Bilateral Investment Treaties, Political Risk and Foreign Direct Investment

Abstract

The study constructs a linear model to evaluate the significant impacts of bilateral investment treaties (BITs) on foreign direct investment (FDI) and the possible consequences of BITs. The results show that BITs have significantly promoted FDI and their effects are a substitute for the level of political risk in a country. Another interesting finding is that BITs signed with non-Organisation for Economic Co-operation and Development countries should not be overlooked. By estimating the growth of FDI resulting from an additional BIT ratified, the finding further indicates that BITs offer more potential for most Asian countries to promote FDI. On average, a BIT ratified by a country in South Asia, East Asia and South-East Asia can raise FDI by around 2.3%.

Keywords: Bilateral investment treaties, political risk, foreign direct investment

JEL Classification: F13, K33