Investment Treaties and Foreign Direct Investment: Correlation versus Causation

provides open access, scholarly publishing services to the University of California and delivers a dynamic research platform to scholars worldwide. 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. 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. 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.