Credible Commitments for Investors: International Agreements and Domestic Law in Vietnam

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Which is more reassuring to investors --- domestic laws or international agreements?  A substantial literature argues that investment may be under-provided, because governments cannot offer credible guarantees that investment projects will remain safe after they commence. This time inconsistency problem deters profitable activities by both domestic and foreign firms. Consequently, for emerging market leaders, seeking to deepen their countries' integration into global value chains (GVCs), enhancing the confidence of investors is critical. In this paper, we study the emerging market country of Vietnam to examine which type of reassurance mechanism is most successful. Using a survey of 8,600 domestic and 1,500 foreign firms, we inform investors about either a domestic law or international treaty designed to strengthen contracting institutions. We find that priming both foreign and domestic investors about the international treaty has a larger impact on their views about the future profitability of their projects and the likelihood of contracting with other firms in GVCs. 
Last updated on 12/02/2019