Bilateral Investment Treaties and Foreign Direct Investment: Correlation Versus Causation

This chapter examines whether participation in bilateral investment treaties (BITs) leads to increased foreign direct investment (FDI) inflows from the treaty partner countries. The chapter is organized as follows. It begins in Section A with a short overview of the basic theory and case evidence on the potential of BITs to function as a commitment device for the host. Section B presents a theoretical model of BIT function and the decision of a host country to participate in one. Section C introduces and motivates an empirical approach to the endogeneity of BIT participation, and shows that selection bias is not a concern in the specifications. Section D presents the results of the regression analysis, followed by the graphical event study of BIT participation. The final subsection of results shows that BITs do not attract investment from nonpartner countries through signaling.