Networked capital: indirect investment and BIT formation

Andrey Tomashevskiy

doi:10.1017/bap.2021.11

Abstract

AbstractWhy do states participate in bilateral investment treaties (BITs)? In this article, I examine the role of indirect investment on BIT formation. Indirect investment flows are an important aspect of the global investment regime that are underexamined by research focused on direct flows only. Indirect flows play an important role in affecting incentives for BIT participation because firms channel investment through intermediary destinations to take advantage of existing BITs. I argue that governments are more likely to participate in BITs when states expect to access groups of capital exporting states through second order links. When selecting BIT partners, states evaluate expected indirect foreign direct investment (FDI) flows by considering characteristics of a potential partner's second order FDI partners. States are thus more likely to participate in BITs when expectations for indirect flows are high. I use a variety of analyses to demonstrate evidence in favor of my hypotheses. I find evidence that indirect flows affect the likelihood of BIT formation and increase dyadic FDI flows. This research provides a novel explanation for BIT formation and contributes to research on indirect capital flows, treaty shopping and BIT formation.

Highlights

Bilateral investment treaties (BITs) are a prominent part of the international investment regime, with nearly every country a member of at least one BIT.1 Given that BITs are a widely used policy instrument, it is important to understand why states sign BITs
In this article I have argued that indirect foreign direct investment (FDI) plays an important role for BIT formation and for FDI inflows
BITs are a central feature of the international investment regime; considering the emphasis placed on BITs by the UN, BITs will continue to be an important mechanism for governing bilateral investment

Summary

Introduction

Bilateral investment treaties (BITs) are a prominent part of the international investment regime, with nearly every country a member of at least one BIT.1 Given that BITs are a widely used policy instrument, it is important to understand why states sign BITs. States that receive FDI from a large number of capital exporting states are more likely to be attractive BIT partners due to the potential for indirect FDI flows. The potential for indirect flows can be larger when forming BITs with countries that receive FDI from a large number of capital-exporting partners.

Results

Conclusion