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Bilateral investment treaties and foreign direct investment : correlation versus causation

  • Aisbett, Emma

    (University of California, Berkeley. Dept of agricultural and resource economics and policy)

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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Paper provided by University of California at Berkeley, Department of Agricultural and Resource Economics and Policy in its series CUDARE Working Paper Series with number 1032R.

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Length: 48 pages
Date of creation: 2007
Date of revision:
Handle: RePEc:are:cudare:1032r
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  1. Bruce A. Blonigen & Ronald B. Davies, 2001. "The Effects of Bilateral Tax Treaties on U.S. FDI Activity," University of Oregon Economics Department Working Papers 2001-14, University of Oregon Economics Department, revised 01 Jan 2001.
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  8. Mary Hallward-Driemeier, 2003. "Do bilateral investment treaties attract foreign direct investment? Only a bit - and they could bite," Policy Research Working Paper Series 3121, The World Bank.
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  10. 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.
  11. Bruce A. Blonigen & Miao Wang, 2004. "Inappropriate Pooling of Wealthy and Poor Countries in Empirical FDI Studies," NBER Working Papers 10378, National Bureau of Economic Research, Inc.
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  14. Chakrabarti, Avik, 2001. "The Determinants of Foreign Direct Investment: Sensitivity Analyses of Cross-Country Regressions," Kyklos, Wiley Blackwell, vol. 54(1), pages 89-113.
  15. Doyle, Christopher & van Wijnbergen, Sweder, 1984. "Taxation of Foreign Multinationals: A Sequential Bargaining Approach to Tax Holidays," CEPR Discussion Papers 25, C.E.P.R. Discussion Papers.
  16. Assaf Razin & Efraim Sadka & Hui Tong, 2005. "Bilateral FDI Flows: Threshold Barriers and Productivity Shocks," NBER Working Papers 11639, National Bureau of Economic Research, Inc.
  17. Elhanan Helpman & Marc Melitz & Yona Rubinstein, 2006. "Trading Partners and Trading Volumes," DEGIT Conference Papers c011_022, DEGIT, Dynamics, Economic Growth, and International Trade.
  18. Eckhard Janeba, 2001. "Attracting FDI in a Politically Risky World," NBER Working Papers 8400, National Bureau of Economic Research, Inc.
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