introduction · impact on fdi into the broader perspective of what determines fdi flows; second, to...
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INVESTMENT POLICY MONITOR
Note: This report can be freely cited provided appropriate acknowledgement is given to UNC-TAD and UNCTAD’s website is mentioned (www.unctad.org/diae).
IntroductionThis Monitor
A PERIODIC REPORt by thE UNCtAD sECREtARIAt
U n i t e d n at i o n s C o n f e r e n C e o n t r a d e a n d d e v e l o p m e n t
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September 2014
The ImpacT of InTernaTIonal InvesTmenT agreemenTs on foreIgn DIrecT InvesTmenT: an overvIew of
empIrIcal sTuDIes 1998–2014
IIA ISSUES NOTE – Working Draft
Working Draft for peer review on the investmentpolicyhub platform. Comments welcome. Citation possible upon request.
This issues note has not been formally edited. Advance copy.
IIa Issues noTe
This working draft for a forthcoming IIA Issues Note invites investment and development stakeholders to engage in this topical debate. Posted on the investment policy hub’s discussion platform, it encourages academics, policy makers and the community at large to help improve our common understanding on the empirical evidence and underlying policy issues. Lending itself to a multi-disciplinary approach to research and policymaking on investment and development issues and calling for further research across a wide range of methodologies, this process will also feed into the Multi-disciplinary Academic Conference that will take place during the forthcoming World Investment Forum (WIF), 13-16 October in Geneva. “Investing in sustainable development”, the WIF’s overall guiding motto, is the background against which this online peer-review process is taking place.
Key messages
• Over the years, numerous empirical studies have assessed the impact of international investment agreements (IIAs), including bilateral investment treaties (BITs), on foreign direct investment (FDI) – with mixed results. A policy debate is now underway to reappraise previous findings and unsolved questions.
• An important consideration for the policy debate is the ultimate function of IIAs with respect to countries’ overall development strategies. Attracting FDI is neither the prime - nor the only - role of IIAs.
• The point of departure for present research and policy analysis is that IIAs are one of several determinants of FDI, and their importance is likely to be contingent on other variables. Other host-country policy areas are also significant, and so are business facilitation initiatives and economic determinants. Since IIAs play a complementary role among several determinants, they cannot substitute for sound domestic policies, regulatory and institutional frameworks.
• Existing empirical studies of IIAs’ impact on FDI provide heterogeneous results and have some limitations because of, among others, data and methodological challenges. The majority of studies conclude that IIAs have a positive impact on FDI. An empirical correlation does not necessarily imply causation, but most recent studies that address the so-called endogeneity problem are able to
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establish a positive causal relationship between IIAs and FDI. More nuanced recent research finds that the content of IIAs matters: the FDI impact of IIAs is dependent on the presence of certain substantive treaty provisions. On the other hand, some empirical studies find no effect of IIAs on FDI flows.
• Across the board, empirical studies point to the importance of host country conditions. The quality of institutions, the level of political risk, or the development of the financial sector all influence companies’ investment decisions.
• Properly understanding the potential impact of IIAs on FDI is important for defining their role in countries’ investment policies and overall development strategies. Econometric studies can help, but also have limitations. Moreover, prominent counterfactuals (i.e. investment relationships that exist without being covered by IIAs) suggest that legal instruments’ influence on economic matters are limited and that other determinants, in particular the economic ones, are more important. Still, the question of whether an IIA would improve such an investment relationship remains open.
• Finally, the role of IIAs has to be put into the broader context of countries’ efforts to attract and benefit from FDI, with the ultimate objective to promote sustainable development. It is therefore important to consider the challenges that IIAs can give rise to, including with respect to potential constraints on policy space or exposure to investment litigation.
• What matters is the creation of a new generation of investment policies that places inclusive growth and sustainable development at the heart of efforts to attract and benefit from investment. UNCTAD’s Investment Policy Framework for Sustainable Development (IPFSD) can assist policy makers in doing so.
IntroductionThe regime of international investment agreements (IIAs) is undergoing a period of reflection, review and reform. In this context, an important policy debate is underway on the role of IIAs in promoting foreign direct investment (FDI). Thus, an important consideration is the ultimate function of IIAs with respect to countries’ overall development strategies. Attracting FDI is neither the prime – nor the only – role of IIAs. Instead, the key function of IIAs is to contribute to predictability, stability and transparency in investment relations. In this regard, IIAs can help improve countries’ regulatory and institutional frameworks, including by adding an international dimension to them. IIAs can reduce risks for foreign investors and, more generally, signal a better investment climate. Through all of this, IIAs can help facilitate cross-border investment flows, which, if managed properly, can help achieve sustainable development objectives.
The role of IIAs in promoting FDI has been the subject of a number of empirical studies. There are a significant number of econometric studies that address the question of the effectiveness of IIAs, and especially of bilateral investment treaties (BITs).
The purpose of this IIA Issues Note is twofold. First, to put the question of IIAs’ impact on FDI into the broader perspective of what determines FDI flows; second, to present an overview of the diverse empirical literature on the relationship between IIAs and FDI (primarily econometric, but also touching on other methodologies), spanning papers published from the late 1990s to the present.
In so doing, this IIA Issues Note aims to inform policy makers, academia, and other investment and development stakeholders about the current state of this on-going debate, noting that further research – across a wide range of methodologies – is warranted.
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Host Country determinants Type of FDI classified Principal economic determinantsby motives of TNCs in host countries
I. Policy framework for FDI• Economic, political and social stability• Good governance• Policies on functioning and structure
of markets(especially competition, M&A and simple, transparent report-ing standards in line with international practise)
• Protection of property rights (including intellectual property)
• Industrial and regional policies; devel-opment of competitive clusters
• Trade policy (tariffs and non-tariff bar-riers) and stable exchange rates
• International Investment Agree-ments
II. Economic determinants
III. Business facilitation• Investment promotion• Investment incentives• Reduction of hassles costs • Availability of one-stop shop services• Provision of social amenities • Provision of after-investment services
A. Market-seeking • Per capita income• Market size • Market growth• Access to regional/global
markets
B. Natural resource-seeking• Access to raw materials
C. Efficiency-seeking• Different comparative advan-
tages of countries• Better deployment of global
resources
D. Strategic asset-seeking• Access to new competitive
advantages• Availability of and access to
skilled labour• Strategic infrastructure (e.g.
oil pipelines, power grids)
Table 1. Host country determinants of FDI
The determinants of fDI and the role of IIas
The determinants of FDIExisting research and policy analysis suggest that FDI flows are influenced by a wide range of factors. These factors include a country’s policy framework, its economic attractiveness (which depends on the motives of investors), and the business facilitation framework in place (Table 1).
The policy framework for FDI comprises all host-country policy areas that may be relevant to a foreign investor. These vary from one investment to the other. IIAs are only one element within the overall policy framework. While they are a part of the policy framework explicitly targeting FDI issues, other policy areas may be even more critical for a foreign company’s investment decision.
Economic determinants differ according to the main motive of an investor: market-seeking FDI is driven by considerations of market size and growth, access to regional or global markets, or specific market structure characteristics. Resource/asset-seeking FDI is aimed at gaining access to raw material, skilled and/or unskilled labour, technology and other created assets, and infrastructure. Efficiency-seeking FDI is undertaken to rationalize elements of a transnational corporation’s (TNC) global value chain (GVC) by accessing inputs (goods and services, including for trade and communication as well as skilled and unskilled labour) at lower costs and making use of economic cooperation and integration agreements for international production networks.
Finally, business facilitation measures (including promotional activities, incentive provisions, and other measures catering to TNCs’ needs) may tilt the balance in favour of a location once other preconditions are in place.
Source: UNCTAD, 1998a and 2010.
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The IIA regime as a determinant of FDIThe expected role of IIAs as determinants of FDI includes (UNCTAD, 2012):
• adding an international dimension to investment protection and by fostering stability, predictability and transparency, reinforce investor confidence and thus promote both investment and trade flows.
• promoting investment in other ways beyond granting investor protection. Some IIAs include commitments on the part of home countries to promote outward investment or to engage in collaborative initiatives for this purpose (although this is currently a small minority of treaties).
• helping to build and advertise a more attractive investment climate. By establishing international commitments, they can foster good governance and facilitate or support domestic reforms.
However, IIAs alone cannot turn a weak domestic investment climate into a strong one and they cannot guarantee the inflow of foreign investment. There is no mono-causal link between the conclusion of an IIA and FDI inflows; IIAs play a complementary role among many determinants that drive firms’ investment decisions. Most importantly, IIAs cannot be a substitute for domestic policies and a sound national regulatory framework for investment.
Another important point relates to the type of IIAs a country has concluded. While BITs are self-standing and explicitly focused on issues of foreign investment, there are broader economic agreements where investment disciplines are just one element in a comprehensive treaty that encompasses trade in goods and services, and covers other aspects of economic cooperation (“other IIAs”). The latter can encourage FDI in additional ways, as they not only protect (and possibly provide access for) investment, but may also dismantle trade barriers, facilitate integration into GVCs, and lead to the creation of a larger market. These “other IIAs” with substantive investment provisions not only change the policy framework, but also affect the economic determinants of FDI. Currently, such treaties account for a very small percentage of all IIAs.
empirical studies on the relationship between IIas and fDIThe impact of IIAs on FDI flows has been the subject of empirical analyses for many years. Most of these studies focus on BITs. A comprehensive review of the literature since the late 1990s reveals two fundamental points (see the full analysis in the Annex).
• First, the majority of studies find a positive impact of IIAs on FDI. This also includes those studies that address the endogeneity problem (i.e. concerns about the direction of causality between IIAs and FDI, Box 1).
• Second, more nuanced recent research finds that the content of IIAs matters: IIAs positively influence FDI flows, provided that they include certain substantive provisions.
As ever more investment-related provisions are integrated into broader economic agreements, their coverage of a wide set of pertinent FDI determinants may be even more effective than BITs in attracting FDI; and research on them is growing accordingly.
The majority of econometric studies find a positive correlation between the presence of BITs and “other IIAs” and FDI. In their seminal paper, Neumayer and Spess (2005) used panel data for 119 countries over the period 1970 to 2001. They showed a positive effect of BITs on FDI inflows that is consistent and robust across various model specifications. The impact of BITs was found to be conditional on countries’ institutional quality. Other early studies produced
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similar results: Büthe and Milner (2004) used a sample of 122 developing countries from 1970 to 2000 and found a “predicted positive, statistically and substantially significant correlation between BITs and subsequent inward FDI into developing countries”. Similarly, Egger and Pfaffermayr (2004) found that “BITs exert a positive and significant effect on outward FDI”. More recent studies also demonstrate a positive impact of BITs on FDI: Berger et al. (2013) in their sample of 28 home and 83 host countries found a significant positive impact, as did Tortian (2012) who looked at FDI inflows into 20 Southeast European and Central Asian countries. A positive impact of BITs on FDI is also reported by Oh and Fratianni (2010), Guerin (2010), Kerner (2009), Banga (2008), Siegmann (2008), Tobin and Rose-Ackerman (2006) and Grosse and Trevino (2005). Some studies nuance these results. For example, Salacuse and Sullivan (2005) suggest that United States (US) BITs are more likely to induce FDI inflows than those concluded by other OECD countries. Tobin and Rose-Ackerman (2011) concluded that “BITs do attract FDI to developing countries, but … cannot entirely substitute for an otherwise weak investment environment”. According to Pinto et al. (2010) ratified BITs have a significant and sizable effect on FDI flows but the impact is not stable and dissipates over time. Desbordes and Vicard (2009) mention that “the effect of BITs crucially depends on the quality of relations between the signatory countries”.
