Investment policy reform as a driver of foreign direct investment: Evidence from China

Abstract

A longstanding concern has been the proposition that the international investment treaty system lacks reform. Governments forgo Foreign Direct Investment (FDI) and thus forgo a driver of economic growth, employment and innovation. We assess the validity of this concern in the context of a major home and host country for global foreign direct investment, China, and the major reform of its Bilateral Investment Treaties (BITs). Besides other innovations, the so‐called ‘third‐generation’ BITs of China introduce a strong dispute resolution mechanism, which makes Chinese BITs more investor‐friendly. Our evidence suggests that more investor‐friendly BITs exert a positive impact on FDI in China. We argue that the positive impact of reforming BITs in a country like China, which offers a high degree of stability of the legal and political system and a strong culture of informal dispute resolution, points towards the relevance of the enforceability of property rights for investments.

The (Political) Economics of Bilateral Investment Treaties—The Unique Trajectory of Brazil

“…Similar arguments are provided by Du (2023) and Li and Bian (2020). Leibrecht and Bellak (2023) conclude that "(g)iven the economic importance of China, its political stability and regime durability, long-term orientation in policy as well as its informal channels of dispute resolution, one may ask why formal institutions like the more investor-friendly BITs have an impact on investors from treaty-partner states at all. The findings of this study are consistent with the view that the formality (enforceability) of investor-friendly BITs matters for FDI.…”

“…In short, compared to traditional BITs, the new CFIAs include some traditional and some rare, new, and innovative clauses and exclude some traditional clauses, notably ISDS and FET. The omission of an ISDS clause is interesting as while the basic motivation of the Brazilian government to sign CFIAs instead of traditional BITs is again to stimulate increasingly outward FDI, the path of Brazil is contrary to other large countries like China, which transitioned from a non-ISDS (or limited ISDS) to a strong ISDS status in order to incentivize outward FDI (see Leibrecht and Bellak 2023).…”

“…Hartmann and Spruk (2023) unveil a significant reduction in FDI inflows to India by more than 30 percent when compared to countries without BIT terminations. Leibrecht and Bellak (2023) investigate a major BIT reform in China and note that the substitution of first-with third-generation BITs, whereby first-generation BITs include no or only limited ISDS and third-generation BITs include strong ISDS clauses, exerts a positive impact on the quantity of FDI received by China. 30 The estimated coefficients of the variable indicating the ratification of a thirdgeneration BIT suggest a "range from USD (constant 2010) 185 to USD 101 per capita.…”

“…(p. 16). From this conclusion by Leibrecht and Bellak (2023), one might infer that the ratification of investor-friendly BITs (i.e., including strong ISDS) by Brazil, which is relatively less politically stable and less long-term-oriented, likely would have had a positive impact on FDI in Brazil.…”