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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.

Suggested Citation

  • Aisbett, Emma, 2007. "Bilateral Investment Treaties and Foreign Direct Investment: Correlation versus Causation," MPRA Paper 2255, University Library of Munich, Germany.
  • Handle: RePEc:pra:mprapa:2255
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    Cited by:

    1. Bergstrand, Jeffrey H. & Egger, Peter, 2013. "What determines BITs?," Journal of International Economics, Elsevier, vol. 90(1), pages 107-122.
    2. Lauge N. Skovgaard Poulsen & Emma Aisbett, 2011. "When the Claim Hits: Bilateral Investment Treaties and Bounded Rational Learning," Crawford School Research Papers 1105, Crawford School of Public Policy, The Australian National University.
    3. Alessandro Barattieri, 2011. "Estimating Trade and Investment Flows: Partners and Volumes," Cahiers de recherche 1133, CIRPEE.
    4. repec:spr:weltar:v:153:y:2017:i:4:d:10.1007_s10290-017-0287-z is not listed on IDEAS
    5. Li, Chen, 2016. "Signing a Bilateral Investment Treaty - A tradeoff between investment protection and regulation," Annual Conference 2016 (Augsburg): Demographic Change 145505, Verein für Socialpolitik / German Economic Association.
    6. 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.
    7. Cao, Thi Hong Vinh & Lu, Thi Thu Trang & Nguyen, Thi Viet Hoa, 2014. "The Impact of Heterogeneous Bilateral Investment Treaties (BIT) on Foreign Direct Investment (FDI) inflows to Vietnam," Papers 916, World Trade Institute.
    8. Andrew Myburgh & Jordi Paniagua, 2016. "Does International Commercial Arbitration Promote Foreign Direct Investment?," Journal of Law and Economics, University of Chicago Press, vol. 59(3), pages 597-627.
    9. Arjan Lejour & Maria Salfi, 2015. "The Regional Impact of Bilateral Investment Treaties on Foreign Direct Investment," CPB Discussion Paper 298, CPB Netherlands Bureau for Economic Policy Analysis.
    10. Rod Falvey & Neil Foster-McGregor, 2017. "Heterogeneous effects of bilateral investment treaties," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(4), pages 631-656, November.
    11. Falvey R. & Foster-McGregor N., 2015. "North-South FDI and Bilateral Investment Treaties," MERIT Working Papers 010, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
    12. Zoe Phillips Williams, 2016. "Investor-State Arbitration in Domestic Mining Conflicts," Global Environmental Politics, MIT Press, vol. 16(4), pages 32-49, November.
    13. Aisbett, Emma & Busse, Matthias & Nunnenkamp, Peter, 2016. "Bilateral investment treaties do work: Until they don't," Kiel Working Papers 2021, Kiel Institute for the World Economy (IfW).
    14. Baetens, Freya, 2015. "Transatlantic Investment Treaty Protection – A Response to Poulsen, Bonnitcha and Yackee," CEPS Papers 10297, Centre for European Policy Studies.
    15. Peter Draper & Andreas Freytag & Frank Schorkopf & Christian Bellak & Stormy-Annika Mildner & Christoph Sprich & Elizabeth Johnson & Stefan Beck & Christoph Scherrer, 2014. "Streitpunkt Investitionsschutz: Für und Wider des Investitionsschutzes im TTIP-Abkommen," ifo Schnelldienst, ifo Institute - Leibniz Institute for Economic Research at the University of Munich, vol. 67(12), pages 03-19, June.

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    Keywords

    International investment agreements; Foreign Direct Investment; Developing Countries;

    JEL classification:

    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F20 - International Economics - - International Factor Movements and International Business - - - General

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