Do bilateral investment treaties accomplish their policy objectives? A case for developing & OECD member countries

Foreign direct investment (FDI) makes up the largest component of net resource flows to developing countries, a trend that is likely to continue well into the future. With no multilateral framework for governing foreign direct investment in existence, countries have relied on bilateral investment treaties (BITs) to govern FDI.;The purpose of this study is to provide empirical evidence that BITs accomplish their current policy objectives: to increase FDI flows to BIT partner countries and to protect the rights of foreign investors, particularly from expropriation of investment by host countries. The evidence provided by this study shows that a greater number of BITs causes FDI flows to developing countries to increase, even after taking extensive measures to control for the selection of developing countries that are more or less likely to sign a BIT. It will also show that BITs mitigate the adverse effect that country risk has on FDI flows to developing countries. In light of these conclusions, if the policy objectives of BITs remain the same, policymakers should continue to rely on BITs to govern foreign direct investment in developing countries.;Using time series data of 120 countries from 1970-2002 and a fixed-effects model, I test whether FDI flows going to developing countries are affected by the cumulative number of BITs a developing country has signed with any of the 30 OECD member countries. I use this cumulative BIT variable in several interaction terms that indicate how country risk, in the countries that sign BITs, affects FDI flows to developing countries. The estimation results suggest that country risk does affect FDI flows to developing countries that do not sign BITs and does not affect FDI flows to developing countries that do sign BITs. Thus, BITs effectively mitigate the adverse affects that country risk has on FDI flows to developing countries. I then compare these regression results to another set of regression results that include a variable which controls for the selection of developing countries that are more or less likely to sign BITs. In comparing the two regression results, I find that the selection control variable does have a slightly significant affect on FDI flows but does not weaken the magnitude of the BITs variable. Therefore, the selection of developing countries that sign BITs does not bias the results of this study.;This study relies on BITs between developing and OECD member countries to explain FDI flows to developing countries primarily because 90 percent of global investment flows come from the thirty OECD member countries. Also, the OECD is an established international organization that has had great success in promoting "best practices" for foreign direct investment. The control variables used in this study are in accordance with the literature on FDI and BITs.