Do International Investment Agreements Attract Foreign Direct Investment into Developing Countries?

Abstract

The study is concerned with answering a question: what is the role of international investment agreements (IIAs) in attracting foreign direct investment (FDI) into developing countries? It reviews the literature on the impact of IIAs on the size of FDI into developing countries to the extent, to which such literature exists. This is the case for bilateral investment treaties (BITs) and regional integration agreements, but less so for bilateral free trade agreements (FTAs), nowadays including also investment provisions. In the absence of the literature the study relies on the conceptual discussion of possible impacts. Needless to say the literature, especially that on the impact of BITs on FDI, is not only far from reaching definite conclusions but also has come to conflicting findings. The study offers an own assessment of these findings and of the likely impact of IIAs on FDI. As regards the impact of BITs, the study concludes that there is evidence that BITs have played a role in a number of individual FDI projects, thus increasing FDI, but apparently these increases have not been large enough to be captured in aggregated flows of FDI used in most econometric studies. But in their rather narrow responsibilities, BITs constitute one of the most solid, although quite small, components of a coherent, transparent, predictable and stable investment framework of developing countries. Other agreements, and notably regional integration agreements, including investment and trade provisions, lead to new FDI. The impact is more evident in the case of FDI from outside of the economic grouping. EIIAs can also stimulate some intra-regional FDI. The latter impact can be strong when EIIA membership includes both developed and developing or transition countries.

Keywords: International Investment Agreements, Bilateral Investment Treaties, Foreign Direct Investment, Developing Countries

JEL Classification: F21, F15