Although an empirical correlation does not necessarily imply causation, most recent studies that address endogeneity find a positive causal relationship between IIAs and FDI. The causal relationship between IIAs and FDI might theoretically run in both directions. Not only may IIAs attract FDI, but countries may also sign IIAs with other countries with which they already have a strong FDI relationship. Such reverse causality, as well as the potential for omitted variables, creates endogeneity problems, which more recent empirical literature has sought to address (Box 1). Aisbett (2009) notes that papers that ignore reverse causality find, in general, greater effects on FDI. However, recent papers confirm that the positive relationship between BITs and FDI holds even if endogeneity is taken into account. For instance, Busse, Königer, and Nunnenkamp (2010) employ a gravity-type methodology and various model specifications, including an instrumental variable approach, and find that BITs do promote FDI flows to developing countries. Berger et al. (2013), also using a gravity model, covering the 1978-2004 period and 28 home and 83 host countries, come to the same conclusions. Egger and Merlo (2007), using an unbalanced panel covering 24 home and 28 host countries between 1980 and 2001, find a strong contribution in the first years of an IIA’s existence. Colen et al. (2014), covering FDI stocks for 13 countries in the Commonwealth of Independent States (CIS) and in Central and Eastern Europe, clearly show a positive impact, but this impact varies by sector. Nevertheless, some papers dissent: e.g. the Peinhardt and Allee (2012) study on the impact of US BITs and Preferential Economic Agreements finds that very few countries have witnessed increased investment flows after signing such deals with the US, once endogeneity is accounted for. Similarly Aisbett (2009) tested OECD countries’ investment flows and found that the “initial strong correlation between BITs and investment flows is not robust controlling for selection into BIT participation” (i.e. controlling for endogeneity).
Some studies found little – or no – effects of BITs on FDI. UNCTAD’s (1998b) econometric study of a cross-sectional time-series model of the determinants of bilateral FDI inflows in 72 host countries over 23 years found that the relationship between BITs and FDI was weak – BITs could be expected to only “marginally increase” FDI. Hallward-Driemeier (2003) analyzed 20 years of bilateral FDI flows from OECD countries to developing countries with respect to several dependent variables (absolute amount of FDI, the ratio of FDI to host country GDP and the share of host country FDI in total FDI outflows of a home country) and found little evidence that BITs have stimulated additional FDI. Tobin and Rose-Ackerman
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(2003) examined bilateral FDI flows between the US and 54 developing countries and found that, overall, the number of BITs has little impact on a country’s ability to attract FDI. This result is also supported by Peinhardt and Allee (2008) and Gallagher and Birch (2006).
Box 1. empirical challenges when analyzing the relationship between IIas and fDI
Correlation versus causation. The decision to enter into an IIA may be endogenous to FDI. Generally speaking, endogeneity makes it hard to properly distinguish causation (an additional IIA “causes” an increase of FDI) from simple correlation (an additional IIA “is empirically associated” with an increase in FDI). There are two sources of endogeneity: reverse causality and omitted variables. Reverse causality originates from the fact that increasing FDI flows may increase the probability that countries will sign an IIA: the motivation and the rationale for entering into an IIA is stronger if the two parties are already related (or expect to be related) by substantial investment relationships. The problem of omitted variables arises as a third exogenous variable acts simultaneously on FDI and IIAs, making their relationship spurious: for example, positive changes to a host country’s investment climate may at the same time stimulate more investment inflows and lead to a higher propensity to conclude BITs to ensure a safer legal framework for foreign investors.
Data limitations with respect to bilateral FDI. Most empirical studies rely on the classic gravity model, broadly adopted in the econometric literature on the determinants of FDI. In this class of models the dependent variable is represented by bilateral FDI (flows or stocks) between any two (source and host) countries. Covariates include a variable signaling the existence of a bilateral treaty between the countries of interest and a number of additional explanatory variables (acting as controls). These approaches face challenges from the limited availability of information on bilateral FDI. First, time-series of bilateral FDI data are available only for developed countries and a limited subset of developing countries. Second, focusing on developed countries leads to numerous “zeros” and “missing values” in the panel data (countries may have different reporting systems, for example reporting FDI only above a certain level, or may have started reporting bilateral FDI at different points in time).
These data limitations pose a number of challenges. First, data constraints limit the scope of the empirical analysis carried out. While many studies have investigated the impact of treaties between developed and developing countries (“North–South”), very limited attention has been given to the increasingly relevant “South–South” dimension for which bilateral investment data is poorer. Second, data limitations make it difficult to generalize results from a selected sample of reporting countries to a broader range of countries. Such a generalization may be affected by a selection bias due to systematic differences between countries that report and countries that do not report FDI data. Finally, data limitations give rise to technical challenges, e.g. those arising from the limited size of the statistical sample and the analytical treatment of zeros and missing values (especially in the presence of econometric models specified in logarithmic terms).
Also in terms of the explanatory variable, there are some major data challenges. Most studies employ an undifferentiated treatment of BITs, modeling them through a binary 0-1 variable. This approach ignores the fact that investment treaties contain different provisions, and their attractive capacity on FDI may depend on their content rather than their mere existence. The «black box» issue may be one of the key factors explaining the lack of conclusive evidence on the impact of BITs on FDI. Analytically the inclusion of the «content» of the BITs into the econometric analysis is not trivial as it requires a rigorous and comprehensive method to translate treatments’ provisions the legal framework into quantifiable and operational metrics.
These data and methodological challenges, as well as the very nature of econometric studies to work on the basis of a simplified description of a complex reality, make it difficult to draw policy conclusions from existing econometric studies on this matter.
Source: UNCTAD.
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The early literature does not pay attention to the substance of BITs and other IIAs (i.e. their content) which can significantly affect their impact on FDI. Analytically, the inclusion of the “content” of IIAs into an econometric analysis is difficult, as it requires a way to translate the legal framework into quantifiable and operational metrics. Some studies have gone this extra mile. For example, the national treatment clause was found to be important in order for BITs to be effective (Berger et al., 2013). Berger et al. (2011) show that any positive FDI effects of BITs can be attributed to ISDS provisions; however the effectiveness of this relationship remains elusive due to its sensitiveness to the model specification, in particular to the inclusion of Central and Eastern European countries. In addition, and not sufficiently empirically tested yet, the overall nature of IIAs may matter, in particular whether a treaty is limited to post-establishment treatment of investments, or also includes guarantees for the establishment stage. Pre-establishment IIAs, especially if they involve liberalization of access conditions for investors (i.e. if they result in liberalization at the domestic level), are more likely to lead to an increase of FDI flows. Currently, only about 10 per cent of all IIAs provide for pre-establishment protection.
The status of an IIA (e.g. whether and when it moved from signature to ratification and entry into force) also influences their effect on FDI. To have an impact on FDI, an IIA need not merely be signed but must also enter into force, after being ratified by both countries. By the end of 2013, about 77 per cent of concluded IIAs had entered into force. Haftel (2010) shows that only ratified BITs have a statistically significant effect on FDI. The effect of BITs on FDI may also not be stable over time, with the impact being stronger in the interval immediately after an agreement’s entry into force, and dissipating over time. Egger and Merlo (2007) and Pinto et al. (2010) found that the effect of a BIT on FDI inflows is concentrated in the first years after its entry into force and is much weaker later.
The impact of “other IIAs”, especially preferential trade and investment agreements (PTIAs), on FDI flows is stronger than the impact of BITs. The impact of preferential trade and investment agreements (PTIAs) on FDI inflows is generally found to be positive (Medvedev, 2012; Büthe and Milner, 2014; World Bank, 2005; Banga, 2003; and Dee and Gali, 2003; see also UNCTAD, 2009 and Te Velde and Bezemer, 2004, for a synopsis of studies). That is even more so when agreements are ratified and include ISDS mechanisms (Büthe and Milner, 2014). Berger et al. (2013) found a positive impact arising from regional trade agreements (RTAs) in cases where liberal admission rules were included. Peinhardt and Allee (2012), on the other hand, found little influence from US BITs and preferential economic agreements on US FDI flows.
An IIA might also have a higher impact on FDI flows if it forms part of a country’s broader effort to attract FDI through other investment promotion activities (e.g. through investment promotion and facilitation measures etc.) or complementary regulatory and institutional reform (e.g. improving governance practices, reducing corruption, or building institutions).
However, it is difficult to disentangle the impact that various elements of PTIAs have on FDI. Lesher and Miroudot (2007) tried to overcome this through the construction of a composite index on the extensiveness of investment provisions in RTAs, and found this measure to have a significantly positive effect on FDI flows. Overall, the evidence, albeit based on a limited number of studies, suggests that the impact on FDI tends to be stronger for PTIAs than for BITs. This corresponds to the method by which the impact of IIAs on FDI is theorized: PTIAs influence a wider range of policy and economic determinants of FDI than BITs.
The host country environment and other factors shape the effectiveness of IIAs. The effectiveness of an IIA may also vary considerably depending on other host country factors, such as governance, institutional quality and political risk.
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Neumayer and Spess (2005) and Siegmann (2008), in line with earlier results of Hallward-Driemeier (2003), show that the impact of BITs on FDI can depend on the institutional quality in the host country, while Yackee (2007) finds aspects of institutional quality – referring to them as part of political risk – to have the opposite effect. The latter may be in line with the results of Tobin and Rose-Ackerman (2003) which show that BITs are more effective in attracting FDI in relatively riskier countries. Similarly, Tortian (2012) shows that BITs do not play a strong role in FDI attraction where financial systems are well developed. Allee and Peinhardt (2011) find that the contribution of BITs to FDI attraction turns negative if countries are challenged through ISDS procedures and even more strongly so following a case in which the government loses.
Other approaches have been used to examine the impact of IIAs on FDI. Surveys, firm-level data, and transaction-level data produce mixed results. UNCTAD’s 2007 survey found that for an overwhelming majority (70 per cent of the surveyed TNCs), IIAs play a role in the decision to invest in a host country (UNCTAD, 2007). Despite the difficulties to express the relationship between FDI and BITs in a single number, Bellak (2014) finds a statistically significant positive effect of 2 per cent increase of FDI (confidence interval: 1.4; 2.6 per cent), based on meta-analysis of empirical studies on inward and outward FDI flows and FDI stocks (309 observations). Bellak (2014) concludes that the effect derived is too small to be of practical relevance, given the volatility of FDI flows and stocks in general. Several studies use firm-level evidence of the impact of IIAs on individual firm’s investment decisions. For example, Egger and Merlo (2012) use firm-level data on the activity of German transnational corporations (TNCs) to monitor their investments’ responsiveness to BITs. They find that BITs have a positive effect on TNCs’ foreign investment activity by both raising the number of TNCs that are active in a particular host country and increasing the number of plants, FDI stocks and fixed assets per firm. Following the idea that IIAs reduce political risk for foreign investors, Jandhyala and Weiner (2012) analyzed transaction-level data on the sale of petroleum reserves in 45 countries and found that TNCs pay higher prices for these assets in countries where they are protected by IIAs, pointing towards a risk adjustment in asset prices. Yackee (2011) also tried to “indirectly” measure the impact of BITs on FDI by means of the impact of investment treaties on the perceived political riskiness of host countries. The results of a regression analysis did not show significance. Yackee also highlighted that providers of political risk insurance (PRI) do not take BITs into account when determining their insurance conditions; neither “do in-house counsel in large US corporations view BITs as playing a major role in their companies’ foreign investment decisions”. Similarly, Poulsen (2010) also reports that investors rarely inquire about existing BITs before investing and that “treaties have very little impact on PRI providers’ coverage and pricing policies”.
