Reforming International Investment Agreements

The paper contributes to the debate on the effects of reforms of bilateral investment treaties on Foreign Direct Investment. So far studies show mixed empirical evidence as to the existence of positive effects on Foreign Direct Investment, pointing to rather small impacts. However, isolating the impact of a reform of bilateral investment treaties on Foreign Direct Investment is plagued by methodological issues as well as data restrictions. This paper adds to the literature as it mitigates some of these limitations by focusing on a particular reform-step in China’s international treaty policy, namely the substitution of a first-generation bilateral investment treaty with a much more “investor-friendly” third-generation bilateral investment treaty. Our basic findings, derived from a two-way fixed-effects framework, suggest that the more investor-friendly third-generation bilateral investment treaties indeed increase Foreign Direct Investment stocks in China. These findings are of policy relevance not only for capital importing countries, but also from the viewpoint of China’s increasing relevance as an outward investor in countries included in the Belt and Road initiative.