Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?

Abstract

Summary -Foreign investors are often skeptical toward the quality of the domestic institutions and the enforceability of the law in developing countries. Bilateral Investment Treaties (BITs) guarantee certain standards of treatment that can be enforced via binding investor-to-state dispute settlement outside the domestic juridical system. Developing countries accept restrictions on their sovereignty in the hope that the protection from political and other risks leads to an increase in foreign direct investment (FDI), which is also the stated purpose of BITs. We provide the first rigorous quantitative evidence that a higher number of BITs raises the FDI that flows to a developing country. This result is very robust to changes in model specification, estimation technique and sample size. There is also some limited evidence that BITs might function as substitutes for good domestic institutional quality, but this result is not robust to different specifications of institutional quality.

When BITs have some bite: The political-economic environment for bilateral investment treaties

“…We expect the pie to expand as the number of BITs increases, but as the number of treaties increases, individual countries cannot differentiate themselves from others on the basis of their commitment to the BITs' regime. 4 For example, Kerner (2009), Milner (2008, 2009), Salacuse and Sullivan (2004) and Neumayer and Spess (2005) find strong correlations between BITs and FDI flows. At the same time, using a different set of models and assumptions, Hallward-Driemeier (2003) and Tobin and Rose-Ackerman (2005) find little evidence of this connection.…”

“…At the same time, using a different set of models and assumptions, Hallward-Driemeier (2003) and Tobin and Rose-Ackerman (2005) find little evidence of this connection. 5 See for example Büthe and Milner (2008), Kerner (2009, Salacuse and Sullivan (2004), Neumayer and Spess (2005) and Hallward-Driemeier (2003). 6 An exception is NAFTA that includes an investment chapter covering the United States, Canada and Mexico.…”

“…They are market size, natural resource endowments, trade openness, growth rates, human capital levels, and political and institutional quality and stability. Further, to maintain similarity with the existing BITs literature we base our model on the specification in Neumayer and Spess (2005).…”

The pattern of EU FDI in the manufacturing industry: What role do third country effects and trade policies play?

“…Evidence of a significant positive impact of BIT on FDI has been found for OECD countries (Egger and Merlo 2007), while for developing countries Hallward-Driemeier (2003) found little evidence of a positive influence; however, Neumayer and Spess (2005) and Busse et al (2010), using a larger sample of host and source countries, found that BITs do support FDI towards developing countries.…”

A law for need or a law for greed?: Restoring the lost law in the international law of foreign investment

“…It is clear that not all investments fall within the protection of these regional or bilateral treaties as there is sufficient room left for state regulation and control as to 17 Neumayer and Spess (2005); For a paper seeking to explain the growth in numbers of BITs (rather than evaluating their effects), see Elkins et al (1960Elkins et al ( -2000; For a negative assessment of effect of these treaties, see Tobin and Rose-Ackerman (2005); for an assessment confined to US treaties, see Salacuse and Sullivan (2005). Also see Gallagher and Birch (2006), Tumman and Emmert (2004); Mary Hallward-Dreimeier; United Nations Conference on Trade and Development (UNCTAD) (1998); Simmons and Elkins (2006).…”