Some cases appear to demonstrate a “counter-factual” in reality. Several large developing countries, such as Brazil, China, India or South Africa, are major recipients of FDI flows, including from countries with which they do not have an IIA relationship. While this points to the importance of FDI determinants other than IIAs (notably economic determinants such as market size, market growth, and resource endowments), it also underlines the limitations that legal instruments display in terms of influencing economic matters.
However, the picture is, again, more nuanced. Looking, for example, at US FDI stock in these countries – all countries that do not have IIAs with the US – the percentage share of US FDI stock is considerably lower than the average share of US FDI stock globally.1 While this does not mean that FDI flows from the US would increase once and if an IIA with these countries would be concluded and
1 While the US share in global inward FDI stock is around 25 per cent, for these four countries the US share only ranges between 5 and 15 per cent.
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enter into force, it points to the likelihood that IIAs could play a role in determining investment location decisions.
summary and outlook Properly understanding the potential impact of IIAs on FDI can help define their role in countries’ investment policies and development strategies. Equally, it is important to consider the challenges that IIAs give rise to, including their impact on policy space and the exposure to ISDS cases.
In terms of the former, the present IIA Issues Note has shown three things:
• First, locational decisions of foreign investments are determined by an array of factors, including those related to a host country’s policy framework, the economic determinants and the motives of investors, and business facilitation measures. IIAs are an important part of the investment policy framework: they can foster predictability, stability and transparency; reduce risks for investors and signal a better investment climate. However, IIAs alone cannot turn a weak domestic investment climate into a strong one and they cannot guarantee the inflow of foreign investment. IIAs are only one element within the overall policy framework.
• Second, reviewing the literature on the impact of IIAs on FDI reveals that empirical studies provide heterogeneous results, among others because of significant data and methodological challenges. The majority of studies find a positive impact of IIAs on FDI, with some studies establishing a causal relationship between the two. More nuanced research finds that the content of IIAs matters: IIAs positively influence FDI flows, provided that they include certain substantive provisions and guarantees. The status of IIAs is also important: treaties that are in force have a greater impact than those that have only been signed. While it remains problematic to draw policy conclusions from econometric studies, these studies confirm the broad pathways through which IIAs are theorized to influence FDI flows: from the perspective of investors, BITs and other IIAs provide stability (e.g. the literature refers to risk reduction as a determining factor), protect investors (e.g. ISDS and national treatment clauses are found to be important as a co-determinants) and, more generally, contribute to a better investment climate.
• Third, the impact of IIAs is also conditional on, or mediated by, a number of other factors beyond the treaties themselves. The key factors identified in the literature are the sector and industry in which the FDI takes place, the country of origin of investors, the governance and institutions pertaining in host countries, and the life-cycle of an IIA (e.g. the size of impact is highest immediately after entry into force and then tails off). While these factors are undoubtedly important, whether and how they are treated in studies varies (e.g. in terms of how they are defined and specified or the metrics used).
There are a number of relevant aspects that are not addressed as extensively in the literature. Further, in some cases it is not possible to examine them with studies based on macro-panel data. These aspects include the specific motives of investors or the entry of investors through contractual forms other than FDI (such as contract manufacturing), which are increasingly important in international investment and trade (e.g. regarding GVCs). More research would help clarify these and other unresolved topics related to the impact of IIAs on FDI flows. Such studies would need to use variables grounded in commonly agreed conceptual frameworks, with transparent metrics facilitating the comparison of models and results. Such future research would also utilize a range of complementary methodologies, to fully tease out the nuances and details of IIAs’ impact on FDI, and the relative importance of other factors.
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Such more contextualized evidence is crucial for policy makers aiming to make best-possible choices when formulating their countries’ strategic approach to international engagement on investment. Such more contextualized evidence can help better embed international investment policy making in countries’ development strategy and aid in designing IIA provisions that maximize sustainable development benefits while minimizing risks.
These findings are particularly important at this critical juncture in treaty making, where the IIA regime is experiencing a period of reflection, review and reform. The challenges that IIAs have given rise to, including the concerns related to their development dimension, to the balance between the rights and obligations of investors and States, and to the systemic complexity of the IIA regime in general (UNCTAD, 2012) have led to a situation where almost all countries are parties to one or several IIAs, but many are dissatisfied with the current treaty regime (UNCTAD, 2014). Countries’ efforts to address these challenges reveal four broad paths of action: (i) maintain the status quo, e.g. largely refraining from changes in the way countries enter into new IIA commitments; (ii) implement selective adjustments, e.g. modifying models for future treaties but leaving the treaty core and the body of existing treaties largely untouched; (iii) disengage from the IIA regime, e.g. unilaterally terminating existing treaties or denouncing multilateral arbitration conventions; and, finally, (iv) undertake a systematic reform to address the IIA regime’s challenges in a holistic manner (UNCTAD, 2014).
Deciding which of these paths to pursue, and whether or not to have IIAs (and if so, in which shape or form) is a matter of choice for governments. Such decisions come with a number of trade-offs that will involve – as with any international treaty – giving up some policy space in return for benefits from the treaty partners. Such a decision is usually taken in a specific bilateral (less frequently, in a plurilateral) context, where the IIA is one piece of a broader picture determined by a variety of factors. These factors include, among others, the level of economic development of participating States, relative trade and investment positions, geopolitical factors, and the general approach to bilateral or regional economic cooperation. They can also include the role of IIAs as determinants of trade in the context of GVCs, and their usefulness for domestic (institutional) reform efforts. A country may be prepared to sacrifice some of its policy space and certain aspects of its sovereignty, if there is a prospect of larger benefits to be gained. Hence, in principle, countries would assess the costs and benefits of entering into an IIA in each case, and depending on the potential partner(s) involved.
In all of this, it is essential that governments take utmost care to ensure that these treaties contribute to, rather than impede, their countries’ overall development strategies, including with respect to industrial policy, social and environmental objectives. Success in attracting and benefiting from investment depends not only on investment policy “stricto sensu” (i.e. entry and establishment rules, treatment and protection), both at the national and international levels, but on a host of investment-related policy areas ranging from tax and industrial policies to trade to environmental and labour market policies. These policy areas interact with each other and there is consequently a need for a coherent overall approach to make them conducive to sustainable development (UNCTAD, 2012). UNCTAD’s Investment Policy Framework for Sustainable Development (IPFSD) can offer important guidance in this regard.
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Allee, T. and C. Peinhardt (2011). “Contingent Credibility: The Impact of Investment Treaty Violations on Foreign Direct Investment”, International Organization, Vol. 65, No. 3, pp. 401–432.
Banga, R. (2003). “Impact of Government Policies and Investment Agreements on FDI Inflows”. Working Paper No. 116 (November). New Delhi: Indian Council for Research on International Economic Relations.
Banga, R. (2008). “Government Policies and FDI Inflows of Asian Developing Countries: Empirical Evidence”, in: Fanelli, J.M. and L. Squire (eds.), Economic Reform in Developing Countries Reach, Range, Reason. Cheltenham and Northampton: Edward Elgar, pp. 117-146.
Bellak, C. (2014). “Economic Impact of Investment Agreements”, Asian Development Bank, forthcoming.
Berger, A., M. Busse, P. Nunnenkamp and M. Roy (2011). “More Stringent BITs, Less Ambiguous Effects on FDI? Not a BIT!”, Economics Letter, Vol. 112, No. 3, pp. 270-272.
Berger, A., M. Busse, P. Nunnenkamp and M. Roy (2013). “Do Trade and Investment Agreements Lead to More FDI? Accounting for Key Provisions Inside the Black Box”, International Economics and Economic Policy, Vol. 10, No. 2, pp. 247-275.
Busse, M., J. Königer and P. Nunnenkamp (2010). “FDI Promotion through Bilateral Investment Treaties: More Than a Bit?”, Review of World Economics, Vol. 146, No. 1, pp. 147–177.
Büthe, T. and H.V. Milner (2004). “Bilateral Investment Treaties and Foreign Direct Investment: A Political Analysis.” A revised version of the paper presented at the Annual Meeting of the American Political Science Association (September, 2004), in: Sauvant, K.P. and L.E. Sachs (eds.) (2009), The Effects of Treaties on Foreign Direct Investment: Bilateral Investment Treaties, Double Taxation Treaties and Investment Flows. New York: Oxford University Press.
Büthe, T. and H.V. Milner (2014). “Foreign Direct Investment and Institutional Diversity in Trade Agreements: Credibility, Commitment, and Economic Flows in the Developing World, 1971-2007”, World Politics, Vol. 66, No. 1, pp. 88-122.
Colen, L., D. Persyn and A. Guariso (2014). “What Type of FDI Is Attracted By Bilateral Treaties?”, LICOS Discussion Paper Series No. 346/2014.
Dee, P. and J. Gali (2003). “The Trade and Investment Effects of Preferential Trading Agreements”, NBER Working Papers Series, Working Paper No. 10160. Cambridge, Massachusetts: National Bureau of Economic Research.
Desbordes, R. and V. Vicard (2009). “Foreign Direct Investment and Bilateral Investment Treaties: An International Political Perspective”, Journal of Comparative Economics, Vol. 37, No. 3, pp. 372–386.
Egger, P. and M. Pfaffermayr (2004). “The Impact of Bilateral Investment Treaties on Foreign Direct Investment”, Journal of Comparative Economics, Vol. 32, No. 4, pp. 788–804.
Egger, P. and V. Merlo (2007). “The Impact of Bilateral Investment Treaties on FDI Dynamics”, The World Economy, Vol. 30, No. 10, pp. 1536–1549.
Egger, P. and V. Merlo (2012). “BITs Bite: An Anatomy of the Impact of Bilateral Investment Treaties on Multinational Firms”, Scandinavian Journal of Economics, Vol. 114, No. 4, pp. 1240–1266.
12
Gallagher, K.P. and M.B.I. Birch (2006). “Do Investment Agreements Attract Investment? Evidence from Latin America”, The Journal of World Investment and Trade, Vol. 7, No. 6, pp. 961–974.
Grosse, R. and L.J. Trevino (2005). “New Institutional Economics and FDI Location in Central and Eastern Europe”, Management International Review, Vol. 45, No. 2, pp. 123–145.
Guerin, S. (2010). “Do the European Union’s Bilateral Investment Treaties Matter? The Way Forward After Lisbon”, CEPS Working Document No. 333.
Haftel, Y.Z. (2010). “Ratification Counts: US Investment Treaties and FDI Flows into Developing Countries”, Review of International Political Economy, Vol. 17, No. 2, pp. 348–377.
Hallward-Driemeier, M. (2003). “Do Bilateral Investment Treaties Attract FDI? Only a Bit and They Could Bite”, World Bank Policy Research Paper, WPS 3121. Washington, D.C. World Bank.
Jandhyala, S. and R. Weiner (2012). “Do International Investment Agreements Protect Investment?”, Petroleum Evidence, mimeo.
Kerner, A. (2009). “Why Should I Believe You? The Costs and Consequences of Bilateral Investment Treaties”, International Studies Quarterly, Vol. 53, No. 1, pp. 73-102.
Lesher, M. and S. Miroudot (2007). “The Economic Impact of Investment Provisions in Regional Trade Agreements”, Aussenwirtschaft, Vol. 62, No. 2, pp. 193-232.
Medvedev, D. (2012). “Beyond Trade: The Impact of Preferential Trade Agreements on FDI Inflows”, World Development, Vol. 40, No. 1, pp. 49–61.
