debt crisis of the 1980s catalyzed a dramatic shift in the attitude of developing
countries towards foreign investors. Many countries began to actively seek foreign investment for
economic development and stabilization (Kobrin, 2005). In doing so, IIAs provided a commitment
mechanism by which developing country governments could signal their changing attitudes towards
property rights of foreign investors. As a result, the number of IIAs exploded in the 1990s (Jandhyala,
Henisz & Mansfield, 2011). By the end of 2009, there were over 3000 agreements governing
international investment negotiated either bilaterally or multilaterally (UNCTAD, 2010).
29
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33
0
1000
2000
3000
Figure 1: Worldwide cumulative number of BITs signed, 1959-2008
1960
1970
1980
1990
2000
2010
year
Source: UNCTAD
34
Table 1: Countries of petroleum reserves transactions in the sample
Total number of transactions = 409
Asset Location
Algeria
Angola
Argentina
Australia
Azerbaijan
Bangladesh
Brazil
Cameroon
China
Colombia
Congo
Croatia
Denmark
Ecuador
Egypt
France
Gabon
Germany
Guatemala
India
Indonesia
Ireland
Japan
Total
Transactions
6
3
19
33
5
3
3
2
11
10
9
1
5
6
11
3
4
1
1
3
34
1
1
Asset Location
Kazakhstan
Libya
Mongolia
Netherlands, The
New Zealand
Nigeria
Norway
Oman
Pakistan
Papua New Guinea
Peru
Philippines
Romania
Russia
Sudan
Thailand
Trinidad and Tobago
Tunisia
Turkey
Ukraine
United Kingdom
Venezuela
Total
Transactions
24
3
1
5
6
1
25
3
3
3
1
3
1
77
4
4
4
5
1
2
54
4
35
Table 2: Summary Statistics and correlation table for the main variables
-1-
-2-
-3-
-4-
-5-
-6-
-7-
-8-
-9-
-10-
-11-
-12-
-13-
-14-
-15-
-16-
-17-
-18-
Mean
1.50
0.31
0.68
0.12
0.43
0.64
3.78
0.30
0.36
0.04
19.55
0.35
0.02
0.03
0.14
0.03
0.03
0.01
SD
1.16
0.46
0.47
0.33
0.32
0.48
0.48
0.46
0.48
0.19
34.78
0.48
0.15
0.17
0.35
0.18
0.18
0.10
Min
-2.92
0
0
0
0
0
2.99
0
0
0
0
0
0
0
0
0
0
0
Max
4.15
1
1
1
0.87
1
4.50
1
1
1
100
1
1
1
1
1
1
1
1
ln(V/R)
1.00
2
IIA
0.04
1.00
3
Resources
Foreign State
Ownership
Host Polcon
-0.20
0.04
1.00
0.02
0.26
0.20
1.00
0.25
-0.05
0.09
-0.07
1.00
0.17
0.50
-0.02
0.28
0.03
1.00
0.35
-0.04
-0.33
-0.10
-0.14
-0.02
1.00
0.06
0.02
-0.11
-0.12
-0.10
-0.04
0.15
1.00
-0.22
-0.01
-0.02
-0.05
0.03
-0.04
0.22
-0.13
1.00
0.05
0.11
-0.02
0.11
-0.03
0.05
0.01
-0.05
-0.12
1.00
0.04
0.02
0.03
0.05
0.26
0.02
-0.13
0.08
-0.42
-0.11
1.00
12
Crossborder
ln(Oil Strip
Price)
M&A
Proved +
Probable
Heavy Oil
% Gas of
proved
reserve
Buyer report
0.03
-0.06
-0.17
-0.11
0.04
-0.01
0.23
-0.08
0.09
-0.02
-0.12
1.00
13
Coal Bed
0.05
-0.10
-0.04
-0.06
0.20
-0.17
0.14
0.08
-0.04
-0.03
0.25
0.03
1.00
14
-0.16
0.04
0.12
0.07
0.02
0.07
-0.13
-0.11
-0.04
-0.04
0.25
-0.10
-0.03
1.00
0.24
-0.07
-0.09
-0.07
0.21
0.06
0.29
-0.14
0.21
-0.08
-0.03
0.10
-0.06
-0.07
1.00
16
LNG
Shallow
Water
Deep Water
0.00
-0.07
0.10
0.13
0.13
0.08
0.10
-0.12
