Bits Bite: An Anatomy of the Impact of Bilateral Investment Treaties on Multinational Firms

27 Pages Posted: 27 Nov 2012

See all articles by Peter H. Egger

Peter H. Egger

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment; ETH Zurich; Ludwig-Maximilians University of Munich; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Valeria Merlo

University of Tuebingen

Date Written: December 2012

Abstract

Bilateral investment treaties (BITs) are one of the few policy instruments that countries can use to directly attract foreign investment. Previous research has aimed at a quantification of the impact of BITs on foreign direct investment (FDI) at aggregated levels only. In contrast, in this paper, we deliver an anatomy of the effects of BITs on multinational activity at the micro level. We hope that this strategy will improve our understanding of the precise channels through which BITs determine aggregate investment. Using data on the foreign activity of the universe of German multinationals, we provide descriptive evidence on changes in the intensive and extensive margins of multinational firm activity around the adoption of BITs. The results of multivariate empirical models broadly support the hypotheses derived from a parsimonious model of heterogeneous firms on the effects of BITs on different margins of investment: BITs raise the number of multinational firms that are active in a particular host country and they have a positive effect on the number of plants per firm, as well as on FDI stocks and fixed assets per firm.

Keywords: Bilateral investment treaties, count data, multinational firms

JEL Classification: C23, F15

Suggested Citation

Egger, Peter H. and Merlo, Valeria, Bits Bite: An Anatomy of the Impact of Bilateral Investment Treaties on Multinational Firms (December 2012). The Scandinavian Journal of Economics, Vol. 114, Issue 4, pp. 1240-1266, 2012, Available at SSRN: https://ssrn.com/abstract=2181273 or http://dx.doi.org/10.1111/j.1467-9442.2012.01729.x

Peter H. Egger (Contact Author)

Ifo Institute for Economic Research - International Trade and Foreign Direct Investment ( email )

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ETH Zurich ( email )

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Switzerland

Ludwig-Maximilians University of Munich

Schackstr. 4
Munich, 80539
Germany

CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Poschinger Str. 5
Munich, DE-81679
Germany

Valeria Merlo

University of Tuebingen ( email )

Department of Economics
Nauklerstr. 47
Tübingen, 72074
Germany

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