Bilateral Investment Treaties and FDI: Does the Sector Matter?

Abstract

Developing and transition countries have increasingly engaged in the signing of bilateral investment treaties (BITs) in order to attract FDI, based on the widely shared view that FDI can contribute significantly to economic development and poverty reduction. However, the degree to which foreign investments can be expected to generate employment, offer access to international technology and know-how, and ultimately create growth, varies considerably depending on the type of investment. It is therefore important to determine what type of FDI is attracted by BITs.By providing a legal commitment to the fair and equitable treatment of foreign investors, BITs aim to decrease investment risk and to attract foreign investors. We argue that BITs can be expected to be most effective in those sectors of the economy with a larger risk of expropriation, i.e. sectors characterized by large sunk costs, relatively low levels of firm-specific know-how and in sectors that are politically sensitive to foreign ownership. This paper represents the first attempt to empirically study the heterogeneous effect that BITs may have across different sectors of investments. We analyze investments made in 13 countries in the former Soviet Union and Central and Eastern Europe, disaggregated over 7 sectors. We indeed BITs refers to the number of ratified BITs. Robust standard errors in parentheses.

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).…”

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

“…The authors interpret this result as an effect caused by the anticipative behaviour of investors. A recent study by Colen, Persyn, and Guariso () analyses the effect of BITs on FDI in different economic sectors. Their study takes into account sectoral disaggregated FDI in seven sectors of 13 countries from the former Soviet Union and Central and Eastern Europe.…”

“…Bilateral investment treaties as a commitment device can help overcome the described time‐inconsistency problem. Especially, ISDS allows countries to credibly commit themselves not to change the terms of an investment after it is established (Colen et al., ; Elkins, Guzman, & Simmons, ; Vandevelde, ). The possibility for investors to gain compensation through ISDS in case host countries pursue discriminatory or discretionary behaviour decreases the incentives of governments to treat FDI unfavourably.…”

“…In regressions with FDI as the dependent variable, these extreme values will bias the results. A solution to this problem is to simply take the logarithm of FDI as a dependent variable, which brings this outliers closer to the middle of the distribution (see, e.g., Berger et al., ; Colen et al., ; Neumayer & Spess, ). However, this requires either that negative observations are deleted, which might cause a selection bias, or that they have to be substituted by some other strict positive value.…”

Investment Treaty Arbitration in Latin America

“…The benefits of investment treaties for states are more ambiguous. Although there is some mixed evidence that investment treaties promote foreign investment (Egger and Pfaffermayr 2004;Salacuse and Sullivan 2005;Kerner 2009;Vis-Dunbar and Nikiema 2009;Yackee 2011;Colen, Persyn, and Guariso 2016), their dispute settlement provisions also create new sets of risks for states, including costly settlement proceedings, unpredictable arbitral decisions, potentially crippling financial awards, and constraints on national sovereignty.…”