|
Do Investment Agreements Attract Investment?
Evidence from Latin America
Kevin P. Gallagher and Melissa B.L. Birch
Journal of World Investment and Trade, December 2006
In a globalizing world where many developing nations lag behind the developed world in standards of living, developing countries increasing look to foreign direct investment (FDI) as a source for foreign currency, employment generation, and to gain access to cutting edge technology. Over the past twenty years the U.S. government has argued that signing Bilateral Investment Treaties (BITs) and regional trade agreements with strong investment chapters will bring the more foreign investment to the participating country or region.
This new paper calls these claims into question. GDAE’s Kevin P. Gallagher and Melissa Birch find that signing a BIT with the United States does not have an independent effect on attracting foreign direct investment from the United States.
Their paper is the first to look exclusively at the determinants of foreign investment in Latin America. It draws on an extensive dataset of U.S. foreign investment in the region between 1980 and 2002. The most significant determinants of foreign investment are the degree to which a nation has a large or growing economy, and whether the nation has achieved macroeconomic and political stability. Their findings are consistent with the majority of studies on the determinants of foreign investment in developing countries. Though a small handful of studies have found some evidence of a BIT-investment link, recent studies by the World Bank and Yale University have found that BITs on their own do not attract investment.
In an interesting twist, the authors do find that there is a correlation between the number of total BITs signed and the amount of foreign investment that flows to Latin American countries. In other words, countries that are signing BITs with countries besides the United States are attracting more foreign investment.
If the findings in this study and the others on investment treaties and FDI are correct, they suggest that developing country governments should think twice before signing an investment treaty with the United States. The treaty may stimulate little investment, and such treaties carry costs, most notably limitations on the policy instruments governments can use to promote national development.
Link to Journal, with full text accessible only to subscribers:
http://www.wernerpubl.com/frame_inves.htm
Full citation: Gallagher, Kevin P. and Melissa B.L. Birch (2006), “Do Investment Agreements Attract Investment? Evidence from Latin America,” Journal of World Investment and Trade v7, no6.
For more on GDAE’s Globalization and Sustainable
Development Program:
http://www.ase.tufts.edu/gdae/policy_research/globalization.html
|
