The Impact of Unilateral Bilateral Investment Treaties Terminations on FDI: Evidence from a Natural Experiment

Abstract

This paper attempts a new way of identifying the impact of Bilateral Investment Treaties (BITs) on foreign direct investments (FDI) by taking advantage of the random timing of 44 unilateral BIT terminations in India between 2013 and 2019. Using quarterly bilateral FDI data of 138 investor countries, our difference-in-differences (DD) estimates uncover a significant reduction in FDI inflows to India in response to BIT terminations in a range between 14 and 28 percent compared to countries without terminations. Further investigations reveal the sudden break with investor protection for new investments rather than a general negative signal as the major transmission channel. Moreover, we find that similar quality of investor legal institutions relative to India offsets the negative effect of BIT terminations.

Keywords: BIT terminations, Natural experiment, Difference-in-differences, Bilateral FDI, India

JEL Classification: F30, F63, K40, O10, O53