Neumayer, E. and L. Spess (2005). “Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?”, World Development, Vol. 33, No. 10, pp. 1567–1585.
Oh, C.H. and M. Fratianni (2010). “Do Additional Bilateral Investment Treaties Boost Foreign Direct Investments?”, Indiana University, Kelley School of Business, Department of Business Economics and Public Policy, Working Papers.
Peinhardt, C. and T. Allee (2008). “The Costs of Treaty Participation and Their Effects on U.S. Foreign Direct Investment”, American Society for International Law’s International Economic Law Interest Group Meeting in Washington, DC, pp. 1-39.
Peinhardt, C. and T. Allee (2012). “Failure to Deliver: The Investment Effects of US Preferential Economic Agreements”, The World Economy, Vol. 35, No. 6, pp. 757-783.
Pinto, M.P., S.M. Pinto and N. Stier-Moses (2010). “Regulating Foreign Investment: A Study of the Properties of Bilateral Investment Regimes”, Paper prepared for presentation at the Annual Meeting of the International Political Economy Society, Cambridge, MA, November 12-13, mimeo, pp. 1-24.
Poulsen, L. (2010). “The Importance of BITs for Foreign Direct Investment and Political Risk Insurance: Revisiting the Evidence”, in: Sauvant, K. (eds.), Yearbook on International Investment Law & Policy 2009-2010. New York: Oxford University Press.
Salacuse, J.W. and N.P. Sullivan (2005). “Do BITS Really Work? An Evaluation of Bilateral Investment Treaties and Their Grand Bargain”, Harvard International Law Journal, Vol. 46, No. 1, pp. 67–130.
13
Siegmann, T. (2008). “The Impact of Bilateral Investment Treaties and Double Taxation Treaties on Foreign Direct Investments”, University of St. Gallen Law School Law and Economics Research Paper Series, Working Paper No. 2008-22.
Te Velde, D.E. and D. Bezemer (2003). “Regional Integration and Foreign Direct Investment in Developing Countries”, Overseas Development Institute, mimeo.
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Tobin, J. and S. Rose-Ackerman (2006). “Bilateral Investment Treaties: Do They Stimulate Foreign Direct Investment?”, Yale University (June), mimeo.
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Tortian, A. (2012). “The Impact of Bilateral Investment Treaties and Financial Development on Foreign Direct Investment: Evidence from Eurasia”, Paper Submission for Armenian Economic Association Conference, 13-14, October, Yerevan, Armenia, Haigazian University, Beirut, Lebanon.
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Yackee, J.W. (2007). “Do Bits Really Work? Revisiting the Empirical Link Between Investment Treaties and Foreign Direct Investment”, Legal Studies Research Paper Series, Paper No. 1054. Wisconsin: University of Wisconsin Law School.
Yackee, J.W. (2011). “Do Bilateral Investment Treaties Promote Foreign Direct Investment? Some Hints from Alternative Evidence”, Virginia Journal of International Law, Vol. 51, No. 2, pp. 397-440.
14
A
NN
EX
: A s
umm
ary
of
sele
cted
eco
nom
etri
c st
udie
s o
n th
e im
pac
t o
f B
ITs
and
PT
IAs
on
FDI (
in c
hro
nolo
gic
al o
rder
)
Sour
ceDe
pend
ent
varia
ble
Perio
dHo
st a
nd h
ome
coun
trie
sEx
plan
ator
y va
riabl
e re
-la
ted
to B
ITs
and
PTIA
sCo
ntro
l var
iabl
esEc
onom
etric
met
hod
Econ
omet
ric re
sults
Conc
lusi
ons
Büth
e an
d M
ilner
(201
4)FD
I/GDP
19
71-2
007
122
coun
tries
; 3,
067
coun
try-y
ear
obse
rvat
ions
•PT
IAs
in fo
rce
•ch
ange
in P
TIAs
in fo
rce
•di
sput
e se
ttlem
ent
wei
ghte
d PT
IAs
•W
orld
Tra
de O
rgan
izatio
n (W
TO)
mem
bers
hip
•tra
de/G
DP•
polit
ical
sta
bilit
y in
dica
tors
•m
arke
t size
•GD
P gr
owth
•ec
onom
ic d
evel
opm
ent
Erro
r cor
rect
ion
mod
el•
The
estim
ated
effe
ct o
f PTI
As in
forc
e is
hig
her t
han
for s
igne
d PT
IAs.
•Th
e es
timat
ed c
oeffi
cien
t of i
nves
t-m
ent-
wei
ghte
d PT
IAs
is p
ositi
ve a
nd
sign
ifica
nt.
•FD
I inc
reas
es o
ccur
for r
atifi
ed P
TIAs
, not
mer
ely
sign
ed P
TIAs
.
•PT
IAs
with
inve
stm
ent c
laus
es o
f dis
pute
-set
tlem
ent
mec
hani
sms
attra
ct m
ore
FDI.
Cole
n, P
ersy
n an
d Gu
aris
o (2
014)
Tota
l FDI
sto
cks
in a
cou
ntry
in a
sp
ecifi
c se
ctor
1994
-200
913
cou
ntrie
s in
the
form
er S
ovie
t Uni
on
and
Cent
ral a
nd
East
ern
Euro
pe
•Nu
mbe
r of B
ITs
by
coun
try•
Mon
thly
wag
es in
man
ufac
turin
g•
polit
ical
inst
itutio
nal q
ualit
y•
infla
tion
•tra
de o
penn
ess
•av
erag
e ca
pita
l sto
ck p
er fi
rm a
nd
capi
tal/l
abou
r rat
io
Fixe
d ef
fect
s m
odel
The
stud
y fin
ds th
at e
spec
ially
for i
n-ve
stm
ents
in th
e se
ctor
s of
util
ities
and
re
al e
stat
e, a
nd to
a le
sser
ext
ent f
or
bank
ing
and
min
ing,
BIT
s ha
ve a
robu
st
and
econ
omic
ally
sign
ifica
nt e
ffect
on
FDI s
tock
s. F
or fo
reig
n in
vest
men
ts in
m
anuf
actu
ring
and
serv
ices
, BIT
s se
em
not t
o pl
ay a
maj
or ro
le in
inve
stm
ent
deci
sion
s.
BITs
can
be
expe
cted
to b
e m
ost e
ffect
ive in
thos
e se
ctor
s w
ith la
rge
sunk
cos
ts, r
elat
ively
low
leve
ls o
f fir
m-s
peci
fic k
now
-how
and
sec
tors
that
are
pol
itica
lly
sens
itive
to fo
reig
n ow
ners
hip.
Berg
er, B
usse
, Nu
nnen
kam
p an
d Ro
y (2
013)
Bila
tera
l FDI
flow
s19
78-2
004
Hom
e: 2
8De
velo
ped
Host
: 83
deve
lopi
ng c
ount
ries
•Au
thor
-cre
ated
BIT
in
dex
•Re
al G
DP g
row
th
•in
flatio
n •
trade
ope
nnes
s •
DTT
•cu
rrenc
y
Grav
ity m
odel
for
dete
rmin
ants
of F
DIRT
As a
nd B
ITs
have
pos
itive
, sig
nific
ant
impa
ct o
n FD
I flow
s on
ly w
hen
NT p
rovi-
sion
s ar
e in
clud
ed.
The
pres
ence
of n
atio
nal t
reat
men
t pro
visio
ns h
as a
st
rong
, pos
itive
rela
tions
hip
with
FDI
, whe
reas
ISDS
m
echa
nism
s ap
pear
to p
lay
a m
uch
wea
ker r
ole
in d
eter
-m
inin
g FD
I.
Egge
r and
M
erlo
(201
2)Fi
rm le
vel d
ata
on
the
inte
rnat
iona
l ac
tivity
of G
erm
an
TNCs
in th
e ho
st
coun
tries
; tar
get
met
rics
of fo
reig
n ac
tivity
: num
ber o
f af
filia
tes,
em
-pl
oyee
s, a
sset
s,
turn
over
1996
-200
5Ge
rman
TNC
s; 8
6 ho
st c
ount
ries
•Ra
tifica
tion
of a
BIT
•si
gnat
ure
of a
BIT
•GD
P of
the
host
cou
ntry
•sk
illed
labo
ur e
ndow
men
ts•
capi
tal-l
abou
r rat
io•
stat
utor
y ta
x ra
te o
f the
hos
t cou
ntry
•pr
esen
ce o
f dou
ble
taxa
tion
trea
ties
•pr
esen
ce o
f a P
TIA
Pois
son
Fixe
d Ef
fect
s Qu
asi M
axim
um L
ikel
i-ho
od e
stim
atio
n
BITs
(bot
h si
gned
and
ratifi
ed) r
aise
the
num
ber o
f mul
tinat
iona
l firm
s th
at a
re
activ
e in
a p
artic
ular
hos
t cou
ntry
.
BITs
hav
e a
posi
tive
effe
ct o
n th
e nu
m-
ber o
f pla
nts
per fi
rm, a
s w
ell a
s on
FDI
st
ocks
and
fixe
d as
sets
per
firm
.
The
pres
ence
of B
ITs
incr
ease
s th
e in
tern
atio
nal a
ctivi
ty
of T
NCs
in th
e ho
st c
ount
ry.
Med
vede
v (2
012)
Net F
DI in
flow
s19
80-2
003
143
econ
omie
s•
Dum
my
for P
TIAs
join
ed•
GDP
•tra
de o
penn
ess
•GN
I•
GDP
grow
th•
infla
tion
•w
orld
FDI
inflo
ws
Pane
l est
imat
ion
PTIA
-rel
ated
var
iabl
es e
stab
lish
a po
sitiv
e lin
k be
twee
n ne
t FDI
flow
s an
d pr
efer
entia
l tra
de li
bera
lizat
ion.
PTIA
mem
bers
hip
is a
ssoc
iate
d w
ith a
pos
itive
cha
nge
in
net F
DI in
flow
s, a
nd th
e FD
I gai
ns a
re in
crea
sing
with
the
mar
ket s
ize o
f the
PTI
A pa
rtner
s an
d th
eir p
roxim
ity to
the
host
cou
ntry
.
Pein
hard
t and
Al
lee
(201
2)US
out
war
d FD
I flo
ws
1977
-200
7Un
ited
Stat
es a
s in
vest
orHo
st: 1
78 e
cono
-m
ies
•Du
mm
y fo
r yea
r PTI
A si
gned
•La
gged
FDI
Tim
e se
ries
inte
rven
-tio
n an
alys
isAg
reem
ents
rare
ly ha
ve a
sta
tistic
ally
sign
ifica
nt e
ffect
on
US F
DI fl
ows.
US B
ITs
and
PTIA
s ra
rely
resu
lt in
an
incr
ease
in F
DI.
15
Sour
ceDe
pend
ent
varia
ble
Perio
dHo
st a
nd h
ome
coun
trie
sEx
plan
ator
y va
riabl
e re
-la
ted
to B
ITs
and
PTIA
sCo
ntro
l var
iabl
esEc
onom
etric
met
hod
Econ
omet
ric re
sults
Conc
lusi
ons
Torti
an (2
012)
Bila
tera
l out
war
d FD
I sto
ck19
92-2
010
Hom
e: 2
0 OE
CD
coun
tries
Host
: 20
Sout
h Ea
st E
urop
ean,
So
uth
Cauc
asus
an
d Ce
ntra
l Asi
an
coun
tries
•BI
T ex
iste
nce
•Re
gion
al e
cono
mic
agr
eem
ent d
um-
mie
s •
GDP
•gr
owth
•
infla
tion
•fin
anci
al d
evel
opm
ent
•cr
editw
orth
ines
s •
natu
ral r
esou
rce
endo
wm
ents
Pane
l est
imat
ion
The
BIT
varia
ble
is h
ighl
y si
gnifi
cant
in
all s
peci
ficat
ions
.
