Evaluating the Impact of BITs and Preferential Trade and Investment Treaties on Foreign Direct Investment between Developed Countries

Abstract: This paper focuses on the effect of Bilateral Investment Treaties and Preferential Trade and Investment Agreements on outwards FDI stocks of developed countries (proxied by OECD countries) in one another in the period of 1985-2013. Estimations are obtained with use of the gravity equation in a large panel based on OECD FDI positions data, where the “knowledge-and-physical-capital model” of international investment motivates the choice of independent variables. This research is the first one to analyze the effect of both types of investment agreements on FDI of developed countries; moreover the most recent data available is used. Empirical analysis reveals an absence of statistically significant positive effect for FDI of both BITs and PTIAs with exception of a strong positive effect associated with joining the EU. Although the results are robust to changes in independent variables and estimation techniques, sensitivity analysis suggests that BITs had a stronger positive effect on FDI (34%) in the period of 1985-2000. PTIAs appear to have mixed effect on FDI because of the connection between trade and investment. Overall the findings reinforce doubts voiced about the effectiveness of bilateral treaties as a policy measure for increasing FDI attractiveness. Existence of such treaties between OECD countries may be partly explained by a growing wish on their part to create more liberalized and open markets rather than simply protect investment abroad.