Abstract
India has one of the largest Bilateral Investment Treaty (BIT) networks with other counties around the world. The BITs is to promote foreign investment by increasing investor confidence, empowering individual private parties to take international arbitral proceedings against the threat of appropriation by the government of the host country. This paper analyses the effect of BITs on FDI inflows in India using panel data for 76 countries for the time period 2000-2016 applying a dynamic panel generalised method of moments instrumental variable estimation method. The differenced GMM and system GMM estimates show a significant negative effect of bilateral investment treaties on the FDI inflows in India. While the lagged FDI has a significant positive effect, the financial openness of the source nations is reducing FDI inflows to India. The POLCON index shows that the countries with lesser political constraints have positive FDI outflow towards India. As opposed to domestic variables, the Chinn-Ito and POLCON indices have a greater share of change in FDI inflows to India. It seems that the BITs is not efficient enough to create investor confidence to invest in India.
Highlights
Foreign direct investment (FDI) is recognised as the most powerful engine of the recent trends in economic growth
The objective of this paper is to identify the determinants of FDI and their effect on FDI inflows to India, with a specific focus on the effect of bilateral investment treaty (BIT)
As the OLS estimation suffers from serial correlation and endogeneity bias, the estimates of differenced Generalised Method of Moments (GMM) and system GMM have been compared and interpreted
Summary
Foreign direct investment (FDI) is recognised as the most powerful engine of the recent trends in economic growth. In order to protect the interests of foreign investors, the governments generally direct their policies towards some control measures that determine the FDIs. One of the few control variables is the Bilateral Investment Treaty (BIT). The BIT is to protect the interests of foreign investors against the threat of appropriation by the government of the host country, empowering individual private parties to take international arbitral proceedings against host nations under their terms In this respect, India has one of the largest BIT networks with other counties around the world. In order to enforce such agreements, the international tribunals may charge heavy fines which creates financial pressure and regulatory pressure on the host economy From this view, the FDI inflows from investors will be greater when a BIT exists than when it does not. The empirical analysis uses a dynamic panel data methodology and the estimation method followed is the Generalised Method of Moments (GMM)
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