Other provisions that tend to encourage foreign investors include clear procedures for dispute settlement and effective protection of one of the key advantages of multinational enterprises (MNEs)—intellectual property.<sup>4</sup> Taken together, these policies are likely to generate an “investment creation” effect—an FDI parallel to the classic trade creation example. However, although the theoretical links between these provisions and greater incentives for foreign investment are relatively simple, none of them guarantee increased FDI or, conversely, that FDI will not increase even if these disciplines are not strengthened following the signing of a PTA. In other words, improved dispute settlement mechanisms and more IPR protection are neither necessary nor sufficient conditions for increased FDI, although both are capable of creating additional investment at the margin. The empirical literature confirms this observation, since the relationship between, for example, IPR provisions and FDI is difficult to establish and, if found, tends to be quite weak. Thus, in a review of the literature on the relationship between the strength of the IPR regime and FDI, Maskus (2000) cites Mansfield (1993), Maskus and Eby-Konan (1994), and Primo Braga and Fink (1998), who could not establish a link between measures of IPR protection and the distribution of FDI. Other studies, such as Lee and Mansfield (1996) and Maskus (1998), manage to isolate a relationship between US-sourced FDI and IPR, but the results are tentative and, for the latter paper, limited to developing countries.

Even if a particular agreement does not go very far in terms of “deep integration,” its provisions could still inspire investor confidence by locking in the existing reforms. Krueger (1999) mentions this possibility in an argument for PTAs as “building blocks” toward global free trade. This hypothesis is also supported by Burfisher et al. (2001), who, while analyzing the effects of NAFTA on its member countries, argue that one of the agreement’s main impacts on Mexico has been to lock in the country’s commitment to reforms and open policy stance, which in turn helped to buttress investor confidence during the peso crisis and improve the aggregate trade balance. A related transmission channel is that PTAs may stimulate FDI to the extent that greater outward orientation contributes to an overall lowering of country political risk (the reform lock-in phenomenon is just one example of this). In this case, the results of Kolstad and Tondel (2002), who note a positive association between low political risk and larger FDI per capita in a cross-sectional study of 120 developing and industrialized countries, may be relevant for the link between preferential liberalization and FDI.

At the same time, other “third wave” provisions such as mutual recognition of standards and enforcement of competition rules could result in increased or decreased FDI. To the extent that these represent non-tariff barriers to trade, the removal of such barriers may encourage MNEs to export rather than defer production to a local affiliate. Alternatively, since the goods produced in a host country can now be sold in a larger market, the above provisions could motivate increased investment in foreign subsidiaries. Overall, the observations in this and previous paragraphs show that the relationship between FDI and PTA investment climate provisions is difficult to predict _ex ante_ . At the same time, while most of the existing empirical evidence points to a positive association between the two, the relationship is not robust to changes in specification and varied samples.

> 4See, for example, chapter 4 of Maskus (2000), which suggests that FDI, particularly when it represents complex but easily copied technologies, is likely to respond positively to stronger protection of IPRs, since such protection increases the value of MNEs’ knowledge-based assets.

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