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Bilateral investment treaties as deterrents of host-country discretion: the impact of investor-state disputes on foreign direct investment in developing countries

Author

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  • Emma Aisbett

    (University of Hamburg)

  • Matthias Busse

    (Ruhr-University Bochum)

  • Peter Nunnenkamp

    (Kiel Institute for the World Economy)

Abstract

The recent boom of investor-state disputes filed under international investment agreements has fueled a controversial academic and policy debate. We study the impact of these compensation claims on foreign direct investment (FDI) flows to the responding host country. Our econometric analysis focuses on differences in the FDI response from BIT-partner and non-partner countries of developing host countries. This approach allows us not only to distinguish competing hypotheses about BIT function, but also to address endogeneity concerns in earlier studies. We find that BITs stimulate bilateral FDI flows from partner countries—but only so long as the developing host country has not had a claim brought against it to arbitration. Our results provide an additional explanation for the policy-changes observed in many states subsequent to their first experience of an investor-state dispute.

Suggested Citation

  • Emma Aisbett & Matthias Busse & Peter Nunnenkamp, 2018. "Bilateral investment treaties as deterrents of host-country discretion: the impact of investor-state disputes on foreign direct investment in developing countries," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 154(1), pages 119-155, February.
    • Handle: RePEc:spr:weltar:v:154:y:2018:i:1:d:10.1007_s10290-017-0285-1
    DOI: 10.1007/s10290-017-0285-1
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    Cited by:

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    2. Edmund J. Malesky & Helen V. Milner, 2021. "Fostering global value chains through international agreements: Evidence from Vietnam," Economics and Politics, Wiley Blackwell, vol. 33(3), pages 443-482, November.
    3. Josef C. Brada & Zdenek Drabek & Ichiro Iwasaki, 2021. "Does Investor Protection Increase Foreign Direct Investment? A Meta‐Analysis," Journal of Economic Surveys, Wiley Blackwell, vol. 35(1), pages 34-70, February.
    4. Liu, Pengcheng & Lu, Yue & Sheng, Bin & Das, Khanindra Ch. & Li, Lei, 2021. "Can foreign direct investment promote BIT signing?," Journal of Asian Economics, Elsevier, vol. 75(C).
    5. Monika Sztajerowska, 2021. "International Investment Agreements, Double-Taxation Treaties and Multinational Activity: The (Heterogeneous) Effects of Binding," Working Papers halshs-03265057, HAL.
    6. Shujiro Urata & Youngmin Baek, 2023. "Impact of International Investment Agreements on Japanese FDI: A firm‐level analysis," The World Economy, Wiley Blackwell, vol. 46(8), pages 2306-2334, August.
    7. Nathapornpan Piyaareekul Uttama, 2021. "International Investment Agreements Provisions and Foreign Direct Investment Flows in the Regional Comprehensive Economic Partnership Region," Economies, MDPI, vol. 9(1), pages 1-23, March.
    8. Michael Frenkel & Benedikt Walter, 2017. "Do Bilateral Investment Treaties Attract Foreign Direct Investment? The Role of International Dispute Settlement Provisions," WHU Working Paper Series - Economics Group 17-08, WHU - Otto Beisheim School of Management.
    9. Tag, Mehmet Nasih & Degirmen, Suleyman, 2022. "Economic freedom and foreign direct investment: Are they related?," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 737-752.
    10. Tag, Mehmet Nasih, 2021. "Judicial institutions of property rights protection and foreign direct investment inflows," International Review of Law and Economics, Elsevier, vol. 65(C).
    11. Khalil, Umair & Oak, Mandar & Ponnusamy, Sundar, 2021. "Political favoritism by powerful politicians: Evidence from chief ministers in India," European Journal of Political Economy, Elsevier, vol. 66(C).
    12. Peter Egger & Alain Pirotte & Catharine Titi, 2023. "International investment agreements and foreign direct investment: A survey," The World Economy, Wiley Blackwell, vol. 46(6), pages 1524-1565, June.
    13. Julian Donaubauer & Eric Neumayer & Peter Nunnenkamp, 2018. "Winning or losing in investor‐to‐state dispute resolution: The role of arbitrator bias and experience," Review of International Economics, Wiley Blackwell, vol. 26(4), pages 892-916, September.
    14. Li, Shi & Urata, Shujiro & Zhao, Long, 2024. "Does the quality of bilateral investment treaties matter for outward foreign direct investment?," International Review of Economics & Finance, Elsevier, vol. 91(C), pages 207-218.
    15. Rod Falvey & Neil Foster-McGregor, 2017. "Heterogeneous effects of bilateral investment treaties," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 153(4), pages 631-656, November.
    16. Shunya Ozawa, 2023. "Do international investment agreements attract foreign direct investment in knowledge intensive industries?," The World Economy, Wiley Blackwell, vol. 46(7), pages 2080-2101, July.
    17. Simon Hartmann & Rok Spruk, 2023. "The impact of unilateral BIT terminations on FDI: Quasi-experimental evidence from India," The Review of International Organizations, Springer, vol. 18(2), pages 259-296, April.
    18. Christian Bellak & Markus Leibrecht, 2024. "The (Political) Economics of Bilateral Investment Treaties—The Unique Trajectory of Brazil," Economies, MDPI, vol. 12(6), pages 1-20, May.
    19. Markus Leibrecht & Christian Bellak, 2023. "Investment policy reform as a driver of foreign direct investment: Evidence from China," Economics of Transition and Institutional Change, John Wiley & Sons, vol. 31(4), pages 1035-1053, October.
    20. Monika Sztajerowska, 2021. "International Investment Agreements, Double-Taxation Treaties and Multinational Activity: The (Heterogeneous) Effects of Binding," PSE Working Papers halshs-03265057, HAL.
    21. Parfait Bihkongnyuy Beri & Gabila Fohtung Nubong, 2021. "Impact of bilateral investment treaties on foreign direct investment in Africa," African Development Review, African Development Bank, vol. 33(3), pages 439-451, September.

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    More about this item

    Keywords

    Bilateral investment treaties; Investor-state dispute settlement; Compensation claims; Foreign direct investment; Developing host countries;
    All these keywords.

    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F21 - International Economics - - International Factor Movements and International Business - - - International Investment; Long-Term Capital Movements
    • F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
    • F53 - International Economics - - International Relations, National Security, and International Political Economy - - - International Agreements and Observance; International Organizations
    • K33 - Law and Economics - - Other Substantive Areas of Law - - - International Law

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