scholars have argued that firms from emerging markets, given their experience doing business in challenging and uncertain environments, are less sensitive to poor governance and low institutional quality problems in other developing countries. An observable implication of this “adversity advantage” of emerging market firms would be no significant attention to BITs or any other institutional mechanisms signaling credibility and reliability by the host country government.

To assess this empirically, we interact _BIT_ and _PTA_ with dummy variables indicating the direction of FDI flows. South-South (SS) is equal to 1 if the host country is a Southern country and 0 otherwise, while SouthNorth (SN) takes the value of 1 if the destination country is in the North.<sup>18</sup> Table 7 reports these results. All else equal, both BITs and PTAs appear to have a _stronger_ effect on South-South FDI flows. While the main effects are insignificant, the interaction _BIT*SS_ is positive and statistically significant in the second stage regression model, suggesting that BITs have a stronger effect on the intensity of investments when emerging market firms invest in other developing countries than when they invest in the North. The coefficient of PTA*SS, on the other hand, is positive and significant only in the first-stage logistic regression. PTAs are more effective in shaping the likelihood of SS (than SN) investment. Moreover, these results hold when controlling for political stability and institutional quality. Indeed, in Model 13, the coefficient of _Pol stability_ continues to be statistically significant and positive, although _Gov. quality_ (Model 12) is not.

To shed further light on the importance of political risk and institutional quality for emerging market investors, we then examine whether the effects of BITs and PTAs are conditional on the quality of institutions in the host market. Indeed, Neumayer and Spess (2005) found that BITs tend to have greater effectiveness in attracting FDI when quality of institutions is low. In other words, BITs tend to substitute also for good domestic institutions. Our results, reported in Table 8, confirm these findings. In Model 14, the interaction term _BIT*Pol stability_ is negative and statistically significant at the 95% in the second stage regression. We obtain a similar result when we interact BIT with _Gov quality_ (Model 15) and with rule of law (Model 16). By contrast, the coefficient for the interaction terms _PTA*Pol stability_ and _PTA*Gov quality_ in the first two models are not statistically significant. This suggests that the effect of PTAs, unlike those of BITs, do not depend on the quality of domestic political institutions. This may be viewed as an indication that investors value PTAs mainly for their commercial – not their political—effects.

**Table 7.** IEAs and direction of FDI flows. Hurdle negative binomial regressions

||(|12)|(1|3)|
|---|---|---|---|---|
|VARIABLES|Logit|NB|Logit|NB|
|_GDPpcj_|0.293|-0.0654|0.539**|0.375|
||(0.226)|(0.262)|(0.266)|(0.237)|
|_Populationj_|0.636***|0.415**|0.419***|0.704***|
||(0.113)|(0.175)|(0.114)|(0.210)|
|_Distanceij_|-0.0003***|-6.07e-05|-0.0003***|-0.000159|
||(8.59e-05)|(0.000196)|(8.95e-05)|(0.000141)|
|_Tradeij_|6.35e-08*|-1.10e-08|9.96e-08***|-2.48e-08|
||(3.63e-08)|(1.20e-08)|(3.84e-08)|(1.55e-08)|
|_SS ij_|0.585|-1.732*|0.775|-1.828*|
||(0.770)|(0.894)|(0.788)|(1.068)|

18 In this paper, the Republic of Korea is treated as “South”.

21