Regi
onal
eco
nom
ic a
gree
men
t var
iabl
e is
not
sig
nific
ant.
With
the
finan
cial
dep
th in
tera
ctio
n te
rm,
the
BIT
varia
ble
lose
s its
sig
nific
ance
.
Ratifi
catio
n of
BIT
s be
twee
n OE
CD a
nd E
URAS
IA c
ount
ries
exer
t a h
ighl
y si
gnifi
cant
pos
itive
effe
ct o
n bi
late
ral i
nwar
d FD
I.
The
Blac
k Se
a Ec
onom
ic C
o-op
erat
ion
RTA
had
no im
pact
on
intra
-reg
iona
l FDI
.
BITs
do
not p
lay
a pa
rticu
larly
stro
ng ro
le in
incr
easi
ng
FDI i
n th
e ca
se o
f wel
l-dev
elop
ed fi
nanc
ial s
yste
ms.
Alle
e an
d Pe
in-
hard
t (20
11)
Net F
DI in
flow
s19
84-2
007
Num
ber o
f BIT
s co
nclu
ded
•IC
SID
disp
utes
•
dem
ocra
cy•
prop
erty
righ
ts•
popu
latio
n •
GDP
per c
apita
•
GDP
•fin
anci
al o
penn
ess
•ex
chan
ge ra
te v
olat
ility
Pane
l dat
a, fi
xed
effe
cts
Gove
rnm
ents
acc
used
of i
nves
tmen
t tre
aty
viola
tions
bef
ore
ICSI
D ex
perie
nce
stat
istic
ally
and
subs
tant
ive re
duct
ions
in
FDI
.
All c
oeffi
cien
t est
imat
es fo
r “lo
st” I
CSID
di
sput
es a
re n
egat
ive a
nd s
igni
fican
t.
BITs
incr
ease
FDI
into
cou
ntrie
s th
at s
ign
them
, but
onl
y if
thos
e co
untri
es a
re n
ot s
ubse
quen
tly c
halle
nged
bef
ore
ICSI
D.
On th
e ot
her h
and,
gov
ernm
ents
suf
fer n
otab
le lo
sses
of
FDI
whe
n th
ey a
re ta
ken
befo
re IC
SID
and
suffe
r eve
n gr
eate
r los
ses
whe
n th
ey lo
se a
n IC
SID
disp
ute.
Berg
er, B
usse
, Nu
nnen
kam
p an
d Ro
y (2
011)
Bila
tera
l FDI
flow
s (e
xpre
ssed
as
shar
es);
thre
e ye
ars
aver
age
to
smoo
th a
nnua
l flu
ctua
tions
1978
-200
4Ho
me:
14
coun
tries
Host
: 83
deve
lopi
ng
econ
omie
s
•Ra
tified
BIT
with
out
effe
ctive
ISDS
•ra
tified
BIT
with
ef-
fect
ive IS
DS (t
he B
IT
cont
ains
stri
ct IS
DS p
ro-
visio
ns fo
r the
inve
stor
pr
otec
tion)
•Ho
st c
ount
ry G
DP a
nd G
DP g
row
th•
host
cou
ntry
infla
tion
•ho
st c
ount
ry o
penn
ess
to tr
ade
•di
ffere
nce
GDP
per c
apita
bet
wee
n ho
me
and
host
cou
ntry
•pr
esen
ce o
f DTT
•pr
esen
ce o
f com
mon
cur
renc
y•
pres
ence
of a
PTI
A
Gene
raliz
ed M
etho
ds
of M
omen
ts e
stim
a-to
r with
inst
rum
enta
l va
riabl
es
Any
posi
tive
FDI e
ffect
s of
BIT
s ca
n be
at
tribu
ted
to IS
DS p
rovis
ions
.
How
ever
the
effe
ctive
ness
of t
his
rela
tions
hip
rem
ains
elu
sive
due
to it
s se
nsiti
vene
ss to
the
mod
el s
peci
ficat
ion,
in
par
ticul
ar to
the
incl
usio
n of
Cen
tral
and
East
ern
Euro
pean
cou
ntrie
s.
The
resu
lts o
n th
e im
pact
of B
ITs
on F
DI a
re q
uite
elu
sive
. Th
e po
sitiv
e im
pact
of B
IT is
lim
ited
to B
ITs
with
effe
c-tiv
e IS
DS p
rovis
ions
. How
ever
the
effe
ctive
ness
of t
his
rela
tions
hip
rem
ains
elu
sive
due
to it
s se
nsiti
vene
ss to
th
e m
odel
spe
cific
atio
n, in
par
ticul
ar to
the
incl
usio
n of
Ce
ntra
l and
Eas
tern
Eur
opea
n co
untri
es.
Tobi
n an
d Ro
se-A
cker
-m
an (2
011)
Bila
tera
l FDI
dat
a19
84-2
007
97 h
ost c
ount
ries
•Ra
tified
BIT
sBI
Ts d
o at
tract
FDI
, pro
vided
the
host
cou
ntrie
s ha
ve
stro
ng d
omes
tic in
stitu
tions
.
Yack
ee (2
011)
Polit
ical
risk
ra
tings
of t
he h
ost
coun
tries
; thr
ee
diffe
rent
met
rics
of p
oliti
cal r
isk
Diffe
rent
tim
e pe
riods
ac
cord
ing
to
the
met
rics:
- 19
85-
2003
- 19
81
-200
3-
1983
- 19
97
Diffe
rent
set
s of
(h
ost)
deve
lopi
ng
econ
omie
s ac
cord
-in
g to
the
met
rics:
- 11
0-
35-
97
•Nu
mbe
r of «
stro
ng»
BITs
sig
ned
by th
e co
untry
of i
nter
est (
a BI
T is
cla
ssifi
ed a
s «s
trong
» if
it co
ntai
ns
the
stat
e’s
pre-
cons
ent
to in
vest
or-in
itiat
ed
arbi
tratio
n fo
r a w
ide
rang
e of
dis
pute
s)
•GD
P pe
r cap
ita•
infla
tion
rate
•du
mm
y va
riabl
e fo
r “m
ass
expr
opria
-to
r”•
stat
e’s
birth
yea
r•
dem
ocra
cy in
dica
tors
Two
mod
els
test
ed:
1. G
ener
alize
d Le
ast
Squa
res
with
Fixe
d Ef
fect
s2.
Pan
el C
orre
cted
St
anda
rd E
rror
Ther
e is
a s
tatis
tical
ly si
gnifi
cant
impa
ct
of B
ITs
on c
ount
ries’
risk
ratin
g on
ly fo
r on
e of
the
thre
e ris
k in
dica
tors
test
ed.
BITs
hav
e a
limite
d ca
paci
ty to
mod
ify th
e ris
k pr
ofile
of
host
cou
ntrie
s (a
nd th
us to
attr
act m
ore
inve
stm
ents
).
16
Sour
ceDe
pend
ent
varia
ble
Perio
dHo
st a
nd h
ome
coun
trie
sEx
plan
ator
y va
riabl
e re
-la
ted
to B
ITs
and
PTIA
sCo
ntro
l var
iabl
esEc
onom
etric
met
hod
Econ
omet
ric re
sults
Conc
lusi
ons
Buss
e, K
önig
er
and
Nunn
en-
kam
p (2
010)
Bila
tera
l FDI
flow
s (e
xpre
ssed
as
shar
es);
thre
e ye
ars
aver
age
to
smoo
th a
nnua
l flu
ctua
tions
; ver
-si
on w
ith «
zero
» an
d ve
rsio
n w
ithou
t «ze
ro»
1978
-200
4Ho
me:
28
coun
tries
Host
: 83
deve
lopi
ng
econ
omie
s ex
clud
-in
g OF
Cs
•Pr
esen
ce o
f a ra
tified
BI
T be
twee
n th
e tw
o co
untri
es o
f int
eres
t
•Ho
st c
ount
ry G
DP a
nd G
DP g
row
th•
host
cou
ntry
infla
tion
•ho
st c
ount
ry o
penn
ess
•di
ffere
nce
GDP
per c
apita
bet
wee
n ho
me
and
host
cou
ntry
•pr
esen
ce o
f DTT
•pr
esen
ce o
f com
mon
cur
renc
y•
pres
ence
of a
PTI
A•
mea
sure
of o
vera
ll ca
pita
l ope
nnes
s
Diffe
rent
mod
el s
peci
fi-ca
tions
test
ed:
1. O
rdin
ary
Leas
t Sq
uare
s w
ith fi
xed
effe
cts
2. F
ixed
Effe
cts
Pois
-so
n Ps
eudo
Max
imum
Li
kelih
ood
3.
Gen
eral
ized
Met
hods
of
Mom
ents
est
ima-
tor w
ith in
stru
men
tal
varia
bles
Unde
r all
the
mod
el s
peci
ficat
ions
and
fo
r bot
h FD
I spe
cific
atio
ns (w
ith z
eros
an
d w
ithou
t zer
os),
the
coef
ficie
nt o
f the
BI
T va
riabl
e re
mai
ns p
ositi
ve a
nd s
igni
fi-ca
nt; i
n m
ost c
ases
at 5
or 1
% le
vel.
BITs
do
prom
ote
FDI fl
ows
to d
evel
opin
g co
untri
es a
nd
they
may
eve
n su
bstit
ute
for w
eak
dom
estic
inst
itutio
ns,
thou
gh p
roba
bly
not f
or u
nila
tera
l cap
ital a
ccou
nt li
ber-
aliza
tion.
Guer
in (2
010)
Bila
tera
l FDI
flow
s 19
92-2
004
Hom
e: 1
4 OE
CD
econ
omie
sHo
st: 2
5 ho
st
mid
dle
inco
me
emer
ging
mar
kets
•Pr
esen
ce o
f a B
IT b
e-tw
een
the
two
coun
tries
of
inte
rest
•Ho
me
and
host
cou
ntry
GDP
•so
urce
and
hos
t cou
ntry
GDP
per
ca
pita
Fixe
d-ef
fect
s es
tima-
tion
(with
cou
ntry
-pai
r fix
ed e
ffect
s an
d co
untry
-and
-tim
e du
mm
ies)
BITs
hav
e a
stat
istic
ally
sign
ifica
nt a
nd
posi
tive
impa
ct o
n FD
I flow
s be
twee
n th
e (1
4) O
ECD
coun
tries
and
thei
r BIT
pa
rtner
s.
The
estim
ated
coe
ffici
ent i
ndic
ates
th
at a
n ad
ditio
nal B
IT in
crea
ses
sour
ce
coun
try F
DI b
y 1.
3%.
BITs
do
prom
ote
FDI o
utflo
ws
from
OEC
D co
untri
es to
BIT
pa
rtner
s.
Hafte
l (20
10)
Bila
tera
l flow
s fro
m th
e Un
ited
Stat
es to
dev
elop
-in
g co
untri
es;
expr
esse
d as
pe
rcen
tage
on
the
GDP
of th
e ho
st
coun
try
1977
-200
4Th
e Un
ited
Stat
es
as in
vest
orHo
st: 1
20 d
evel
op-
ing
coun
tries
•Si
gned
BIT
s •
BITs
in fo
rce
•Ho
st c
ount
ry G
DP, G
DP g
row
th a
nd
GDP
per c
apita
•tra
de o
penn
ess
of h
ost c
ount
ry•
pres
ence
of P
TIAs
•ho
st c
ount
ry p
oliti
cal r
isk
•po
litic
al c
onst
rain
ts a
nd le
vel o
f de
moc
racy
•en
d of
the
cold
war
•di
stan
ce b
etw
een
the
US a
nd h
ost
coun
try
Fixe
d ef
fect
est
imat
ion
Ther
e is
a p
ositi
ve im
pact
of r
atifi
ed
BITs
on
FDI.
