Bilateral Investment Treaties and Foreign Direct Investment: Correlation versus Causation

Aisbett, Emma (2007): Bilateral Investment Treaties and Foreign Direct Investment: Correlation versus Causation.

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.

• Item Type: MPRA Paper
• Institution: University of California at Berkeley
• Language: English
• Keywords: International investment agreements; Foreign Direct Investment; Developing Countries
• Subjects: F - International Economics > F2 - International Factor Movements and International Business > F23 - Multinational Firms ; International Business; F - International Economics > F2 - International Factor Movements and International Business > F21 - International Investment ; Long-Term Capital Movements; F - International Economics > F2 - International Factor Movements and International Business > F20 - General

References

Baldwin, R. and Taglioni, D.: 2006, Gravity for dummies and dummies for gravity equations. NBER Working Paper 12516. Baltagi, B. H. and Wu, P. X.: 1999, Unequally spaced panel data regressions with AR(1) disturbances, Econometric Theory 15, 814–823. Bhargava, A., Franzini, L. and Narendranathan, W.: 1992, Serial correlation and the fixed effects model, Journal of Applied Econometrics 7, 243–257. Blonigen, B. A.: 2005, A review of the empirical literature on FDI determinants. NBER Working Paper 11299. Blonigen, B. and Davies, R.: 2004, The effects of bilateral tax treaties on U.S. FDI activity, International Tax and Public Finance 11, 601–622. Blonigen, B., Davies, R. and Head, K.: 2003, Estimating the knowledge-capital model of the multinational enterprise: Comment, American Economic Review 93, 980–994. Blonigen, B. and Wang, M.: 2004, Inappropriate pooling of wealthy and poor countries in empirical FDI studies. NBER Working Paper 10378. Carr, D., Markusen, J. R. and Maskus, K. E.: 2001, Estimating the knowledge-capital model of the multinational enterprise, American Economic Review 91, 693–708. Doyle, C. and vanWijnbergen, S.: 1994, Taxation of foreign multinationals: a sequential bargaining approach to tax holidays, International Tax and Public Finance 1994(1), 211– 225. Elkins, Z., Guzman, A. and Simmons, B.: 2004, Competing for capital: The diffusion of bilateral investment treaties, 1960-2000. UC Berkeley Public Law Research Paper No. 578961. Guzman, A.: 2005, The design of international agreements, European Journal of International Law 16(4), 579–612. Hallward-Driemeier, M.: 2003, Do bilateral investment treaties attract FDI? Only a bit and they could bite. World Bank Policy Research Paper WPS 3121. Helpman, E., Melitz, M. and Rubinstein, Y.: 2005, Trading partners and trading volumes. Working Paper. Helpman, E., Melitz, M. and Yeaple, S.: 2004, Export versus FDI with heterogeneous firms, American Economic Review 91(1), 300–316. Janeba, E.: 2002, Attracting FDI in a politically risky world, International Economic Review 43(4), 1127–1155. Neumayer, E. and Spess, L.: 2005, Do bilateral investment treaties increase foreign direct investment to developing countries?, World Development 33(10), 1567–1585. Nijman, T. and Verbeek, M.: 1982, Nonresponse in panel data: the impact on estimates of a life cycle consumtion function, The Review of Economic Studies 49(4), 533–549. Pistor, K.: 2002, The standardization of law and its effect on developing economies, The American Journal of Comparative Law 50(1), 97–130. Razin, A., Rubinstein, Y. and Sadka, E.: 2003, Which countries export FDI, and how much? NBER Working Paper 10145. Razin, A., Sadka, E. and Tong, H.: 2005, Bilateral FDI flows: Threshold barriers and productivity shocks. NBER Working Paper 11639. Rose, A.: 2001, The determinants of foreign direct investment: sensitivity analyses of cross-country regressions, Kyklos 54, 89–114. Rosenbaum, P. and Rubin, D.: 1983, The central role of the propensity score in observational studies for causal effects, Biometrika 70, 41–55. Salacuse, J. and Sullivan, N.: 2004, Do BITs really work? an evaluation of bilateral investment treaties and their grand bargain, Harvard International Law Journal 46(1). Tobin, J. and Rose-Ackerman, S.: 2004, Foreign direct investment and the business environ- ment in developing countries: The impact of bilateral investment treaties. Yale Law School Center for Law, Economics and Public Policy Research Paper No. 293. UNCTAD: 2001, WORLD INVESTMENT REPORT 2001 - Promoting Linkages, UNCTAD. UNCTAD: 2005, Recent developments in international investment agreements. IIA Monitor Number 2. UNCTAD: 2006a, Developments in international investment agreements in 2005. IIAMonitor Number 2 (2006). UNCTAD: 2006b, WORLD INVESTMENT REPORT 2006 - FDI from Developing and Transition Economies: Implications for Development, UNCTAD. Wooldridge, J. M.: 2002, Econometric Analysis of Cross Section and Panel Data, The MIT Press.