Bilateral Legal Treaties and the Investment from Emerging Economies

We investigate how bilateral legal arrangements between home and host countries determine the entry decision of multinational firms from emerging markets. We propose that the cooperative treaties of mutual legal assistance bridge the legal systems home and abroad, reducing entry barriers and encouraging investment. On the contrary, the extradition treaties based on the mutual acknowledgment of two jurisdictions deter foreign direct investment by reducing the arbitrage options of multinational firms. Our analysis on Chinese firms shows that the mutual legal assistance treaties and extradition treaties between China and host countries exert short impacts on their propensity of investing in host countries.