Impact of bilateral investment treaties on foreign direct investment in Africa

Abstract

AbstractAfrica continues to face several challenges that make its share of global foreign direct investment (FDI) to be infinitesimal. These include the prevalence of fragmented investment policies, information asymmetry and high sovereign risk. Bilateral investment treaties (BITs) can help overcome some of these encumbrances by signalling the host country's willingness to protect FDIs. This study hypothesizes that BITs can play an augmentation role and investigates their impact on FDI attraction using data across 48 African countries from 2000 to 2018. In contrast to the previous theoretical and most empirical literature, results based on the two‐step systems generalized method of moments (GMM) show that ratified BITs do not perform a significant role in FDI attraction. Nonetheless, the additional analyses allowed us to make some rather non‐trivial conclusions about the possible effects of BITs concluded with France on FDI. The study recommends that countries should participate in some BITs, although governments need to be cautious when tying their hands with BITs because of susceptibility to damaging litigations that sometimes follow, irrespective of the less than commensurate benefits.