0.20
-0.04
-0.04
0.09
-0.03
-0.03
-0.08
1.00
17
Frontier
-0.17
0.09
0.03
-0.03
-0.16
-0.04
0.01
0.06
0.04
-0.04
-0.10
-0.05
-0.03
-0.03
-0.07
-0.03
1.00
18
Diversified
0.07
-0.01
0.02
-0.04
-0.04
-0.03
0.07
0.10
-0.02
-0.02
0.03
-0.07
-0.01
-0.02
-0.04
-0.02
-0.02
4
5
6
7
8
9
10
11
15
1.00
36
Table 3: OLS models with robust standard errors
Dependent variable = ln(Transaction value of petroleum reserves, per barrel)
-1-
-0.1014
(0.103)
-20.2716*
(0.133)
-0.0948
(0.102)
0.2163
(0.160)
0.1467
(0.170)
-3-0.0649
(0.214)
-0.2396+
(0.126)
0.5044*
(0.238)
0.0902
(0.168)
0.1023
(0.506)
Crossborder
0.1159
(0.100)
ln(Oil Strip Price)
1.0050*
(0.432)
M&A transaction
0.1783+
(0.100)
Proved + Probable Dummy
-1.0233***
(0.117)
Heavy Oil
-0.198
(0.218)
% Gas of Proved Reserve
-0.0060***
(0.002)
Buyer Report
-0.2067*
(0.092)
Coal Bed
-0.5369+
(0.279)
Liquefied Natural Gas (LNG)
-0.5929+
(0.354)
Shallow Water
-0.0243
(0.152)
Deep Water
0.0678
(0.307)
Frontier
-0.0968
(0.301)
Diversified
0.6189+
(0.318)
Host Country Dummies
Yes
Year Dummies
Yes
Constant
-1.9917
(1.406)
Number of Transactions
409
R-sq
0.6
Note: Robust standard errors in parantheses
+ p<0.1, * p<0.05, ** p<0.01, *** p<0.001
-0.0798
(0.519)
-0.0217
(0.114)
1.0250*
(0.432)
0.1675+
(0.101)
-1.0521***
(0.121)
-0.1953
(0.212)
-0.0061***
(0.002)
-0.2060*
(0.092)
-0.5681*
(0.271)
-0.5955+
(0.353)
-0.0002
(0.148)
0.1233
(0.311)
-0.1417
(0.299)
0.6355*
(0.285)
Yes
Yes
-1.9361
(1.411)
409
0.61
-0.1574
(0.505)
-0.0026
(0.116)
0.9402*
(0.429)
0.1495
(0.098)
-1.0667***
(0.119)
-0.2219
(0.219)
-0.0061***
(0.002)
-0.2001*
(0.092)
-0.6020*
(0.263)
-0.6276+
(0.358)
-0.0312
(0.148)
0.0906
(0.326)
-0.1612
(0.297)
0.6648*
(0.290)
Yes
Yes
-1.5483
(1.410)
409
0.61
IIA (H1)
Financial Resources
IIA * Financial Resources (H2)
Foreign State Ownership
IIA * Foreign State Ownership (H3)
Host Polcon
-40.3007*
(0.139)
-0.0915
(0.103)
0.241
(0.316)
-0.154
(0.352)
-0.0661
(0.521)
-0.036
(0.112)
1.0213*
(0.431)
0.1688+
(0.101)
-1.0537***
(0.121)
-0.1888
(0.212)
-0.0063***
(0.002)
-0.2057*
(0.092)
-0.5630*
(0.270)
-0.5771
(0.354)
-0.003
(0.148)
0.1235
(0.312)
-0.1439
(0.300)
0.6396*
(0.284)
Yes
Yes
-1.9267
(1.405)
409
0.61
-5-0.0328
(0.216)
-0.2432+
(0.125)
0.5389*
(0.238)
0.265
(0.308)
-0.2919
(0.347)
-0.1368
(0.506)
-0.0282
(0.114)
0.9274*
(0.425)
0.1508
(0.099)
-1.0707***
(0.119)
-0.2113
(0.220)
-0.0064***
(0.002)
-0.1992*
(0.092)
-0.5946*
(0.264)
-0.5950+
(0.359)
-0.0386
(0.147)
0.0888
(0.329)
-0.1665
(0.299)
0.6745*
(0.287)
Yes
Yes
-1.5041
(1.395)
409
0.62
37
Figure 2a: Interaction Effect of IIA and Firm Resources
(Based on Model 3 in Table 3)
1.3
1.4
1.5
1.6
1.7
1.8
Graph of IIA * Resources interaction
0
1
International Investment Agreement
Resources = Low
Resources = High
Figure 2b: Interaction Effect of IIA and Foreign State Ownership
(Based on Model 4 in Table 3)
1.4
1.5
1.6
1.7
1.8
