Bilateral investment treaties and backward linkages in Sub-Saharan Africa

Abstract

This article is an original contribution to the understanding of the impact of bilateral investment treaties in developing countries. By exploiting a unique sample of foreign affiliates in nineteen Sub-Saharan Africa countries, we show that the presence of a bilateral investment treaty between FDI origin and destination countries is positively related to the propensity of foreign investors to generate linkages to local suppliers. In addition, we find evidence that such relationship is stronger for countries with lower institutional quality and that bilateral investment treaties become more effective the larger the difference in levels of development between source and host. The estimation technique we use is a two-limit Tobit model. Our results are of high importance from a political point of view. They support the argument that bilateral investment treaties can help countries with low levels of governance quality, as several Sub-Saharan African countries, to credibly remedy local institutional inefficiencies and, therefore, the participation in an international treaty make the opportunities for local sourcing more likely. These potential gains can justify the decision of policymakers in developing countries to sign BITs, despite such agreements impinging on their national sovereignty.