Heterogeneous effects of bilateral investment treaties

Abstract

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.

Cross-Border Higher Education: The Expansion of International Branch Campuses

“…There is a wide range of estimated effects on FDI in the literature; Bellak ( 2015 ) reported a wide range of BIT estimates on FDI, including positive, non-significant and negative (11% in total) estimated coefficients. Falvey and Foster-McGregor ( 2017 ) summarised how the literature responded to this ambiguity, concluding that 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. Therefore, the larger resemblance of home and host countries in IBC investment might explain their higher impact on IBC than aggregate FDI flows.…”

Mergers and acquisitions & trade: A global value chain analysis

“…This is a somewhat counterintuitive result since BITs is expected to favour FDI by reducing risks for investors (Desbordes & Vicard, 2009). Nonetheless, the empirical evidence suggests that the significance and sign associated to BIT can vary depending on the sector of investment (Colen, Persyn, & Guariso, 2016), the institutional distance between the source and host country (Falvey & Foster-McGregor, 2017), the intensity of bilateral FDI flows (Paniagua, Figueiredo, & Sapena, 2015) or the level of development of signing countries (Berger, Busse, Nunnenkamp, & Roy, 2011).…”

The political regime as a determinant of inward foreign direct investment

“…There is a positive relation between BITs and FDI (Falvey and Foster-McGregor, 2017;Grosse and Trevino, 2005;Kerner, 2009;Neumayer and Spess, 2005;Salacuse and Sullivan, 2005). Salacuse and Sullivan (2005) stated the positive contribution of BITs to inward FDI in determining BITs effectiveness concerning foreign investment protection, market liberalization, and investment promotion.…”

“…The not-significant negative relationship between the signing of the BITs and inward FDI is in contrast with most of the literature expect the few studies that argue [288] for BITs reduced effectiveness when a host country suffers from weak political institutions (please see 4.4). In a weak institutional environment, BITs' role is limited to complement domestic institutions (Falvey and Foster-McGregor, 2017;Hallward-Driemeier, 2003). Also, the increased competition between the countries for inward FDI share reduces the significance of BITs as a determinant to FDI.…”

“…Hence, the nonsignificant negative relationship between BITs and inward FDI contrasts with the extant literature (please see 4.4). However, some studies leave space for this negative relationship based on the argument that BITs are less effective in an environment of weak political institutions, and is thus supportive of a complementary relationship between domestic political institutions and BITs (Hallward-Driemeier, 2003) (Falvey and Foster-McGregor, 2017). Hence, the positive effect of BITs on FDI flows fades away when there are relatively large differences in the strength of political institutions between source and host countries (Falvey and Foster-McGregor, 2017, p. 653).…”