The Impact of Bilateral Investment Treaties and Double Taxation Treaties on Foreign Direct Investments

Abstract

This is an empirical analysis upon the influence of investment agreements (multilateral and bilateral) and double taxation treaties (DTTs) upon foreign direct investment (FDI). A Gravity type and Knowledge-Capital type model is applied, to assess FDI flows from industrialized into developing countries. Pooled OLS, random effects and fixed effects estimations are conducted, the overall panel encompasses 1364 country-pairs and 25 observation years. The results give clear evidence of a significant positive impact of Investment Agreements and DTTs upon FDI flows. In addition, interaction between bilateral investment agreements (BITs) and policy indicators suggest a complementary relationship between investment agreements and a stable institutional environment. This contradicts the traditional notion of BITs to act as substitutes for institutional stability. Furthermore, US BITs appear to be most efficient as inducement devices for FDI, followed by European BITs, while Asian and Pacific BITs appear rather ineffective.

Keywords: foreign direct investment (FDI), investment agreements, bilateral investment treaties (BIT), double taxation treaties (DTT), gravity model, knowledge-capital model

JEL Classification: F19, F21, K33