Foreign Direct Investment and the Business Environment in Developing Countries: The Impact of Bilateral Investment Treaties

Abstract

The effects of Bilateral Investment Treaties on FDI and the domestic business environment remain unexplored despite the proliferation of treaties over the past several years. This paper explores the objectives and possible consequences of BITs. Specifically, it asks whether BITs stimulate FDI flows to host countries, and if this relationship is conditional on the level of political risk in a country. We find a very weak relationship between BITs and FDI. Further, we find that rather than encouraging greater FDI in riskier environments, BITs only have a positive effect on FDI flows in countries with an already stable business environment. Overall, BITs seem to have little positive effect either on foreign investment or on outside investors' perception of the investment environment in low- and middle-income countries.