Are human rights treaties a “reputational umbrella” for foreign investment?

When countries commit to international human rights regimes, does this affect the amount of foreign direct investment (FDI) they receive? Although many studies examine why countries commit to human rights regimes, and whether these regimes affect human rights violations, we know less about the effect of human rights regimes on third party behavior.

In a recent article, drawing on data collected from 135 developing countries, between 1982 and 2011, I show that while foreign investors are often deterred by countries’ human rights violations, ratifying human rights treaties apparently mitigates this effect. Human rights regimes appear to provide a “reputational umbrella” for investment in countries with the worst human rights practices. As a result, human rights treaties can shield host countries from the normally FDI-deterring effect of their own human rights violations.

My research shows that the ratification of an additional human rights treaty is associated with more FDI, especially in countries with higher levels of human rights violations. In fact, the positive effect of an additional treaty on FDI is more than 250% larger for countries with the worst human rights records versus other countries. Violating more human rights is associated with less FDI, but only for countries that have committed to three or fewer human rights treaties. (This is not a rare event: half of the sample used in this study fits that condition.) Beyond that threshold, human rights violations do not seem to significantly affect FDI flows. Thus, human rights violations do deter investment, but only in countries that are not fully engaged in the network of international human rights conventions.

If the host country’s membership in human rights regimes allows investors to justify their operations, ratification of these treaties will attract FDI. 

Does this mean that investors care more about international law than about human rights? Arguably, it’s about appearances: investors react to countries’ human rights violations because they worry about their own reputation. Mechanisms that potentially shield investors’ reputation from doing business in countries that do not respect human rights will attract investment—that’s the case of human rights treaties. If the host country’s membership in human rights regimes allows investors to justify their operations, ratification of these treaties will attract FDI, especially in countries with poor human rights records.

This explains why research shows contradictory findings about the relationship between human rights and FDI. Human rights violations deter FDI because investors fear being associated with countries responsible for these violations. Interestingly, this reaction may even anticipate the so-called “spotlight phenomenon” —when NGOs direct media attention to human rights violations and make it difficult for multinational corporations to avoid linkages to the countries responsible. Yet if there is no media attention, most investors do not appear to care about human rights violations. In fact, the reputational deterrent effect I find has an effect on FDI regardless of whether or not there is media coverage. The same is true for other channels through which human rights violations might affect investment—such as human capital formation or political instability.

Press Association Images/Tatan Syuflana (All rights reserved)

A Coca-Cola plant in Cibitung, Indonesia. Has frequent participation in the UNHRC and other treaty bodies provided cover for Indonesia's largest sources of FDI despite recent scrutiny of the country's human rights record?

Investors also reward commitment to human rights regimes by providing tangible rewards to treaty ratification. My research suggests that investors rely on the host country’s international commitments to deflect claims (from shareholders, consumers, NGOs, etc.) regarding the country’s human rights record. Qualitative evidence shows that most companies—not only companies concerned with their corporate social responsibility ranking—have strong incentives to pay attention to host countries international commitments.  

Unfortunately, my research also shows that when host countries increase their commitment to human rights regimes, the deterrent effect of actual violations on FDI fades and even disappears: countries that continue to violate human rights receive the highest benefits from participating in human rights regimes in terms of FDI inflows. In other words, investors can use the host country’s commitment to human rights regimes to deflect reputational attacks, and forget about the human rights conditions.

From a theoretical standpoint, this research not only shows that international institutions (treaties) matter, but it also suggests how they matter. The characteristics of human rights regimes allow us to distinguish theoretically and empirically three different mechanisms through which international institutions can affect third parties: information, costs and reputation. My empirical analysis allows us to rule out the informational and costs effects of treaties on FDI choices, and supports the existence of a reputational mechanism.

Overall, these findings suggest that treaties may not be working as mere cognitive shortcuts to investors assessing the human rights situation in a country. Treaties seem to provide some type of reputational cover for investors, especially in cases in which actual human rights practices do not match international commitments. This also questions the effectiveness of corporate social responsibility and socially responsible investment practices: if impact evaluations and screenings rely on standardized tools (e.g. questionnaires for evaluation) that highly weight participation in human rights regimes, these well-intentioned practices may give countries the wrong incentives, with pervasive and self-defeating effects.