Do bilateral investment treaties increase foreign direct investment to developing countries?

• Published in: World development Vol. 33; no. 10; pp. 1567 - 1585
• Main Authors: Neumayer, Eric, Spess, Laura
• Format: Journal Article
• Language: English
• Published: Oxford Elsevier Ltd 01.10.2005; Elsevier; Pergamon Press Inc
• Series: World Development
• Subjects: bilateral investment treaties; Developing countries; Development studies; Disputes; Economic development; Empirical tests; Foreign direct investment; Foreign investment; Foreign trade; institutional quality; Institutionalism; International investment; Investors; Law enforcement; LDCs; protection; Quantitative analysis; Risk; Studies; Treaties; bilateral investment treaties; institutional quality; protection; risk; foreign direct investment
• ISSN: 0305-750X; 1873-5991
• DOI: 10.1016/j.worlddev.2005.07.001

Foreign investors are often skeptical toward the quality of the domestic institutions and the enforceability of the law in developing countries. Bilateral investment treaties (BITs) guarantee certain standards of treatment that can be enforced via binding investor-to-state dispute settlement outside the domestic juridical system. Developing countries accept restrictions on their sovereignty in the hope that the protection from political and other risks leads to an increase in foreign direct investment (FDI), which is also the stated purpose of BITs. We provide the first rigorous quantitative evidence that a higher number of BITs raises the FDI that flows to a developing country. This result is very robust to changes in model specification, estimation technique, and sample size. There is also some limited evidence that BITs might function as substitutes for good domestic institutional quality, but this result is not robust to different specifications of institutional quality.