Investment policy reform as a driver of foreign direct investment: Evidence from China

Abstract

AbstractA longstanding concern has been the proposition that the international investment treaty system lacks reform. Governments forgo Foreign Direct Investment (FDI) and thus forgo a driver of economic growth, employment and innovation. We assess the validity of this concern in the context of a major home and host country for global foreign direct investment, China, and the major reform of its Bilateral Investment Treaties (BITs). Besides other innovations, the so‐called ‘third‐generation’ BITs of China introduce a strong dispute resolution mechanism, which makes Chinese BITs more investor‐friendly. Our evidence suggests that more investor‐friendly BITs exert a positive impact on FDI in China. We argue that the positive impact of reforming BITs in a country like China, which offers a high degree of stability of the legal and political system and a strong culture of informal dispute resolution, points towards the relevance of the enforceability of property rights for investments.