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Bilateral Investment Treaties and Foreign Direct Investment: Correlation versus Causation

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  • Aisbett, Emma

Abstract

The rapid and concurrent increase in both foreign investment and government efforts to attract foreign investment at the end of last century makes the question of causality between the two both interesting and challenging. I take up this question for the case of the nearly 2,500 bilateral investment treaties (BITs) that have been signed since 1980. Using data on bilateral investment outflows from OECD countries, I test whether BITs stimulate investment in twenty eight low- and middle-income countries. In contrast to previous studies that have found a strong effect from BIT participation, I explicitly model and empirically account for the endogeneity of BIT adoption. I also test for a signaling effect from BITs. I find that the initially strong correlation between BITs and investment flows is not robust controlling for selection into BIT participation. Furthermore, I find no evidence for the claim that BITs signal a safe investment climate. My results show the importance of accounting for the endogeneity of adoption when assessing the benefits of investment liberalization policies.

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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 2255.

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Date of creation: Mar 2007
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Handle: RePEc:pra:mprapa:2255

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Keywords: International investment agreements; Foreign Direct Investment; Developing Countries;

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  3. Jennifer Tobin & Susan Rose-Ackerman, 2003. "Foreign Direct Investment and the Business Environment in Developing Countries: the Impact of Bilateral Investment Treaties," William Davidson Institute Working Papers Series 587, William Davidson Institute at the University of Michigan.
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Cited by:
  1. Jeffrey H. Bergstrand & Peter Egger, 2011. "What Determines BITs?," CESifo Working Paper Series 3514, CESifo Group Munich.
  2. Lauge N. Skovgaard Poulsen & Emma Aisbett, 2013. "When the claim hits: bilateral investment treaties and bounded rational learning," LSE Research Online Documents on Economics 45035, London School of Economics and Political Science, LSE Library.
  3. Aisbett Emma & Karp Larry & McAusland Carol, 2010. "Compensation for Indirect Expropriation in International Investment Agreements: Implications of National Treatment and Rights to Invest," Journal of Globalization and Development, De Gruyter, vol. 1(2), pages 1-35, December.
  4. Alessandro Barattieri, 2011. "Estimating Trade and Investment Flows: Partners and Volumes," Cahiers de recherche 1133, CIRPEE.

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