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Do bilateral investment treaties attract foreign direct investment? Only a bit - and they could bite

Author

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  • Mary Hallward-Driemeier

Abstract

Touted as an important commitment device that attracts foreign investors, the number of bilateral investment treaties (BITs) ratified by developing countries has grown dramatically. The author tests empirically whether BITs have actually had an important role in increasing the foreign direct investment (FDI) flows to signatory countries. While half of OECD FDI into developing countries by 2000 was covered by a BIT, this increase is accounted for by additional country pairs entering into agreements rather than signatory hosts gaining significant additional FDI. The results also indicate that such treaties act more as complements than as substitutes for good institutional quality and local property rights, the rationale often cited by developing countries for ratifying BITs. The relevance of these findings is heightened not only by the proliferation of such treaties, but by recent high profile legal cases. These cases show that the rights given to foreign investors may not only exceed those enjoyed by domestic investors, but expose policymakers to potentially large-scale liabilities and curtail the feasibility of different reform options. Formalizing relationships and protecting against dynamic inconsistency problems are still important, but the results should caution policymakers to look closely at the terms of agreements.

Suggested Citation

  • 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.
  • Handle: RePEc:wbk:wbrwps:3121
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. O'Donovan, David & Rios-Morales, Ruth, 2006. "Can the Latin American and Caribbean countries emulate the Irish model on FDI attraction?," Revista CEPAL, Naciones Unidas Comisión Económica para América Latina y el Caribe (CEPAL), April.
    2. Daniel Millimet & Abdullah Kumas, 2007. "Reassessing the Effects of Bilateral Tax Treaties on US FDI Activity," Departmental Working Papers 0704, Southern Methodist University, Department of Economics.
    3. Williams, Christopher & Lukoianova (Vashchilko), Tatiana & Martinez, Candace A., 2017. "The moderating effect of bilateral investment treaty stringency on the relationship between political instability and subsidiary ownership choice," International Business Review, Elsevier, vol. 26(1), pages 1-11.
    4. Bergstrand, Jeffrey H. & Egger, Peter, 2013. "What determines BITs?," Journal of International Economics, Elsevier, vol. 90(1), pages 107-122.
    5. Busse, Matthias & Königer, Jens & Nunnenkamp, Peter, 2008. "FDI Promotion through Bilateral Investment Treaties More Than a Bit," Proceedings of the German Development Economics Conference, Zurich 2008 4, Verein für Socialpolitik, Research Committee Development Economics.
    6. Thierry Mayer, 2006. "Policy Coherence for Development: A Background Paper on Foreign Direct Investment," OECD Development Centre Working Papers 253, OECD Publishing.
    7. Aisbett, Emma, 2007. "Bilateral Investment Treaties and Foreign Direct Investment: Correlation versus Causation," Department of Agricultural & Resource Economics, UC Berkeley, Working Paper Series qt72m4m1r0, Department of Agricultural & Resource Economics, UC Berkeley.
    8. Jennifer Tobin & Susan Rose-Ackerman, 2011. "When BITs have some bite: The political-economic environment for bilateral investment treaties," The Review of International Organizations, Springer, vol. 6(1), pages 1-32, March.
    9. Bruce Blonigen, 2005. "A Review of the Empirical Literature on FDI Determinants," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 33(4), pages 383-403, December.
    10. Desbordes, Rodolphe & Vicard, Vincent, 2009. "Foreign direct investment and bilateral investment treaties: An international political perspective," Journal of Comparative Economics, Elsevier, vol. 37(3), pages 372-386, September.
    11. Eric Neumayer, 2004. "Own interest and foreign need: Are bilateral investment treaty programmes similar to aid allocation?," International Finance 0412005, EconWPA, revised 29 Nov 2005.
    12. Kazunobu Hayakawa & Hyun-Hoon Lee & Donghyun Park, 2014. "Are Investment Promotion Agencies Effective in Promoting Outward Foreign Direct Investment? The Cases of Japan and Korea," Asian Economic Journal, East Asian Economic Association, vol. 28(2), pages 111-138, June.
    13. Colen, Liesbeth & Persyn, Damiaan & Guariso, Andrea, 2016. "Bilateral Investment Treaties and FDI: Does the Sector Matter?," World Development, Elsevier, vol. 83(C), pages 193-206.
    14. Jay Dixon & Paul Alexander Haslam, 2016. "Does the Quality of Investment Protection Affect FDI Flows to Developing Countries? Evidence from Latin America," The World Economy, Wiley Blackwell, vol. 39(8), pages 1080-1108, August.
    15. Cardamone, Paola & Scoppola, Margherita, 2012. "Trade costs and the pattern of Foreign Direct Investment: evidence from five EU countries," Congress Papers 124106, Italian Association of Agricultural and Applied Economics (AIEAA).
    16. Kyla Tienhaara, 2006. "Mineral investment and the regulation of the environment in developing countries: lessons from Ghana," International Environmental Agreements: Politics, Law and Economics, Springer, vol. 6(4), pages 371-394, December.
    17. Neumayer, Eric & Spess, Laura, 2005. "Do bilateral investment treaties increase foreign direct investment to developing countries?," World Development, Elsevier, vol. 33(10), pages 1567-1585, October.
    18. World Bank, 2007. "East Asian FTAs in Services," World Bank Other Operational Studies 19240, The World Bank.
    19. Kim, Sokchea, 2006. "Bilateral Investment Treaties, Political Risk and Foreign Direct Investment," MPRA Paper 21324, University Library of Munich, Germany.
    20. Teehankee, Manuel A.J., 2018. "The Philippines' Readiness for the TPP: Focus on Investor-State Dispute Settlement," Philippine Journal of Development PJD 2016 Vol. 43 No. 2c, Philippine Institute for Development Studies.
    21. Peter Nunnenkamp, 2010. "How Global is Foreign Direct Investment and What Can Policymakers Do About It? Stylized Facts, Knowledge Gaps, and Selected Policy Instruments," Chapters,in: The Shape of the Division of Labour, chapter 2 Edward Elgar Publishing.
    22. Oliver Morrissey, "undated". "Investment Provisions in Regional Integration Agreements for Developing Countries," Discussion Papers 08/06, University of Nottingham, CREDIT.
    23. Nasrollahi Shahri, Nima, 2010. "The Effectiveness of international investment instruments on the amount of foreign investment (a case study of Iran)," MPRA Paper 36317, University Library of Munich, Germany.

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