The
impa
ct o
f rat
ified
BIT
s is
not
onl
y st
atis
tical
ly si
gnifi
cant
(at l
east
at 9
0%
confi
denc
e) b
ut a
lso
subs
tant
ive: a
jo
intly
ratifi
ed B
IT in
crea
ses
US fo
reig
n in
vest
men
t in
the
host
cou
ntry
from
0.
07 to
0.2
4% o
f the
dom
estic
GDP
. In
cont
rast
, the
impa
ct o
f sig
ned
BITs
is
posi
tive
but n
ot s
tatis
tical
ly si
gnifi
cant
.
The
empi
rical
ana
lysis
pro
ves
that
onl
y ra
tified
BIT
s ha
ve
stat
istic
ally
sign
ifica
nt e
ffect
s on
FDI
as
they
func
tion
as a
co
stly
sign
al o
f a p
ro-in
vest
men
t clim
ate
and
of a
cre
d-ib
le c
omm
itmen
t fro
m th
e ho
st c
ount
ry to
the
prot
ectio
n of
FDI
.
Oh a
nd F
rati-
anni
(201
0)Bi
late
ral F
DI fl
ows
1980
-200
514
8 co
untri
es•
Exis
tenc
e of
a B
IT•
tota
l num
ber o
f BIT
s by
th
e tw
o co
untri
es
•GD
P•
popu
latio
n, c
omm
on la
nd b
orde
r, di
stan
ce, c
omm
on la
ngua
ge, c
omm
on
colo
nial
her
itage
, com
mon
cur
renc
y, m
embe
rs o
f sam
e RT
A•
dem
ogra
phic
, ins
titut
iona
l and
cul
tura
l va
riabl
es
A gr
avity
mod
el e
sti-
mat
ed w
ith fi
xed
effe
ct
and
Pois
son
quas
i m
axim
umlik
elih
ood
estim
ator
(Q
MLE
)
Ther
e is
a s
tatis
tical
ly si
gnifi
cant
and
po
sitiv
e im
pact
of B
ITs
on F
DI.
The
stoc
k of
BIT
s is
sub
ject
to d
imin
ish-
ing
retu
rns
mea
sure
d in
term
s of
FDI
flo
ws.
TNCs
find
mor
e va
lue
in in
vest
ing
whe
re a
bila
tera
l tre
aty
is in
pla
ce.
17
Sour
ceDe
pend
ent
varia
ble
Perio
dHo
st a
nd h
ome
coun
trie
sEx
plan
ator
y va
riabl
e re
-la
ted
to B
ITs
and
PTIA
sCo
ntro
l var
iabl
esEc
onom
etric
met
hod
Econ
omet
ric re
sults
Conc
lusi
ons
Pint
o, P
into
an
d St
ier-
Mo-
ses
(201
0)
Bila
tera
l flow
s fro
m th
e Un
ited
Stat
es to
ratif
ying
econ
omie
s
1970
-200
6Ho
me:
Uni
ted
Stat
esHo
st: 6
7 co
untri
es
that
hav
e ra
tified
BI
Ts w
ith th
e Un
ited
Stat
es
•Ra
tified
BIT
s •
GDP
per c
apita
•tra
de o
penn
ess
•ex
chan
ge ra
te•
mar
ket s
ize (p
opul
atio
n)
•as
par
t of a
gra
vity
mod
el d
umm
ies
for a
com
mon
bor
der a
nd la
ngua
ge
betw
een
the
Unite
d St
ates
and
the
host
cou
ntry
•
tem
pora
l dum
mie
s of
four
, five
and
te
n ye
ars
inte
rval
s si
nce
sign
ing
a BI
T •
lagg
ed d
epen
dent
var
iabl
e
A gr
avity
mod
el
Ratifi
ed B
ITs
have
sig
nific
ant a
nd s
izabl
e ef
fect
on
FDI fl
ows.
Add
ing
tem
pora
l du
mm
ies,
how
ever
, red
uces
the
size
and
si
gnifi
canc
e le
vel o
f BIT
s on
out
war
d US
in
vest
men
t.
The
effe
ct o
f BIT
s on
FDI
is n
ot s
tabl
e. T
he e
ffect
dis
-si
pate
s ov
er ti
me.
BIT
s an
d go
od d
omes
tic in
stitu
tions
are
co
mpl
emen
tary
in a
ttrac
ting
FDI.
Desb
orde
s an
d Vi
card
(200
9)Bi
late
ral F
DI s
tock
19
91-2
000
Hom
e: 3
0 OE
CD
coun
tries
Host
: 32
non-
OECD
co
untri
es
•En
try in
to fo
rce
of B
ITs
•M
arke
t size
(GDP
)•
GDP
per c
apita
•
qual
ity o
f dom
estic
inst
itutio
ns
•qu
ality
of i
nter
stat
e re
latio
ns
A gr
avity
mod
el u
sing
Po
isso
n qu
asi m
axi-
mum
like
lihoo
d es
timat
or
(QM
LE)
BITs
hav
e a
grea
ter e
ffect
whe
n im
ple-
men
ted
betw
een
coun
tries
with
pol
itica
l te
nsio
ns w
hile
they
hav
e no
sig
nific
ant
effe
ct b
etw
een
frien
dly
coun
tries
.
BITs
and
goo
d do
mes
tic in
stitu
tions
are
com
plem
enta
ry
in a
ttrac
ting
FDI.
Kern
er (2
009)
Bila
tera
l (lo
g) F
DI
at c
onst
ant 2
000
dolla
rs
1982
-200
1Ho
me:
OEC
D co
un-
tries
Host
: 127
dev
elop
-in
g co
untri
es
•Ra
tified
BIT
s an
d ot
her
IIAs
with
oth
er O
ECD
coun
tries
•M
arke
t size
(GDP
)•
savin
g ra
tes
•tra
de o
penn
ess
•pr
esen
ce o
f a P
TIA
•de
moc
racy
A gr
avity
mod
el w
ith
inst
rum
enta
l var
iabl
e to
tack
le e
ndog
enei
ty
prob
lem
.
Whe
n es
timat
ing
with
inst
rum
enta
l va
riabl
es B
ITs
are
pos
itive
ly an
d si
gnifi
-ca
ntly
corre
late
d w
ith F
DI in
flow
s
BITs
attr
act s
igni
fican
t am
ount
s of
inve
stm
ent.
BITs
attr
act t
his
inve
stm
ent f
rom
pro
tect
ed a
nd u
npro
-te
cted
inve
stor
s.
Aisb
ett (
2009
)Bi
late
ral (
log)
in
flow
s of
FDI
1980
-199
928
dev
elop
ing
coun
tries
; 29
OECD
co
untri
es Le
ss th
an 6
72
obse
rvat
ions
per
ye
ar.
•La
gged
BIT
ratifi
catio
n•
Host
and
hom
e co
untry
GDP
•po
pula
tion
•sh
are
of tr
ade
in G
DP•
the
skill
gap
betw
een
host
and
hom
e co
untry
Fixe
d ef
fect
s es
timat
ion
BITs
are
pos
itive
ly an
d si
gnifi
cant
ly co
rrela
ted
with
FDI
inflo
ws.
But
this
do
es n
ot im
ply
that
BIT
s ca
use
larg
e FD
I inc
reas
e (o
f up
to 5
0%) b
ecau
se o
f en
doge
neity
of B
ITs.
The
lack
of e
viden
ce o
n th
e im
pact
of B
ITs
on F
DI is
im
porta
nt in
form
atio
n fo
r cou
ntrie
s w
eigh
ing
the
cost
and
be
nefit
s of
beg
inni
ng o
r exp
andi
ng B
ITs
prog
ram
mes
.
Bang
a (2
008)
FDI i
nflow
s ba
sed
on a
ppro
ved
FDI
from
dev
elop
ed
and
deve
lopi
ng
coun
tries
1980
-81
to 1
999-
2000
; 19
86-8
7 to
19
96-9
7 fo
r pan
el
data
for 1
0 ho
st c
oun-
tries
15 h
ost d
evel
op-
ing
coun
tries
from
So
uth,
Eas
t and
So
uth-
East
Asi
a; a
ll ho
me
deve
lope
d an
d de
velo
ping
co
untri
es
•FD
I pol
icie
s su
ch a
s FD
I lib
eral
izatio
n, in
cent
ives,
pr
ofit t
rans
fer a
nd ta
riffs
•to
tal n
umbe
r of B
ITs
and
dum
mie
s fo
r APE
C an
d AS
EAN
inve
stm
ent
agre
emen
ts
•GD
P an
d GD
P gr
owth
•w
ages
, edu
catio
n an
d la
bour
pro
-du
ctivi
ty•
cost
of c
apita
l•
exch
ange
rate
•in
frast
ruct
ure
•de
bt a
nd b
udge
t defi
cit
Rand
om e
ffect
s es
ti-m
atio
nFD
I pol
icie
s ar
e an
impo
rtant
det
er-
min
ant o
f FDI
inflo
ws,
esp
ecia
lly th
e re
mov
al o
f res
trict
ions
. BIT
s pl
ay a
n im
porta
nt ro
le in
stim
ulat
ing
inflo
ws,
es-
peci
ally
BITs
with
dev
elop
ed c
ount
ries.
18
Sour
ceDe
pend
ent
varia
ble
Perio
dHo
st a
nd h
ome
coun
trie
sEx
plan
ator
y va
riabl
e re
-la
ted
to B
ITs
and
PTIA
sCo
ntro
l var
iabl
esEc
onom
etric
met
hod
Econ
omet
ric re
sults
Conc
lusi
ons
Pein
hard
t and
Al
lee
(200
8)Bi
late
ral fl
ows
from
the
Unite
d St
ates
1966
-200
717
8 ho
st c
ount
ries
•En
try in
to fo
rce
of B
ITs,
Tr
ade
and
Inve
stm
ent
Fram
ewor
k Ag
reem
ents
(T
IFAs
) and
PTI
As
•Re
al G
DP•
GDP
per c
apita
•US
trad
e ag
reem
ents
•m
embe
rshi
p in
WTO
, com
mitm
ents
to
prop
erty
righ
ts
Fixe
d ef
fect
est
imat
ion
of lo
g-lin
ear m
odel
Depe
ndin
g on
the
mod
el, P
TIAs
hav
e st
rong
er e
ffect
on
FDI t
han
TIFA
s an
d BI
Ts.
Ther
e is
littl
e ev
iden
ce th
at U
S tra
de a
nd in
vest
men
t ag
reem
ents
hav
e ef
fect
s on
FDI
.
Sieg
man
n (2
008)
Bila
tera
l FDI
flow
s19
80-2
004
OECD
cou
ntrie
s as
hom
e an
d 62
de
velo
ping
cou
ntrie
s as
reci
pien
ts
•Ex
iste
nce
of a
rati-
fied
BIT
•Gr
avity
mod
el:
•GD
P ho
me,
•
GDP
host
, •
popu
latio
n ho
me,
•
popu
latio
n ho
st,
•ov
eral
l tra
de h
ome,
•
trade
hos
t, •
skill
diffe
renc
e
A gr
avity
mod
el; i
n ad
ditio
n a
know
ledg
e-ca
pita
l mod
el is
test
ed
Ther
e is
an
empi
rical
ly va
lid, p
ositi
ve
influ
ence
of B
ITs
and
DTTs
on
FDI.
