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Bilateral Investment Treaties and FDI: Does the Sector Matter?

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  • Colen, Liesbeth
  • Persyn, Damiaan
  • Guariso, Andrea

Abstract

Developing and transition countries have increasingly engaged in the signing of bilateral investment treaties (BITs) in order to attract FDI, based on the widely shared view that FDI can contribute significantly to economic development and poverty reduction. However, the degree to which foreign investments can be expected to generate employment, offer access to international technology and know-how, and ultimately create growth, varies considerably depending on the type of investment. It is therefore important to determine what type of FDI is attracted by BITs. By providing a legal commitment to the fair and equitable treatment of foreign investors, BITs aim to decrease investment risk and to attract foreign investors. We argue that BITs can be expected to be most effective in those sectors of the economy with a larger risk of expropriation, i.e., sectors characterized by large sunk costs, relatively low levels of firm-specific know-how, and in sectors that are politically sensitive to foreign ownership.

Suggested Citation

  • Colen, Liesbeth & Persyn, Damiaan & Guariso, Andrea, 2016. "Bilateral Investment Treaties and FDI: Does the Sector Matter?," World Development, Elsevier, vol. 83(C), pages 193-206.
    • Handle: RePEc:eee:wdevel:v:83:y:2016:i:c:p:193-206
    DOI: 10.1016/j.worlddev.2016.01.020
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