Do Trade and Investment Agreements Lead to More FDI? Accounting for Key Provisions Inside the Black Box

Kiel Working Paper No. 1647

28 Pages Posted: 13 May 2011

See all articles by Axel Berger

Axel Berger

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE)

Matthias Busse

Ruhr-University Bochum; HWWI - Hamburg Institute of International Economics

Peter Nunnenkamp

University of Kiel

Martin Roy

World Trade Organization (WTO) - Trade in Services Division

Date Written: September 1, 2010

Abstract

The previous literature provides a highly ambiguous picture on the impact of trade and investment agreements on FDI. Most empirical studies ignore the actual content of BITs and RTAs, treating them as black boxes, despite the diversity of investment provisions constituting the essence of these agreements. We overcome this serious limitation by analyzing the impact of modalities on the admission of FDI and dispute settlement mechanisms in both RTAs and BITs on bilateral FDI flows between 1978 and 2004. We find that FDI reacts positively to RTAs only if they offer liberal admission rules. Dispute settlement provisions play a minor role. While RTAs without strong investment provisions may even discourage FDI, the reactions to BITs are less discriminate with foreign investors responding favourably to the mere existence of BITs.

Keywords: foreign direct investment, bilateral investment treaties, regional trade agreements, admission rules, investor-state dispute settlement

JEL Classification: F21, F23, K33

Suggested Citation

Berger, Axel and Busse, Matthias and Nunnenkamp, Peter and Roy, Martin, Do Trade and Investment Agreements Lead to More FDI? Accounting for Key Provisions Inside the Black Box (September 1, 2010). Kiel Working Paper No. 1647. Available at SSRN: https://ssrn.com/abstract=1838660 or http://dx.doi.org/10.2139/ssrn.1838660

Axel Berger (Contact Author)

German Development Institute / Deutsches Institut für Entwicklungspolitik (DIE) ( email )

Tulpenfeld 6
Bonn, 53113
Germany

HOME PAGE: http://www.die-gdi.de

Matthias Busse

Ruhr-University Bochum ( email )

Faculty of Management and Economics, GC 3/145
D-44780 Bochum, DE 44780
Germany

HWWI - Hamburg Institute of International Economics

Heimhuder Str. 71
Hamburg, 20148
Germany

Peter Nunnenkamp

University of Kiel ( email )

D-24100 Kiel
Germany

Martin Roy

World Trade Organization (WTO) - Trade in Services Division ( email )

Centre William Rappard
Rue de Lausanne 154
12111 Geneva
Switzerland

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