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.

Institutional Reforms Debate and FDI Flows to MENA Region: Does One 'Best' Fit All?

“…9 However, the impact of ratified treaties is higher than that of signed treaties. Similarly Neumayer and Spess (2005) find that BITs have a significant positive impact on FDI flows to 119 developing countries for a longer time period . 10 Also Tobin and Rose-Ackerman (2006), in studying the impact of BITs contracted between home OECD countries and host developing countries during the period 1980-2003, find that the number of treaties contracted has a positive impact on FDI in subsequent periods but their marginal impact diminishes as the number of globally contracted BITs increases.…”

“…Table 8, we use natural logarithm. To get around zeros and negative value, we use the same approach adopted by Blonigen and Davies (2004) and Neumayer and Spess (2005). 30 If the value of FDI flows is zero, we add one dollar and take the natural logarithm, resulting in a value of zero; otherwise we would have obtained no value as the log of zero does not exist.…”

Spatial Effects in Dyadic Data

“…In our application, all types of contagion have theoretical plausibility and were therefore tested+ In general, however, researchers should not mine the data for potential evidence of all types of contagion but test only those types of contagion specified by their theory+ Aggregate source and0or target contagion will often be a plausible diffusion channel, but the specific channels can be equally, if not more appropriate+ To give but three examples+ In the bipolar world of the Cold War period one might theorize that alliances diffused primarily via directed dyad contagion: if the Soviet Union allied with, say, India this increased the likelihood that the United States would ally with neighboring Pakistan+ With economic sanctions, one might consider specific source contagion as most appropriate: as some states impose sanctions on a specific target, the likelihood increases that other states will follow suit+ With preferential bilateral trade agreements between developed and developing countries, one might theorize that diffusion works mainly via specific target and specific source contagion+ If, say, Chile has managed to conclude such 38+ See Neumayer and Spess 2005+ an agreement with the United States, other developing countries such as Peru, Colombia, and Panama will want to conclude a similar treaty with the United States, while other developed countries such as Canada, the European Union, and Japan seek a similar treaty with Chile+ A better understanding of the full set of options of specifying spatial effects in dyadic data will allow formulating and testing novel hypotheses predicting dependence of a dyad of two political units on the policy choices of other sources, other targets, or other dyads+…”

How Do Cultural and Institutional Distance Affect China’s OFDI towards the OBOR Countries?

“…7,No. 1 (22) promote FDI flows to developing countries (Neumayer & Spess, 2005;Busse et al, 2010). However, the effect of a BIT crucially depends on the quality of political relations between the signatory countries; it increases FDI more between countries with tense relationships than between friendly countries (Desbordes & Vicard, 2009).…”