Bits Bite: An Anatomy of the Impact of Bilateral Investment Treaties on Multinational Firms
27 Pages Posted: 27 Nov 2012
Date Written: December 2012
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
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