Graph of IIA * Foreign State Ownership interaction
0
1
International Investment Agreement
Foreign State Ownership = 0
Foreign State Ownership = 1
38
Table 4: Effect of Change IIA = 0 to IIA = 1
(Based on Models 3-5 of Table 3)
Financial Resources = Low
Financial Resources = High
Model 3
-0.06
(0.21)
0.43**
(0.14)
Foreign State Ownership = 0
Foreign State Ownership = 1
Model 4
0.3*
(0.13)
0.14
(0.33)
Model 5
-0.06
(0.21)
0.46***
(0.14)
0.33*
(0.13)
0.04
(0.32)
Note: Standard Errors in Parantheses
+ p<0.1, * p<0.05, ** p<0.01, *** p<0.001
39
Table 5: Robustness tests, OLS models with robust standard errors & Vertical Integration controls
Dependent variable = ln(Transaction value of petroleum reserves, per barrel)
-1IIA
-20.023
(0.167)
-0.1727
(0.127)
0.3526+
(0.204)
-0.2296
(0.245)
-0.2649+
(0.153)
0.5991+
(0.315)
0.3123
(0.320)
-0.3063
(0.374)
-0.0602
(0.143)
0.0787
(0.240)
0.3679
(0.538)
0.3424
(0.532)
-0.0142
(0.126)
1.2743**
(0.465)
0.1942+
(0.108)
-0.2305*
(0.102)
Yes
Yes
Yes
-2.9187+
(1.496)
367
0.59
-0.0442
(0.125)
1.0940*
(0.463)
0.1774+
(0.107)
-0.2173*
(0.101)
Yes
Yes
Yes
-2.1802
(1.523)
367
0.6
Financial Resources
IIA * Financial Resources
Foreign State Ownership
IIA * Foreign State Ownership
Integrated
IIA * Integrated
Host country level controls:
Host Country Polcon
Transaction level controls:
Crossborder transaction
ln(Oil Strip price)
M&A transaction
Buyer report
Reserve level controls
Country dummies
Year dummies
Constant
Number of observations
R-Squared
Note: Robust standard errors in parantheses
+ p<0.1, * p<0.05, ** p<0.01, *** p<0.001
40
Table 6: Probit for Heckman Two-Stage Model
Dependent variable = Presence of an IIA (0/1)
Average of dyad POLCON scores
Vertical FDI - ln(abs diff of GDP/C of dyad)
Horizontal FDI - ln(sum GDP of dyad)
Horizontal FDI - ln((dyad GDP difference)^2)
Total worldwide BITs
Total worldwide ECT members
ln(distance between dyad countries)
Constant
Number of observations
Pseudo R-square
Log likelihood
Chi-square
Note: Standard errors in parantheses
+ p<0.1, * p<0.05, ** p<0.01, *** p<0.001
All countries
1.0436***
(0.028)
0.0227***
(0.004)
0.4537***
(0.009)
-0.0691***
(0.003)
0.0003***
(0.000)
0.0079
(0.005)
-0.7414***
(0.008)
-4.7422***
(0.218)
95,888
0.29
-33790.64
18,059.39
41
Table 7: Robustness Tests – Second stage OLS model with robust standard errors
Dependent variable = ln(Transaction value of petroleum reserves, per barrel)
Inverse Mills Ratio (from first stage)
IIA
Financial Resources
-1-0.0138
(0.181)
0.2704*
(0.131)
-0.0953
(0.102)
-3-0.0119
(0.181)
0.2996*
(0.137)
-0.0919
(0.102)
0.1493
(0.171)
-2-0.001
(0.178)
-0.065
(0.213)
-0.2396+
(0.126)
0.5043*
(0.238)
0.0904
(0.168)
0.243
(0.316)
-0.1536
(0.353)
-40.0035
(0.178)
-0.0325
(0.215)
-0.2431+
(0.125)
0.5390*
(0.238)
0.2644
(0.308)
-0.2921
(0.348)
-0.0825
(0.517)
-0.1576
(0.503)
-0.0685
(0.520)
-0.1361
(0.505)
-0.1501
(1.689)
1.0229*
(0.435)
