Extradition treaties and emerging market firms’ host country location choice✰

Abstract

Traditional perspectives on interstate cooperation stress its benefits in facilitating foreign direct investment (FDI) by reducing uncertainty in international operations and enhancing mutual trust between countries. Our investigation explores another side of interstate cooperation by discussing the potential risks that can emerge from it. Our fulcrum for exploring risks comes from an explicit consideration of the divergent interests that can exist between nation states and business. We focus on the phenomenon known as bilateral treaties on extradition, which enable one country to request the repatriation of fugitives or convicted criminals from another country through official cooperation. Extradition treaties extend the jurisdictional influence of a firm's home country to a host country. This mechanism can create concerns for firms when they are motivated to use FDI to escape from their home country, especially from certain emerging markets with weak institutions. We propose that emerging market firms can be motivated to circumvent host countries that have established extradition treaties with their home country. Both private-owned and state-owned enterprises can show this behavior, albeit the effect is weaker for state-owned enterprises as compared to private-owned ones. The effect is particularly strong on firms that have documented malfeasance in their home country. We test these ideas on outward FDI made by Chinese firms in 106 foreign countries during 2001–2013.