BIT by BIT: How Bilateral Investment Treaty Network Shapes FDI Flows

• In Event: International Institutions and Foreign Investment

Abstract

How does the evolving network of bilateral investment treaties (BIT) shape the patterns of transnational investment? Existing studies have exclusively theorized and evaluated the monadic effects of BIT ratification on the signatory states, focusing on BITs’ ability to mitigate the issue of incomplete contracts permeated in international investment. In contrast, This paper takes a network approach that further allows for the scenarios in which a state’s investment flow is also shaped by treaties to which it is not a party. We posit that firms assess investment risks not solely based on enforceable contracts but also through the experiences of their peers. When a firm observes its peers successfully investing in a foreign country without host government interference, it revises its perception of investment risk in that country, potentially leading to increased investment, even in the absence of a BIT with its home country. To test this claim, we draw on multiple sources to compile a novel dataset of investment flows from 1977-2012 that covers over 17000 country dyads. We then provide reduced-form evidence showing that when two states become indirectly connected via BITs, the FDI flow between the pair increases by over 40% in the next five years. Finally, using recent advances in network analysis and causal inference, we show that after controlling for the network spillover effects, signing a BIT can still boost the direct investment flow between the signatories.

Authors

• Licheng Liu, Massachusetts Institute of Technology

• Ruofan Ma, Harvard University