0.1676+
(0.101)
-0.2063*
(0.092)
Yes
Yes
Yes
-1.7885
(2.392)
409
0.61
-0.0118
(1.665)
0.9401*
(0.431)
0.1496
(0.099)
-0.2001*
(0.092)
Yes
Yes
Yes
-1.5377
(2.357)
409
0.61
-0.1467
(1.688)
1.0195*
(0.433)
0.1689+
(0.101)
-0.2060*
(0.093)
Yes
Yes
Yes
-1.7995
(2.398)
409
0.61
0.0042
(1.661)
0.9279*
(0.427)
0.1508
(0.099)
-0.1991*
(0.092)
Yes
Yes
Yes
-1.5413
(2.363)
409
0.62
IIA * Financial Resources
Foreign State Ownership
IIA * Foreign State Ownership
Host country level controls:
Host Polcon
Transaction level controls:
Crossborder
ln(Oil Strip Price)
M&A transaction
Buyer Report
Reserve level control
Host Country Dummies
Year Dummies
Constant
Number of Transactions
R-sq
Note: Robust standard errors in parantheses
+ p<0.1, * p<0.05, ** p<0.01, *** p<0.001
42
Table 8: Robustness tests, OLS models with robust standard errors
Dependent variable = ln(Transaction value of petroleum reserves, per barrel)
IIA
-1-
-2-
Lower non-IIA
threshold
-0.031
(0.214)
Large
Reserves
0.5146**
(0.176)
-3Small/
Medium
Reserves
-0.2162
(0.331)
-4Foreign
State
Owned
0.7423
(1.030)
-5Non Foreign
State Owned
0.3104*
(0.145)
BIT
Financial Resources
IIA * Financial Resources
-0.2176+
(0.129)
0.5120*
(0.239)
-0.9268
(1.122)
-0.0606
(0.107)
BIT * Resources
Foreign State Ownership
IIA * Foreign State Ownership
0.2572
(0.295)
-0.2826
(0.335)
-0.0825
(0.193)
Transaction level controls:
Crossborder
ln(Oil Strip Price)
M&A transaction
Buyer Report
Reserve level controls:
Host Country Dummies
Year Dummies
BIT
-0.0831
(0.229)
-0.2155+
(0.122)
0.5036+
(0.259)
0.3632
(0.303)
1.8943**
(0.559)
BIT * Foreign State Ownership
Host country level controls:
Host Polcon
-6-
-7-
-8-
Crossborder
-0.1818
(0.241)
>=5
Transactions
0.0244
(0.240)
-0.271
(0.182)
0.5566*
(0.274)
-0.2064
(0.136)
0.4488+
(0.258)
0.2275
(0.309)
-0.1498
(0.356)
0.2122
(0.391)
-0.1939
(0.425)
-0.4405
(0.619)
0.0957
(0.542)
0.9073
(0.555)
0.3250*
(0.130)
-0.2674*
(0.115)
Yes
Yes
Yes
-0.0374
(0.118)
0.8258+
(0.443)
0.1638
(0.106)
-0.2451*
(0.099)
Yes
Yes
Yes
-0.4468
(0.363)
-0.125
(0.506)
-0.1331
(0.607)
0.1713
(1.255)
0.0032
(0.119)
0.7587
(0.462)
0.1618
(0.098)
-0.2204*
(0.093)
Yes
Yes
Yes
-0.0662
(0.156)
1.0942*
(0.512)
0.1746
(0.141)
-0.1954
(0.129)
Yes
Yes
Yes
0.147
(0.254)
0.7782
(0.747)
0.1694
(0.223)
-0.2765
(0.193)
Yes
Yes
Yes
-2.0876
(2.147)
0.2516
(0.635)
-0.0627
(0.504)
2.1058
(2.545)
1.1078
(1.529)
-0.7828
(0.702)
Yes
Yes
Yes
-0.0318
(0.115)
0.9574*
(0.449)
0.136
(0.103)
-0.2295*
(0.097)
Yes
Yes
Yes
0.0427
(0.110)
0.9099*
(0.431)
0.1547
(0.099)
-0.2118*
(0.092)
Yes
Yes
Yes
43
Constant
Number of Transactions
R-sq
Note: Robust standard errors in parantheses
+ p<0.1, * p<0.05, ** p<0.01, *** p<0.001
-1.0002
(1.484)
416
0.61
-2.2202
(1.682)
278
0.63
-1.5842
(2.432)
131
0.68
-4.9642
(9.383)
51
0.92
-1.8989
(1.444)
358
0.62
-1.549
(1.410)
409
0.61
-1.2896
(1.795)
263
0.63
-1.3283
(1.464)
345
0.6
44