North-South FDI and Bilateral Investment Treaties

Rod Falvey & Neil Foster-McGregor


Bilateral Investment Treaties (BITs) have become increasingly popular as a means of encouraging FDI from developed to developing countries. We adopt a matched difference-in-difference estimation to deal with the problem of endogeneity when estimating the effects of BITs on inward FDI. Our results indicate that forming a BIT with a developed country approximately doubles FDI inflows and stocks to developing countries on average, with a significant part of this arising from the development of new FDI relationships. The effects of BIT formation on FDI tend to increase with the size and similarity of the host and source economies and BITs may be complementary to institutional quality in the host country.

Keywords: Foreign Direct Investment, Bilateral Investment Treaties, Endogenous treatment effects

JEL Classification: C21, F21

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