The Role of Bilateral Investment Treaties in Promotion of Foreign Direct Investment Inflows: Evidence from Small Open Economy

Abstract

Many developing countries have targeted foreign direct investment as a significant policy variable in the recent past. To promote foreign direct investment, various governments across the globe are focusing on bilateral negotiations with other countries. Currently, the government of Pakistan is also part of 48 treaties. These treaties aim to promote foreign direct investment and provide legal protection to foreign investors. The current study investigates the role of these treaties in promoting foreign direct investment. The study used panel and time-series data to credibility the research findings. The timespan for time series analysis is from 1985 to 2015, whereas panel data analysis is from 1998 to 2015. Sixteen countries have been selected for panel data analysis. The study's findings show that Bilateral Investment Treaties have an insignificant contribution to achieving the specific goal of attracting FDI inflows. However, the study's findings reveal that other factors such as trade openness, physical infrastructure and size of the economy facilitate foreign direct investment. In contrast, the factors that hurt the motivation of foreign investors are exchange rate volatility and political instability.