Revisiting the Role of Bilateral Investment Treaties in Foreign Direct Investment

Abstract

This article revisits the role of Bilateral Investment Treaties (BITs) in Foreign Direct Investment (FDI). It investigates, in particular, the institutional quality of the host countries, the number of cases brought for resolution, plus a more nuanced formulation of numbers of BITs, focusing on developing host countries.

The analysis looks at more recent developments in BITs and incorporates economic freedom as a proxy of institutional quality of the host countries and considers the number of Investor-State Dispute Settlement (ISDS) in the BITs. We assume a non-linear relationship between BIT and FDI. Models are run using feasible generalized least squares (FGLS). Our new findings reveal that there is an optimum level of BITs in attracting FDI (higher and lower numbers do worse), constituting a re-appraisal of past analyses. Previous ISDS cases show a significant negative relationship with FDI. Economic Freedom has a strong positive and significant relationship with FDI/GDP, as previously found.