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.

Foreign direct investment and bilateral investment treaties: An international political perspective

“…Hallward-Driemeier (2003) and Neumayer and Spess (2005) are two exceptions, and they reach opposite conclusions. Hallward-Driemeier (2003) nds evidence that BITs are complementary to good domestic institutions whereas Neumayer and Spess (2005) suggest that BITs function as substitutes for good domestic institutional quality.…”

“…Hallward-Driemeier (2003) nds evidence that BITs are complementary to good domestic institutions whereas Neumayer and Spess (2005) suggest that BITs function as substitutes for good domestic institutional quality. Hence, the existence of this indirect channel of in uence of BITs on FDI remains highly controversial.…”

Do Bilateral Investment Treaties Attract Foreign Direct Investment to Developing Countries? A Review of the Empirical Literature

“…LDCs sign BITs to encourage foreign investment (Tobin & Rose-Ackerman, 2005;Neumayer & Spess, 2005;Salacuse & Sullivan, 2005;Elkins, Guzman, & Simmons, 2006). Investment from an MNC can be beneficial for an LDC's economic development.…”

An Analysis of Double Taxation Treaties and their Effect on Foreign Direct Investment

“…In particular, the studies to date are well specified for core economic determinants with the addition of only one or two other critical control variables but not their simultaneous inclusion. These include BITs, which are entered into with the specific purpose of increasing FDI, and the related quality of host domestic institutions for which they are intended to substitute, (see, for example, Schneider and Frey (1985), Egger and Pfaffermayer, (2004), Neumayer and Spess (2005)). I also control for the host country's tax rate because of its prominence in the empirical research on the determinants of FDI, (see De Mooij and Ederveen, (2003) and Blonigen (2005)) and because it is intuitive to control for taxes in a study of double taxation treaties.…”

“…The index is constructed in 5 year intervals for the period 1985 to 2000, for which I interpolated for the intervening years, and annually thereafter. FDI is decreasing in poor institutional quality, (Schneider andFrey, 1985, Neumayer andSpess, 2005 Indicator variable = 1 in 1990 or later for a host country that was formerly a member of the Soviet Union, = 0 otherwise. Countries that transition from centrally planned to market-based economies seek foreign investment to support firm privatisation (Grosse and Trevino, 2005).…”