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This paper investigates the impact of bilateral investment treaties (BITs) on foreign direct investment (FDI) in transition countries. FDI stocks are characterised by sluggish adjustment and a dynamic pattern. This leads to biased estimates of the contemporaneous impact of BITs on FDI in static models. In our application, the contemporaneous (short‐run) impact of BITs amounts to 4.8 per cent and the long‐run effect to 8.9 per cent in the preferred model.
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Egger et al. (2007) studied this question.
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