The
effe
ct a
ppea
rs to
rang
e be
twee
n 30
per
ce
nt a
nd 4
0 pe
r cen
t for
BIT
s.
The
effe
ct o
f enf
orce
d BI
Ts is
dis
tinct
and
stro
ng, b
ut th
e si
gnat
ure
of a
BIT
doe
s no
t app
ear t
o ha
ve a
sig
nific
ant
impa
ct o
n FD
I flow
s.
A co
mpl
emen
tary
rela
tions
hip
exis
ts b
etw
een
BITs
and
in
stitu
tiona
l qua
lity:
BIT
s ar
e m
ore
effe
ctive
if th
ey a
re
enfo
rced
in a
n en
viron
men
t of h
igh
polit
ical
sta
bilit
y an
d an
effe
ctive
lega
l sys
tem
.
The
effe
ctive
ness
of B
ITs
appe
ars
to b
e gr
eate
r, if
both
pa
rtner
cou
ntrie
s ar
e ra
tifyin
g m
embe
rs o
f the
ICSI
D Co
nven
tion.
The
mac
roec
onom
ic e
nviro
nmen
t of a
hos
t cou
ntry
ap
pear
s to
hav
e no
influ
ence
on
a BI
T’s
effe
ctive
ness
. Li
kew
ise,
exc
hang
e ra
te v
olat
ility,
as w
ell a
s cu
rrenc
y cr
ises
app
ear t
o ha
ve n
o si
gnifi
cant
impa
ct.
Lesh
er a
nd
Miro
udot
(2
007)
Bila
tera
l FDI
flow
s19
90-2
004
182
•Au
thor
-cre
ated
BIT
in
dex
•BI
T du
mm
y va
riabl
es
•Di
stan
ce•
bord
er•
exch
ange
rate
s•
GDP
A gr
avity
mod
el fo
r de
term
inan
ts o
f FDI
Inve
stm
ent p
rovis
ions
in R
TAs
are
posi
-tiv
ely
asso
ciat
ed w
ith in
vest
men
t flow
s.
Ther
e is
an
insi
gnifi
cant
effe
ct o
f BIT
s on
inve
stm
ent fl
ows.
Subs
tant
ive in
vest
men
t pro
visio
ns in
RTA
s im
pact
trad
e an
d FD
I flow
s m
ore
prof
ound
ly or
the
com
bina
tion
of s
ub-
stan
tive
inve
stm
ent r
ules
and
pro
visio
ns li
bera
lisin
g ot
her
parts
of t
he e
cono
my
join
tly im
pact
trad
e an
d in
vest
men
t m
ore
sign
ifica
ntly.
Yack
ee (2
007)
As in
Neu
may
er
and
Spes
s (2
005)
, bu
t add
ing
a co
n-st
ant s
tart
to F
DI
shar
e va
riabl
e
1984
-200
3Ho
st d
evel
opin
g co
untri
es a
nd 1
8 ho
me
capi
tal e
x-po
rting
cou
ntrie
s
•A
wei
ghte
d co
unt o
f BI
Ts s
igne
d by
cap
ital
impo
rting
cou
ntrie
s w
ith
18 c
apita
l-exp
ortin
g co
untri
es•
in a
dditi
on to
BIT
s, F
CN
treat
ies
and
FTAs
with
in
vest
men
t pro
visio
ns
•As
in N
eum
ayer
and
Spe
ss (2
005)
, w
ith tr
ade
open
ness
repl
acin
g th
e nu
mbe
r of F
TAs
Sam
e m
etho
dolo
gy a
s in
Neu
may
er a
nd S
pess
(2
005)
, with
som
e ch
ange
s, e
.g. e
xclu
ding
ye
ar d
umm
ies
The
case
for B
ITs
is fa
r wea
ker t
han
sugg
este
d by
Neu
may
er a
nd S
pess
(2
005)
.
Smal
l cha
nges
in m
etho
dolo
gy a
nd
mod
el s
peci
ficat
ions
mak
e th
e BI
Ts e
f-fe
ct o
n FD
I lar
gely
or e
ntire
ly di
sapp
ear.
The
inst
itutio
nal q
ualit
y te
st s
how
s an
op
posi
te c
ondi
tiona
l rel
atio
nshi
p th
an
that
foun
d by
Neu
may
er a
nd S
pess
(2
005)
.
19
Sour
ceDe
pend
ent
varia
ble
Perio
dHo
st a
nd h
ome
coun
trie
sEx
plan
ator
y va
riabl
e re
-la
ted
to B
ITs
and
PTIA
sCo
ntro
l var
iabl
esEc
onom
etric
met
hod
Econ
omet
ric re
sults
Conc
lusi
ons
Egge
r and
M
erlo
(200
7)Bi
late
ral s
tock
s of
ou
twar
d FD
I19
80-2
001
24 h
ome
and
28
host
cou
ntrie
s;
22 o
f the
28
host
co
untri
es a
re O
ECD
coun
tries
•Du
mm
y va
riabl
e fo
r BIT
ra
tifica
tion
(or c
oncl
u-si
on)
•On
ce-la
gged
FDI
sto
cks
•jo
int s
ize o
f hom
e an
d ho
st c
ount
ry
mar
kets
in te
rms
of G
DP•
hom
e-to
-hos
t cou
ntry
rela
tive
GDP
•ho
me-
to-h
ost c
ount
ry s
kille
d-la
bour
en
dow
men
t rat
io
Gene
ralis
ed M
etho
d of
Mom
ents
(GM
M)
estim
atio
n
The
varia
ble
for B
IT ra
tifica
tion
has
a po
sitiv
e an
d si
gnifi
cant
impa
ct o
n ou
twar
d FD
I sto
cks.
The
shor
t-ru
n im
pact
of B
ITs
is s
mal
ler
than
the
long
-run
impa
ct.
Ther
e is
a s
ubst
antia
l diff
eren
ce b
etw
een
the
exis
ting
posi
tive
shor
t-ru
n an
d lo
ng-r
un im
pact
of B
ITs
on F
DI.
Henc
e th
ere
is a
nee
d to
take
the
dyna
mic
nat
ure
of F
DI
mor
e in
to a
ccou
nt.
Tobi
n an
d Ro
se-A
cker
-m
an (2
006)
Tota
l FDI
inflo
ws
into
dev
elop
-in
g co
untri
es in
co
nsta
nt 2
000
dolla
rs;
OECD
out
flow
s to
de
velo
ping
cou
n-tri
es in
con
stan
t do
llars
;fiv
e-ye
ar a
vera
ges
1980
-200
313
7 de
velo
ping
co
untri
es (i
ncre
ased
fro
m 4
0 de
velo
ping
co
untri
es w
ith a
ll da
ta, u
sing
bes
t da
ta p
redi
ctio
ns a
nd
othe
r tec
hniq
ues)
•To
tal n
umbe
r of B
ITs
•to
tal n
umbe
r of B
ITs
with
dev
elop
ing
coun
-tri
es•
sign
ed B
ITs
•w
eigh
ted
and
un-
wei
ghte
d BI
Ts in
dex
by
the
size
of t
he h
ome
OECD
cou
ntry
; int
er-
actio
n be
twee
n ho
st
coun
try B
ITs
and
tota
l nu
mbe
r of B
ITs
in th
e w
orld
•Po
litic
al ri
sk•
GDP
per c
apita
•po
pula
tion
•GD
P gr
owth
•na
tura
l res
ourc
e en
dow
men
ts•
trade
/GDP
Fixe
d-ef
fect
s es
tima-
tion
The
num
ber o
f BIT
s w
ith h
igh
inco
me
coun
tries
has
a p
ositi
ve a
nd s
igni
fican
t ef
fect
on
FDI i
nflow
s.
Mor
e w
orld
wid
e BI
Ts re
duce
the
mar
-gi
nal b
enefi
t of a
n ex
tra B
IT to
a h
ost
coun
try.
As e
ach
extra
BIT
has
dec
reas
ing
bene
fits
in te
rms
of
stim
ulat
ing
FDI i
nflow
s, h
ost c
ount
ries
may
be
less
eag
er
to s
ign
BITs
ove
r tim
e.
Galla
gher
and
Bi
rch
(200
6)To
tal F
DI in
flow
s;
FDI i
nflow
s fro
m
the
US
1980
-200
324
hos
t cou
ntrie
s fro
m L
atin
Am
eric
a •
Tota
l num
ber o
f BIT
s•
BITs
with
the
US•
Infla
tion
•GD
P•
tota
l exp
orts
or e
xpor
ts/G
DP•
liter
acy
rate
•GD
P pe
r cap
ita•
GDP
grow
th•
num
ber o
f priv
atiza
tions
Fixe
d-ef
fect
s es
tima-
tion
Neith
er th
e to
tal n
umbe
r of B
ITs
nor
BITs
with
the
US h
ave
an in
depe
nden
t an
d po
sitiv
e ef
fect
on
tota
l FDI
inflo
ws
or
inflo
ws
from
the
US.
It m
ay n
ot b
e w
orth
whi
le to
car
ry th
e co
sts
of B
ITs
such
as
lifti
ng p
erfo
rman
ce re
quire
men
ts a
nd a
pplyi
ng b
road
ex
prop
riatio
n ru
les.
Gros
se a
nd
Trev
ino
(200
5)An
nual
FDI
in-
flow
s in
to a
hos
t co
untry
1990
-199
913
hos
t cou
ntrie
s fro
m C
entra
l and
Ea
ster
n Eu
rope
•A
tota
l num
ber o
f BIT
s co
nclu
ded
by a
hos
t co
untry
•th
e im
pact
of B
ITs
was
ex
amin
ed in
the
cont
ext
of o
ther
inst
itutio
nal
varia
bles
rela
ted
to
corru
ptio
n, re
gula
tions
on
FDI
and
ent
erpr
ises
, pr
ivatiz
atio
n an
d po
liti-
cal r
isk
•In
flatio
n•
curre
ncy
valu
atio
n an
d m
arke
t size
Stan
dard
mul
tiple
re
gres
sion
BITs
tend
to s
timul
ate
inw
ard
FDI,
toge
ther
with
the
degr
ee o
f ent
erpr
ise
refo
rm a
nd re
patri
atio
n ru
les.
The
findi
ng s
houl
d be
of i
nter
est t
o in
tern
atio
nal o
rgan
iza-
tions
and
to h
ost d
evel
opin
g co
untri
es.
20
Sour
ceDe
pend
ent
varia
ble
Perio
dHo
st a
nd h
ome
coun
trie
sEx
plan
ator
y va
riabl
e re
-la
ted
to B
ITs
and
PTIA
sCo
ntro
l var
iabl
esEc
onom
etric
met
hod
Econ
omet
ric re
sults
Conc
lusi
ons
Neum
ayer
and
Sp
ess
(200
5)FD
I infl
ows
into
a
host
cou
ntry
in
cons
tant
199
6 US
$; s
hare
of a
ho
st c
ount
ry’s
to
tal i
nflow
s of
de
velo
ping
cou
n-tri
es
1970
-20
01 a
nd
1984
-200
1 fo
r som
e va
riabl
es
119
deve
lopi
ng
coun
tries
; OEC
D co
untri
es
Num
ber o
f BIT
s w
ith
OECD
cou
ntrie
s w
eigh
ted
by a
sha
re o
f a h
ome
coun
try in
wor
ld o
utw
ard
FDI fl
ows
•Lo
g of
per
cap
ita G
DP a
nd p
opul
a-tio
n si
ze•
GDP
grow
th ra
te•
WTO
mem
bers
hip
•nu
mbe
r of B
ITs
with
hom
e co
untri
es•
infla
tion
rate
•na
tura
l res
ourc
e in
tens
ity•
polit
ical
sta
bilit
y•
inst
itutio
nal q
ualit
y•
inve
stm
ent r
isk
inde
x•
trade
ope
nnes
s an
d se
cond
ary
enro
l-m
ent i
n se
nsiti
vity
anal
ysis
Rand
om a
nd fi
xed-
effe
cts
estim
atio
nsA
posi
tive
effe
ct o
f BIT
s w
ith d
evel
oped
co
untri
es o
n FD
I was
foun
d, w
hich
is
cons
iste
nt a
nd ro
bust
acr
oss
vario
us
mod
el s
peci
ficat
ions
. Som
etim
es th
e ef
fect
dep
ends
on
inst
itutio
nal q
ualit
y.
