The impact of unilateral BIT terminations on FDI: Quasi-experimental evidence from India

Abstract

This study identifies the impact of Bilateral Investment Treaties (BITs) on foreign direct investments (FDI) by taking advantage of the random timing of 44 unilateral BIT terminations in India between 2013 and 2019. Using quarterly bilateral data of 138 foreign investors’ home countries (FIHCs), our difference-in-differences (DD) estimates uncover a significant reduction in FDI inflows to India in response to BIT terminations by more than 30 percent compared to countries without terminations. We identify the sudden break with investor protection for new investments as the major transmission channel. Further investigations suggest that investors do not necessarily abandon India in response to BIT terminations but apparently reroute FDI via FIHCs with BITs. Evidence from firm-level data reveals that investors revoke or reroute mainly deals (e.g. mergers and acquisitions) rather than own new projects. Moreover, similarity of some legal institutions with India offsets the negative effect of BIT terminations.

Complementarity Versus Substitution Relationship between Outward FDI and Exports: Evidence from India

“…Among the key or core variables in such a model are the GDP of the home country and that of the host (destination) country, which have a positive effect on trade flows or investment flows, and the distance between the two countries, for which an adverse effect is expected. It would be appropriate to carry out an analysis based on the gravity model to confirm whether India's termination of BITs led to a decrease in FDI flows to India (which has been found by Hartmann & Spruk, 2023;Kotyrlo & Kalachyhin, 2023, by applying the DiD analysis technique) and an increase in India's imports (found in the analysis in the previous section based on the DiD analysis technique). For this analysis based on the gravity model in this section, the following specifications of the models are adopted: Source: Authors' computations.…”

“…Until 2015, India had signed BITs with 83 countries, and 74 were in force then. For certain reasons, a need arose to terminate and renegotiate the BITs (for a discussion, see Hartmann & Spruk, 2023;Kotyrlo & Kalachyhin, 2023). India developed a new model BIT in 2015.…”

“…In two cases, BIT termination occurred during the third quarter of 2016, and in several other cases, it occurred between April 2017 and December 2018. The econometric analyses carried out by Hartmann and Spruk (2023) and Kotyrlo and Kalachyhin (2023) have established that India's termination of BITs led to a significant fall in the inflow of FDI in India. The results of Kotyrlo and Kalachyhin (2023) indicate about a 60% fall in India's inward FDI quarterly on average.…”

“…From their analysis, Hartmann and Spruk (2023) have found a significant reduction in FDI inflows to India in response to BIT terminations by over 30% compared to countries without terminations. Since the occurrence of an adverse effect of BIT termination by India on her FDI inflows is well established by the results of the analysis of Hartmann and Spruk (2023) and Kotyrlo and Kalachyhin (2023), in this article, we look mainly at the effect of the termination of BITs on India's imports, investigating whether there was a positive effect or a negative effect-indicating a substitution relationship or a complementary relationship with FDI. We also examine the impact of BIT termination on FDI inflows to verify the findings of Hartmann and Spruk (2023) and Kotyrlo and Kalachyhin (2023).…”

“…Since the occurrence of an adverse effect of BIT termination by India on her FDI inflows is well established by the results of the analysis of Hartmann and Spruk (2023) and Kotyrlo and Kalachyhin (2023), in this article, we look mainly at the effect of the termination of BITs on India's imports, investigating whether there was a positive effect or a negative effect-indicating a substitution relationship or a complementary relationship with FDI. We also examine the impact of BIT termination on FDI inflows to verify the findings of Hartmann and Spruk (2023) and Kotyrlo and Kalachyhin (2023).…”