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Heterogeneous effects of bilateral investment treaties

Rodney Falvey () and Neil Foster-McGregor ()

No 2017-027, MERIT Working Papers from United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT)

Abstract: Bilateral Investment Treaties (BITs) are an increasingly used policy instrument to encourage FDI inflows, particularly inflows into developing countries. In this paper we estimate a gravity model of FDI flows from a sample of OECD countries to a broader sample of developing economies, examining the impact of BITs on these flows. BITs are signed between highly heterogeneous country-pairs, with important differences found in terms of the institutional and economic distance between BIT signatories. These differences may help explain the mixed results on the effects of BITs on FDI flows in the existing literature, with our exploration of non-linearities in this relationship suggesting that the effects of BITs are increasing in the difference in GDP and GDP per capita between source and host. BITs appear to have no impact upon FDI flows for country-pairs that are too dissimilar in terms of the strength of their political institutions.

Keywords: Foreign Direct Investment; FDI Inflows; Developing countries; Economic development; Bilateral Investment Treaties; Heterogeneous Effects (search for similar items in EconPapers)
JEL-codes: C21 F21 O16 (search for similar items in EconPapers)
Date: 2017-06-19
New Economics Papers: this item is included in nep-int
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