Foreign direct investment and bilateral investment treaties, an international political perspective

Most of the literature dealing with the location of foreign direct investment (FDI) has ignored the fact that multinational enterprises (MME) are not stateless and that their activities take place within an international political system : the return on their FDI can be influenced by the quality of interstate political relations between their home and host countries. This paper investigates whether the quality of interstate political relations between countries influences the volume of bilateral FDI. Thanks to the construction of a new indicator of the quality of interstate political relations, it is found that better interstate political relations foster bilateral FDI, through the signature of a bilateral investment treaty (BIT) may dampen the impact of their fluctuations. In addition, the effect of a variation in the quality of domestic institutions increases with the entry into force of a BIT, suggesting that the latter signals the credibility of an institutional improvement. Overall, when both indirect effects are considered, the entry into force of a BIT increases bilateral FDI stocks by 16%, on average, a lower impact than those found in previous studies. This effect nevertheless significantly differs according to the quality of both interstate political relations and domestic institutions.