Study Confirms Bilateral Investment Treaties Promote Foreign Investment

Kim Sokchea of the International University of Japan has just posted on SSRN an interesting empirical study confirming what has long been expected: that bilateral investment treaties (BITs) “play a significant role in stimulating the inflows of foreign investment.” You can download the article here. Here is the abstract:

Bilateral investment treaties (BITs) are commonly regarded as one of the policy tools that a country uses to signal to capital-exporting countries of her commitment to protect foreign investment. The 1990s was a record of an upsurge of BITs signed by developing countries. Therefore, evaluating precisely the motives of the treaties is very important for policy recommendations. By pooling 10 Asian countries including China, Hong Kong (China), India, Indonesia, South Korea, Malaysia, the Philippines, Singapore, Taiwan Province of China, and Thailand over the period from 1984 to 2002, the study constructs a linear model to evaluate the significant impacts of BITs on foreign direct investment (FDI) and the possible consequences of BITs. The results show that BITs have actually promoted FDI, and their effects are substitute for the level of political risk in a country. The results significantly confirm the theoretical expectations that BITs are more effective in a riskier country. In addition, another interesting finding is that BITs signed with non-OECD countries should not be overlooked. By estimating the growth of FDI resulting from an additional BIT ratified, the finding further indicates that BITs are more potential for most Asian countries to promote FDI except Brunei, Hong Kong, Singapore, South Korea, and Taiwan. On average, a BIT ratified by a country in South, East, and South-East Asia can raise FDI around 2.3 percent.

The study concludes that the empirical results “robustly” confirm expectations and show that signing BITs with OECD countries is beneficial to stimulating foreign direct investment. BITs can function as a credible framework to promote foreign direct investment, and countries with higher political risk are better able to receive foreign direct investment if they have a BIT. “As BITs are viewed as the commitment of a host country to provide a stable legal framework to investors, signing BITs is a signal to not only signatory countries, but also the international business community…. [The] message to a developing country is that a BIT is really worth negotiating….”