Chapter 2: The Impact of Investment Treaties and isds Provisions on fdi in Asia and Globally

in International Investment Treaties and Arbitration Across Asia
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This chapter attempts to estimate the effect of investment treaties and some of their provisions on direct investment flows. It focuses on the question of whether Bilateral Investment Treaties (bits), and those offering treaty-based Investor-State Dispute Settlement (isds), lead to significant increases in inbound foreign direct investment (fdi). The chapter makes two contributions to the existing literature that estimates the effects of bits on fdi. First, it deploys a knowledge capital model of fdi that has theoretical underpinnings consistent with firm behaviour, instead of the typical gravity model originally developed for explaining international trade flows. Second, it constructs a large dataset of explanatory variables over 30 years for a large number of bilateral investment relationships globally. The results of the econometric analysis generates complex results concerning the historical impact of isds on investment. bits have a positive and significant effect on fdi and weaker isds provisions have a larger effect on fdi than stronger isds provisions. The results are consistent and larger in magnitude for the sub-sample of asean + 3 economies. Such results are also robust to different model specifications and across different time periods.

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