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Do bilateral investment treaties increase foreign direct investment to developing countries?

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Author Info
Eric Neumayer
Laura Spess

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Abstract

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.

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Paper provided by EconWPA in its series International Finance with number 0411004.

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Date of creation: 08 Nov 2004
Date of revision: 10 May 2005
Handle: RePEc:wpa:wuwpif:0411004

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Keywords: Foreign direct investment; bilateral investment treaties; institutional quality; protection; risk;

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Find related papers by JEL classification:
F3 - International Economics - - International Finance
F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Wheeler, David & Mody, Ashoka, 1992. "International investment location decisions : The case of U.S. firms," Journal of International Economics, Elsevier, vol. 33(1-2), pages 57-76, August. [Downloadable!] (restricted)
  2. Chakrabarti, Avik, 2001. "The Determinants of Foreign Direct Investment: Sensitivity Analyses of Cross-Country Regressions," Kyklos, Blackwell Publishing, vol. 54(1), pages 89-113.
  3. Christopher T. Taylor, 2000. "The Impact of Host Country Government Policy on US Multinational Investment Decisions," The World Economy, Blackwell Publishing, vol. 23(5), pages 635-647, 05. [Downloadable!] (restricted)
  4. Alberto Alesina & Roberto Perotti, 1993. "Income Distribution, Political Instability, and Investment," NBER Working Papers 4486, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Harm Zebregs, 1998. "Can the Neoclassical Model Explain the Distribution of Foreign Direct Investment Across Developing Countries?," IMF Working Papers 98/139, International Monetary Fund.
  6. Schneider, Friedrich & Frey, Bruno S., 1985. "Economic and political determinants of foreign direct investment," World Development, Elsevier, vol. 13(2), pages 161-175, February. [Downloadable!] (restricted)
  7. W. J. Henisz, 2000. "The Institutional Environment for Economic Growth," Economics and Politics, Blackwell Publishing, vol. 12(1), pages 1-31, 03. [Downloadable!] (restricted)
  8. Noorbakhsh, Farhad & Paloni, Alberto & Youssef, Ali, 2001. "Human Capital and FDI Inflows to Developing Countries: New Empirical Evidence," World Development, Elsevier, vol. 29(9), pages 1593-1610, September. [Downloadable!] (restricted)
  9. repec:fth:coluec:625 is not listed on IDEAS
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Aisbett, Emma, 2007. "Bilateral Investment Treaties and Foreign Direct Investment: Correlation versus Causation," MPRA Paper 2255, University Library of Munich, Germany. [Downloadable!]
    Other versions:
  2. Oliver Morrissey, . "Investment Provisions in Regional Integration Agreements for Developing Countries," Discussion Papers 08/06, University of Nottingham, CREDIT. [Downloadable!]
  3. Udomkerdmongkol, Manop & Morrissey, Oliver & Gorg, Holger, 2008. "Exchange Rates and Outward Foreign Direct Investment: US FDI in Emerging Economies," Working Papers RP2008/102, World Institute for Development Economic Research (UNU-WIDER). [Downloadable!]
  4. M. Sornarajah, 2006. "A law for need or a law for greed?: Restoring the lost law in the international law of foreign investment," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 6(4), pages 329-357, December. [Downloadable!] (restricted)
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