Review of World Economics

, Volume 153, Issue 4, pp 631–656 | Cite as

Heterogeneous effects of bilateral investment treaties

  • Rod Falvey
  • Neil Foster-McGregorEmail author
Original Paper


Bilateral investment treaties (BITs) are an increasingly used policy instrument to encourage FDI inflows, particularly inflows into developing countries. In this paper we estimate a gravity model of FDI flows from a sample of OECD countries to a broader sample of developing economies, examining the impact of BITs on these flows. BITs are signed between highly heterogeneous country-pairs, with important differences found in terms of the institutional and economic distance between BIT signatories. These differences may help explain the mixed results on the effects of BITs on FDI flows in the existing literature, with our exploration of non-linearities in this relationship suggesting that the effects of BITs are increasing in the difference in GDP and GDP per capita between source and host. BITs appear to have no impact upon FDI flows for country-pairs that are too dissimilar in terms of the strength of their political institutions.


Foreign direct investment Bilateral investment treaties Heterogeneous effects 

JEL Classification

C21 F21 



The authors would like to thank two anonymous referees for comments on an earlier draft of this paper. All remaining errors are our own.


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Copyright information

© Kiel Institute 2017

Authors and Affiliations

  1. 1.Bond Business SchoolBond UniversityRobinaAustralia
  2. 2.UNU-MERITMaastrichtThe Netherlands

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