Ratification counts: US investment treaties and FDI flows into developing countries

ABSTRACT The proliferation of North–South bilateral investment treaties (BITs), which provide investors with favorable treatment and legal protections, is one of the most remarkable trends of the contemporary global economy. Presumably, developing countries conclude these agreements in order to attract much-needed capital to their economies. Although the positive effect of BITs on foreign direct investment (FDI) inflows may seem straightforward, the findings produced by extant research are mixed. This article advances the study of the relationship between BITs and FDI in two manners. First, it draws attention to the often underappreciated distinction between signed and mutually-ratified treaties. It argues that only BITs in force function as a costly signal of pro-investment climate and a credible commitment to the protection of FDI. Second, it employs a comprehensive data set on American investment in developing countries to empirically evaluate the effect of BITs on FDI inflows. Employing a variety of model specifications and accounting for potential endogeneity, the findings indicate that BITs have the expected positive effect on FDI inflows, but only to the extent that they are in force.