Bilateral Investment Treaties; ; A strategy for Attracting Foreign Direct Investment in developing countries

In recent decades, bilateral and multilateral investment treaties have become key international legal tools to encourage foreign direct investment (FDI) by providing protections that attract foreign investors. Consequently, many developing countries enter into bilateral investment treaties (BITs) to boost FDI inflows. This study aims to investigate the impact of these treaties on FDI in developing countries, analyzing economic data from 21 developing nations from 2007 to 2022 through an attraction model. The findings indicate that BITs have a consistently positive and significant impact on FDI across all models, with a particularly strong effect observed among developing countries. Additional variables—including institutional quality, colonial ties, and a free trade agreement dummy variable—were added to the model. When a BIT is concluded, the host country provides foreign investors with a reliable institutional framework that may offer better investment protection than domestic institutions. In this context, BITs and domestic institutional quality appear to be substitutes, leading to an expected negative relationship. On the other hand, BITs can also serve as a signaling mechanism, indicating to foreign investors that the host country is committed to safeguarding their investments. To capture this effect, an interaction term between BITs and institutional quality was added to the model. This interaction variable is negative across most country pairs, indicating substitutability, but is positive and significant among pairs of developing countries, highlighting a unique dynamic in these contexts.