The Regional Impact of Bilateral Investment Treaties on Foreign Direct Investment

We examine the impact of bilateral investment treaties (BITs) on bilateral FDI stocks using extensive data from 1985 until 2011. We correct for endogeneity using indicators for governance and membership of international organisations. We find that ratified BITs increase on average bilateral FDI stocks by 35% compared to those of country pairs without a treaty. Upper middle income countries seem to benefit the most from ratified treaties whereas high income countries with high governance levels do not profit at all. In addition, lower middle and low income countries experience significantly larger inward FDI stocks from partner’s countries. Distinguishing by region, we find that ratified BITs increase FDI stocks mainly in East Asia and Middle & Eastern Europe.