Heterogeneous effects of bilateral investment treaties
Rod Falvey & Neil Foster-McGregor
#2017-027
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.
JEL Classification: C21, F21
Keywords: Foreign Direct Investment, Bilateral Investment Treaties, Heterogeneous Effects