On the optimal size of bilateral investment treaty network in foreign direct investment flows

Abstract

PurposeThe aim of this paper first is to go beyond the static effects of bilateral investment treaties (BITs) and empirically estimate the marginal effects of the stock of BITs on foreign direct investment flows.Design/methodology/approachThese statistical models use a gravity equation.FindingsThis paper finds that BITs is subject to diminishing returns measured in terms of FDI flows. Diminishing returns are more pronounced among country-pairs that have not signed BITs but have their own BIT network than among country-pairs with their own BITs.Research limitations/implicationsThe subsidiary finding is that a measure of a country’s BIT network characteristic, capturing conditions favorable for a mix of horizontally and vertically integrated activities, may be the limiting force underlying the diminishing returns of the stock of BITs.Originality/valueFor a given country’s BIT network, a multinational enterprise finds more value in investing where a bilateral treaty is in place. This suggests either stronger property-rights protection or greater latitude to use the host country as an export platform.