The Impact of Investment Treaties and ISDS Provisions on Foreign Direct Investment: A Baseline Econometric Analysis

27 Pages Posted: 18 Aug 2016 Last revised: 25 Sep 2016

Shiro Patrick Armstrong

Australian National University (ANU) - Crawford School of Public Policy

Luke R. Nottage

The University of Sydney Law School; The University of Sydney - Australian Network for Japanese Law

Date Written: August 15, 2016

Abstract

Based on an interdisciplinary and cross-institutional research project (2014-7) assessing international investment treaty dispute management more broadly, this paper (abridged from a related project) introduces part of our joint project examining key questions around the effect of investment treaties and some of their provisions on direct investment flows. It focuses on the vexed question of whether offering treaty-based Investor-State Dispute Settlement (‘ISDS’) leads to significant increases in inbound foreign direct investment (FDI), in light of the persistent public debate about the merits of this procedural option for enforcing substantive commitments made by host states.

Overall, our econometric analysis generates complex implications for policy-makers reassessing the historical impact of ISDS in order to decide whether and how to include different forms of such procedural provisions in future investment treaties. Skeptics can point to counter-intuitive results indicating that weaker-form ISDS and/or substantive provisions seem to have stronger and more robust impact, especially since the turn of this century. Proponents can point to results indicating that there has still been a positive and significant impact from stronger provisions, including from full-scale ISDS provisions in promptly ratified treaties concluded between OECD and non-OECD countries.

Although our baseline model specification has generally dealt effectively with the endogeneity problem characteristic of this field, further variables impacting on FDI may be investigated (notably, double tax treaties) and data limitations remain (notably, FDI outflows from non-OECD countries and sectoral-level data). This econometric analysis can therefore be usefully complemented by the qualitative research component of our ongoing project.

Keywords: Foreign Direct Investment (FDI), econometrics, international economic law, international investment law, international arbitration

JEL Classification: K10, K30

Suggested Citation

Armstrong, Shiro Patrick and Nottage, Luke R., The Impact of Investment Treaties and ISDS Provisions on Foreign Direct Investment: A Baseline Econometric Analysis (August 15, 2016). Sydney Law School Research Paper No. 16/74. Available at SSRN: https://ssrn.com/abstract=2824090 or http://dx.doi.org/10.2139/ssrn.2824090

Shiro Patrick Armstrong

Australian National University (ANU) - Crawford School of Public Policy ( email )

ANU College of Asia and the Pacific
J.G. Crawford Building, #132, Lennox Crossing
Canberra, Australian Capital Territory 0200
Australia

HOME PAGE: http://www.crawford.anu.edu.au/staff/sarmstrong.php

Luke R. Nottage (Contact Author)

The University of Sydney Law School ( email )

New Law Building, F10
The University of Sydney
Sydney, NSW 2006
Australia

The University of Sydney - Australian Network for Japanese Law

Room 640, Building F10, Eastern Avenue
Sydney, NSW 2006
Australia

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