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The Effect of Treaties on Foreign Direct InvestmentBilateral Investment Treaties, Double Taxation Treaties, and Investment Flows$
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Karl P. Sauvant and Lisa E. Sachs

Print publication date: 2009

Print ISBN-13: 9780195388534

Published to Oxford Scholarship Online: May 2009

DOI: 10.1093/acprof:oso/9780195388534.001.0001

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Why Do Developing Countries Sign BITs? *

Why Do Developing Countries Sign BITs? *

The Effect of Treaties on Foreign Direct Investment

Deborah L. Swenson

Oxford University Press

This chapter examines the correlation between previous foreign investment and the signing of bilateral investment treaties (BITs) to explore whether there is any evidence that the signing of BITs is investor-driven. It also looks at how BITs affect the flow of investments between countries when a wide range of controls for the economic environment, such as home and host GDP, wage rates, and risk measures are considered. The chapter identifies two factors that are likely to influence the observed benefits of country decisions to enter into BITs. First, although treaties are viewed as forward-looking tools that are signed to gain future investments, treaty signing also has a backward-looking element. In particular, countries that had already received larger stocks of foreign investment are more likely to sign BITs than countries that had been less successful in attracting foreign investment. This result suggests that the interest of exiting foreign investors drove the signing of BITs, at least in part. The second conclusion of this chapter is that controls for timing, intrinsic country attractiveness, and investor identity are all important. When these issues are addressed, BIT signing did help developing countries attract a larger volume of foreign investment.

Keywords:   bilateral investment treaties, foreign direct investment, foreign investments, investor-driven, country attractiveness

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