New evidence contests impacts of BITs on foreign direct investment

Two new research pieces have come up with evidence to support the contention that investment treaties are a negligible factor in business decisions to open establishments in a country.

The idea that, by entering into onerous bilateral investment treaties (BITs), governments improve their chances at attracting FDI is largely controverted in the literature. But the interesting aspect in these two pieces is the novelty in their methodology to make the assessment –which still leads them to the same conclusion that FDI is largely unaffected  by the signing of such treaties.

In “Do Bilateral Investment Treaties Promote Foreign Direct Investment? Some Hints from Alternative Evidence,” Jason Yackee, of the University of Wisconsin, explains that the question of whether BITs have an impact on FDI is usually approached with a standard research design: the number of BITs is regressed against country-level FDI flow data. The results, he says, are inconsistent, ranging from those that show massive positive impacts, to those that show negative ones.  Given how inconclusive these results are, he makes the case for alternative data and alternative methodologies to reach a better understanding. He attempts three in his paper. First, he argues that if investment treaties are important elements in the foreign investment decision‐making process because they protect against the risk of adverse politically-motivated action, one would expect companies that make a business out of gauging such risks, will incorporate the presence or absence of treaties into their evaluations. Second, he makes a small e‐mail survey asking providers of political risk investment insurance to describe the extent to which investment treaties enter into their underwriting decisions. Third, he does a mail‐based survey asking general counsel in large U.S.‐based corporations whether investment treaties influence their companies’ decisions to invest. The results of all three lines of inquiry provide only weak evidence that BITs meaningfully influence FDI decisions.

In a WTO Working Paper “Do Trade and Investment Agreements Lead to More FDI? Accounting for Key Provisions Inside the Black Box,” the authors also point to the ambiguous results of the literature on the impacts of BITs. But they attribute this claim to the fact that most of the earlier studies treat BITs and RTAs as “black boxes,” that is, they typically ignore the diversity of clauses and legal innovations that make trade and investment treaties different. In order to overcome this shortfall, their approach is to look into specific clauses on investor-state dispute settlement and pre-establishment national treatment, and their impact on bilateral FDI flows between 1978 and 2004. They find strong evidence that existence and coverage of National Treatment provisions in the pre-establishment phase has significant positive impacts, whereas Investor-State Dispute Settlement provisions “appear to play a minor role.”

Read Do Bilateral Investment Treaties Promote Foreign Direct Investment? Some Hints from Alternative Evidence.

Read Do Trade and Investment Agreements Lead to More FDI? Accounting for Key Provisions Inside the Black Box.