Bilateral Investment Treaties and Foreign Direct Investment

Abstract

This paper investigates the relationship between bilateral investment treaties (BITs) and foreign direct investment (FDI) inflows using random coefficient panel models, and accounting for the regime shift that occurred with the 1997 Asian Financial Crisis. The examination results reveal that BITs have a strong positive impact on FDI inflows for the pre-1997 era. However, the strength of this positive impact diminishes as more BITs are concluded, implying that each additional BIT yields a relatively smaller FDI-payoff. No statistically significant impact of BITs on FDI inflows is found for the period following the Asian Financial Crisis, implying a decline in their relative importance in attracting FDI. Further, BITs do not have a stronger impact on FDI inflows for developing countries in comparison to developed countries.