Bilateral investment treaties as deterrents of host-country discretion: the impact of investor-state disputes on foreign direct investment in developing countries

Bilateral Investment Treaties (BITs) are an increasingly used policy instrument to encourage FDI inflows, particularly inflows into developing countries. In this paper we estimate a gravity model of FDI flows from a sample of OECD countries to a broader sample of developing economies, examining the impact of BITs on these flows. BITs are signed between highly heterogeneous country-pairs, with important differences found in terms of the institutional and economic distance between BIT signatories. These differences may help explain the mixed results on the effects of BITs on FDI flows in the existing literature, with our exploration of non-linearities in this relationship suggesting that the effects of BITs are increasing in the difference in GDP and GDP per capita between source and host. BITs appear to have no impact upon FDI flows for country-pairs that are too dissimilar in terms of the strength of their political institutions.

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“…directly to the data as explained below (e.g. Aisbett et al, 2017, andBerger et al, 2013). Both approaches produce very similar results.…”

Section: Introductionmentioning

confidence: 99%

Heterogeneous effects of bilateral investment treaties

Falvey

Foster‐McGregor

2017

Rev World Econ

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“…To interpret the size of the estimates parameters, we use an explanation by Aisbett et al. () and Pence (), according to which we can approximate the marginal effect on a hyperbolic sine‐transformed variable by

e^{β} - 1

, where

β

is the estimated coefficient. On this basis, we estimate that an increase in the average BIT index by one unit raises annual FDI inflows by about 6.4% (

e^{0.0616} - 1 = 0.0635

).…”

Section: Estimation Resultsmentioning

confidence: 99%

“…Aisbett et al. () find a marginal effect of BITs on bilateral FDI flows between 18% and 52%, depending on the specification. Berger et al.…”

Section: Estimation Resultsmentioning

confidence: 99%

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Do bilateral investment treaties attract foreign direct investment? The role of international dispute settlement provisions

Frenkel

Walter

2018

World Economy

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This paper studies the effects of the strength of bilateral investment treaties (BITs) on foreign direct investment (FDI) activity. We develop an index for the strength of international dispute settlement provisions included in BITs in order to examine the role the content of BITs plays in attracting FDI. To this end, we make use of data from UNCTAD's International Investment Agreement Mapping Project and measure the provision strength of 2,571 BITs. Using panel data of bilateral and total FDI inflows and inward FDI stocks, we study the effect of BITs on FDI. Our main finding indicates that stronger international dispute settlement provisions in BITs are indeed associated with positive effects on FDI activity.

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“…ISDS can be expected to involve additional costs by limiting the policy space of respondent states (the so-called regulatory chill) and by impairing the reputation and attractiveness of host countries to future FDI inflows (as assessed byAllee and Peinhardt, 2011). However, casespecific information on such costs is even scarcer than on financial compensation.6 On the challenge to minimize the potential for bias from non-random missing information, see alsoAisbett et al (2018) who analyze the impact of ISDS on FDI flows to the host countries facing claims.…”

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confidence: 99%

EU Investors versus EU States: International Arbitration of Investment Disputes

Donaubauer

Nunnenkamp

2018

J of Common Market Studies

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Recent information on investor‐state dispute settlement, collected by UNCTAD, suggests that European investors are more litigious than non‐European investors. Most of the intra‐EU claims for financial compensation are directed at relatively poor respondent states in Central Europe. However, private investors win surprisingly few intra‐EU disputes. The appointment bias of arbitrators and the composition of tribunals appear to matter for the outcome of investor‐state dispute settlement.

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Bilateral investment treaties as deterrents of host-country discretion: the impact of investor-state disputes on foreign direct investment in developing countries

Cited by 42 publications

References 32 publications

Heterogeneous effects of bilateral investment treaties

Heterogeneous effects of bilateral investment treaties

Do bilateral investment treaties attract foreign direct investment? The role of international dispute settlement provisions

EU Investors versus EU States: International Arbitration of Investment Disputes

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