Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?

World Development, Vol. 3, No. 1, pp. 31-49, 2005

132 Pages Posted: 11 Nov 2004 Last revised: 24 Jun 2010

Eric Neumayer

London School of Economics and Political Science (LSE)

Laura Spess

London School of Economics - Department of Geography and Environment

Date Written: May 1, 2005

Abstract

Foreign investors are often skeptical toward the quality of the domestic institutions and the enforceability of the law in developing countries. Bilateral Investment Treaties (BITs) guarantee certain standards of treatment that can be enforced via binding investor-to-state dispute settlement outside the domestic juridical system. Developing countries accept restrictions on their sovereignty in the hope that the protection from political and other risks leads to an increase in foreign direct investment (FDI), which is also the stated purpose of BITs. We provide the first rigorous quantitative evidence that a higher number of BITs raises the FDI that flows to a developing country. This result is very robust to changes in model specification, estimation technique and sample size. There is also some limited evidence that BITs might function as substitutes for good domestic institutional quality, but this result is not robust to different specifications of institutional quality.

Keywords: Foreign direct investment, bilateral investment treaties, institutional quality, protection, risk

Suggested Citation

Neumayer, Eric and Spess, Laura, Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries? (May 1, 2005). World Development, Vol. 3, No. 1, pp. 31-49, 2005 . Available at SSRN: https://ssrn.com/abstract=616242 or http://dx.doi.org/10.2139/ssrn.616242

Eric Neumayer (Contact Author)

London School of Economics and Political Science (LSE) ( email )

Houghton Street
WC2A 2AE London
United Kingdom
+44 207 955 7598 (Phone)
+44 207 955 7412 (Fax)

HOME PAGE: http://personal.lse.ac.uk/neumayer

Laura Spess

London School of Economics - Department of Geography and Environment ( email )

Houghton Street
WC2A 2AE London
United Kingdom

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