The
unde
rtaki
ng o
f the
obl
igat
ions
con
tain
ed in
BIT
s by
de
velo
ping
cou
ntrie
s do
es h
ave
a de
sire
d pa
yoff
of h
ighe
r FD
I infl
ows.
Dev
elop
ing
coun
tries
that
sig
n m
ore
BITs
with
de
velo
ped
coun
tries
rece
ive m
ore
FDI.
But i
t is
impo
ssib
le
to te
ll if
bene
fits
from
incr
ease
d FD
I infl
ows
are
high
er
than
cos
ts o
f BIT
s fo
r dev
elop
ing
coun
tries
.
Sala
cuse
and
Su
llivan
(200
5)1.
Tot
al F
DI in
-flo
ws
(% c
hang
es)
2. B
ilate
ral F
DI
flow
s fro
m th
e US
1998
, 199
9 an
d 20
00
1991
-200
0
Mor
e th
an 1
00
deve
lopi
ng c
ount
ries
31 d
evel
opin
g co
untri
es; U
SA30
0 ob
serv
atio
ns
•A
US B
IT: a
tota
l num
ber
of B
ITs
with
oth
er O
ECD
coun
tries
; a to
tal w
ith
deve
lopi
ng c
ount
ries
• A
BIT
with
the
US;
num
ber o
f oth
er O
ECD
BITs
• H
ost c
ount
ry G
DP•
GDP
per c
apita
•re
al e
ffect
ive e
xcha
nge
rate
•po
pula
tion
•ru
le o
f law
As a
bove
plu
s to
tal F
DI in
flow
s.
Mul
tivar
iate
OLS
and
cr
oss-
sect
iona
l reg
res-
sion
Fixe
d-ef
fect
s es
tima-
tion
US B
ITs
have
a la
rge,
pos
itive
and
sig
-ni
fican
t ass
ocia
tion
with
a h
ost c
ount
ry’s
ov
eral
l FDI
inflo
ws.
The
impa
ct o
f oth
er
OECD
BIT
s is
wea
ker.
Ther
e is
stro
ng e
viden
ce th
at B
ITs
have
atta
ined
to a
si
gnifi
cant
ext
ent t
heir
stat
ed g
oal o
f pro
mot
ing
FDI.
It is
be
tter t
o si
gn B
ITs
with
hig
her p
rote
ctio
n st
anda
rds
(like
th
ose
of U
S BI
Ts).
Büth
e an
d M
ilner
(200
4)An
nual
inflo
ws
of F
DI in
to h
ost
coun
tries
1970
-200
0Up
to 1
22 h
ost
deve
lopi
ng c
ount
ries
with
a p
opul
atio
n ov
er 1
milli
on
•A
tota
l num
ber o
f si
gned
cum
ulat
ive B
ITs
•M
arke
t size
•ec
onom
ic d
evel
opm
ent
•ec
onom
ic g
row
th•
trade
ope
nnes
s•
dom
estic
pol
itica
l con
stra
ints
and
po
litic
al in
stab
ility
Fixe
d ef
fect
ana
lyses
; ad
ditio
nal t
ests
for
hete
rosk
edas
ticity
and
au
toco
rrela
tion
A st
atis
tical
ly an
d su
bsta
ntia
lly s
ig-
nific
ant c
orre
latio
n be
twee
n BI
Ts a
nd
subs
eque
nt in
war
d FD
I int
o de
velo
ping
co
untri
es w
as fo
und.
Each
dev
elop
ing
coun
try h
as to
wei
gh th
e co
sts
of B
ITs
agai
nst t
he b
enefi
ts o
f inc
reas
ed F
DI a
nd p
ossi
bly
othe
r be
nefit
s.
Egge
r and
Pf
affe
rmay
r (2
004)
Bila
tera
l sto
cks
of o
utw
ard
FDI i
n co
nsta
nt 1
995
US
dolla
rs
1982
-199
719
hom
e OE
CD
coun
tries
(old
and
ne
w) a
nd 5
7 ho
st
coun
tries
(inc
ludi
ng
27 O
ECD
coun
tries
)
•Si
gned
BIT
s an
d ra
tified
BI
Ts b
etw
een
coun
tries
in
the
sam
ple
•Co
untry
size
(GDP
)•
fact
or e
ndow
men
ts (t
ertia
ry
enro
lmen
t)•
trade
and
FDI
fric
tion
and
inte
ract
ion
term
s
In s
ome
spec
ifica
tions
in a
dditi
on (o
r in
stea
d):
•Eu
rope
an U
nion
(EU)
and
Nor
th
Amer
ican
Fre
e Tr
ade
Agre
emen
t (N
AFTA
) mem
bers
hip
•re
al G
DP p
er c
apita
or s
econ
dary
sc
hool
enr
olm
ent (
for f
acto
r end
ow-
men
ts)
Fixe
d-ef
fect
s es
tima-
tion
A po
sitiv
e im
pact
of r
atifi
ed B
ITs
on F
DI
on b
ilate
ral s
tock
s of
FDI
was
est
ab-
lishe
d.
In m
ost o
f the
cas
es th
e po
sitiv
e im
pact
of
eve
n on
ly si
gnin
g BI
Ts o
n ou
twar
d FD
I ex
iste
d, a
lthou
gh a
t a lo
wer
sig
nific
ance
le
vel.
Impl
emen
ted
BITs
exe
rt a
posi
tive
and
sign
ifica
nt e
ffect
on
real
sto
cks
of o
utw
ard
FDI.
21
Sour
ceDe
pend
ent
varia
ble
Perio
dHo
st a
nd h
ome
coun
trie
sEx
plan
ator
y va
riabl
e re
-la
ted
to B
ITs
and
PTIA
sCo
ntro
l var
iabl
esEc
onom
etric
met
hod
Econ
omet
ric re
sults
Conc
lusi
ons
Tobi
n an
d Ro
se-A
cker
-m
an (2
003)
1. T
otal
FDI
in
flow
s, 5
-yea
r av
erag
es; s
hare
of
wor
ld in
flow
s
2. F
DI in
flow
s fro
m th
e US
1975
-200
0
1980
-200
0
45 d
evel
opin
g co
untri
es
48 d
evel
opin
g co
untri
es
•To
tal n
umbe
r of B
ITs
•nu
mbe
r of B
ITs
with
hi
gh-
and
low
-inco
me
coun
tries
•A
BIT
with
the
US
•Lo
g of
GDP
per
cap
ita•
popu
latio
n•
fuel
s an
d or
es e
xpor
ts•
blac
k m
arke
t rat
e of
exc
hang
e pr
emia
•ag
greg
ate
polit
ical
-ris
k•
host
cou
ntry
dis
tanc
e fro
m e
quat
or
Sam
e sp
ecifi
catio
ns a
s ab
ove
plus
di
stan
ce o
f hos
t cou
ntry
from
the
US;
exch
ange
rate
sta
bilit
y; s
kill
diffe
renc
es
Fixe
d-ef
fect
s es
tima-
tion;
on
som
e ca
ses
rand
om e
ffect
s es
tima-
tion
is c
onsi
dere
d Fi
xed-
effe
cts
estim
a-tio
n (in
som
e ca
ses
pool
ed e
stim
atio
n)
BITs
app
ear t
o ha
ve li
ttle
impa
ct o
n FD
I. Ne
gativ
e ef
fect
s at
the
high
leve
l of r
isk.
Po
sitiv
e ef
fect
at t
he lo
w le
vel o
f ris
k.
The
maj
ority
of d
evel
opin
g co
untri
es a
re
in th
e hi
gh ri
sk c
ateg
ory.
Littl
e re
latio
nshi
p be
twee
n a
US B
IT
and
inflo
ws
from
the
US. W
here
ther
e is
re
latio
nshi
p it
is w
eakl
y ne
gativ
e.
Hallw
ard-
Drie
-m
eier
(200
3)Bi
late
ral fl
ows
of
FDI;
inflo
ws/
GDP;
sh
are
of h
ome
coun
try o
utflo
ws
1980
-200
031
hos
t dev
elop
ing
coun
tries
; 20
OECD
co
untri
es
537
pairs
of c
oun-
tries
•Co
nclu
sion
of a
BIT
- The
size
of t
he h
ost a
nd h
ome
coun
try-
infla
tion
- tra
de/G
DP-
skills
gap
- co
mpo
nent
s of
inst
itutio
nal q
ualit
y fro
m IC
RG (l
egal
sys
tem
and
cor
rupt
ion)
In a
dditi
on, t
rans
ition
to a
mar
ket e
cono
-m
y an
d th
e co
nclu
sion
of N
AFTA
.
Fixe
d-ef
fect
s es
tima-
tions
No s
tatis
tical
ly si
gnifi
cant
effe
ct o
f BIT
s on
FDI
inflo
ws
was
foun
d.BI
Ts a
re c
ompl
emen
ts to
goo
d in
stitu
tiona
l qua
lity
rath
er
than
sub
stitu
tes.
UNCT
AD
(199
8b)
1. B
ilate
ral F
DI
flow
s; s
hare
of
host
cou
ntry
in
hom
e co
untry
’s
tota
l out
flow
s;
shar
e of
hom
e co
untry
in to
tal
host
cou
ntry
’s F
DI
inflo
ws
2. T
otal
FDI
in
flow
s in
to a
ho
st c
ount
ry; F
DI
stoc
ks; F
DI/G
DP
1971
-199
4
1995
72 h
ost d
evel
opin
g co
untri
es; 1
4 OE
CD
coun
tries
133
host
dev
elop
ing
coun
tries
•Co
nclu
sion
of a
BIT
•A
tota
l num
ber o
f BIT
s co
nclu
ded
by a
hos
t co
untry
•GD
P of
hos
t cou
ntry
•po
pula
tion
•GD
P•
popu
latio
n•
dom
estic
inve
stm
ent o
f hos
t cou
ntrie
s
Cros
s-se
ctio
nal s
tep-
wis
e re
gres
sion
s
BITs
cou
ld c
ause
sm
all i
ncre
ase
of F
DI
from
a h
ome
partn
er c
ount
ry. B
ut re
sults
ar
e no
t rob
ust.
Smal
l red
irect
ion
of F
DI
to B
IT p
artn
ers.
BITs
foun
d to
hav
e a
posi
tive
and
sta-
tistic
ally
sign
ifica
nt e
ffect
in th
ree
out o
f ni
ne re
gres
sion
s.
BITs
app
ear t
o pl
ay a
min
or a
nd s
econ
dary
role
in in
flu-
enci
ng F
DI fl
ows.
So
urc
e:
UN
CTA
D.
22
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