Investment Treaties Boost FDI — Even for Unprotected Investors

What's at Stake?

Bilateral Investment Treaties (BITs) are the dominant international instrument meant to protect foreign direct investment (FDI). Policymakers and scholars disagree about whether BITs actually attract investment: some studies find clear gains, others find no effect or even negative effects. Resolving this debate matters for states deciding whether to sign or revise BITs and for understanding how international law shapes cross-border capital flows.

The Puzzle

Andrew Kerner asks why empirical studies of BITs produce conflicting results. A central theoretical possibility is that BITs operate through two channels: a direct effect that increases investment by the treaty's protected investors, and an indirect or spillover effect that changes investment by unprotected investors (for example, by signaling better overall investment climate). If common empirical models do not separate these channels or fail to correct for endogeneity, estimates can be biased and contradictory.

How the Paper Approaches It

Kerner develops the theoretical logic linking BITs to both direct and indirect investment effects and proposes a statistical test designed to distinguish between them. The paper emphasizes the importance of addressing endogeneity — the concern that states that sign BITs may differ systematically from those that do not — and applies a modeling strategy that corrects for this bias so the causal impact of BITs can be more reliably estimated.

Key Findings

• BITs have a significant positive effect on FDI inflows.
• This attraction operates both for investors explicitly protected by BITs and for investors who are not formally covered, indicating meaningful spillover effects.
• Standard empirical specifications can obscure these relationships unless they correct for endogeneity; once corrected, the positive effects are clearly visible.

Implications for Policy and Research

The results suggest that BITs can be an effective policy tool to increase foreign investment and that their effects extend beyond the narrow class of protected investors. For researchers, the study highlights the need to model distinct causal channels and to correct for selection and endogeneity when evaluating international institutions that affect economic behavior.

(Article: Andrew Kerner, "Why Should I Believe You? The Costs and Consequences of Bilateral Investment Treaties," ISQ.)