Bilateral investment treaties as signaling device

• Main Author: Santos, Hazel Parcon
• Format: text
• Published: Animo Repository 2010
• Subjects: Investments, Foreign; International Economics
• Online Access: https://animorepository.dlsu.edu.ph/faculty_research/9437
• Institution: De La Salle University

This paper investigates the possibility of positive spillover effects of bilateral investment treaties (BITs) signed by developing countries with developed countries. The unintended benefit to a developing country arises from the possibility that the BIT may give a signal to all countries that the developing country is willing to protect foreign investments at a high cost. Thus, a BIT with a developed country may increase FDI inflows to a developing country even from countries that are not a party to the BIT (third countries). Applying the signaling model in the context of BITs, it is argued that BITs can serve as indicators of social and political stability, good rule of law and property rights. Using a more appropriate dependent variable than those used by previous studies and controlling for endogeneity, results of estimations revealed that BITs do not have an independent impact on FDI inflows from third countries. Rather, BITs serve as proxy for political and social stability, property rights and rule of law in developing countries. In addition, results revealed that only BITs with France, Germany, the United Kingdom, and the United States have the potential of serving as credible signals. Thus, the choice of developed country partner matters. Moreover, BITs do not have a signaling effect for African countries and only FDI coming from developed countries are sensitive to the signaling effect of BITs.