Documentos de Académico
Documentos de Profesional
Documentos de Cultura
The null hypothesis is that the instruments are not correlated with the residuals.
21
Table 2
Conditional Effects of BITs on FDI inflows
Total
BITs
(a)
High Income
BITs
(b)
Countries in
Range
Range of Political Risk
0 (high risk) -6.96
***
-9.20
*
(3.43) (5.02)
5 -6.39
***
-8.44
*
(3.15) (4.61)
10 -5.82
***
-7.68
*
(2.88) (4.21)
15 -5.24
***
-6.92
*
(2.60) (3.80)
20 -4.67
**
-6.17
*
(2.32) (3.39)
25 -4.10
**
-5.41
*
1
(2.05) (2.98)
30 -3.53
**
-4.65
*
2
(1.77) (2.58)
35 -2.96
**
-3.89
*
7
(1.50) (2.17)
40 -2.39
**
-3.13
*
18
(1.22) (1.76)
45 -1.82
*
-2.37
*
22
(0.95) (1.36)
50 -1.25
*
-1.61
*
30
(0.68) (0.96)
55 -0.68 -0.85 31
(0.42) (0.57)
60 -0.11 -0.09 44
(0.22) (0.26)
65 0.46
*
0.67
*
23
(0.26) (0.38)
70 1.03
**
1.43
*
23
(0.49) (0.74)
75 1.60
**
2.19
*
7
(0.76) (1.14)
80 2.17
**
2.95
*
3
(1.03) (1.54)
85 2.74
**
3.71
*
(1.30) (1.95)
90 3.31
**
4.47
*
(1.57) (2.35)
95 3.88
**
5.23
*
(1.85) (2.76)
100 (low risk) 4.45
**
5.99
*
(2.12) (3.17)
Notes: The dependent variable FDI inflows is equal to FDI inflows to country/FDI
inflows to all developing countries over the five years of each period;
(Heteroskedasticity-consistent standard errors are in parentheses.)
* Significant at 90-percent level.
** Significant at 95-percent level.
*** Significant at 99-percent level.
22
c. Results
All of our models clearly demonstrate the importance of economic growth and population or
market size for determining FDI. The results are in Table 1. In our base specification, we find a
positive and significant relationship between economic growth and FDI inflows, controlling for
the remaining determinants of FDI. Specifically, a one-percent increase in economic growth
leads to a 0.03 percent increase in a countrys share of FDI to all developing countries. This
positive association grows stronger when we include BITs into the specification. Population
also has a positive and significant effect that holds throughout all of the specifications, though its
impact is small. Inflation has a negative and significant effect in our base model as well as our
models that control for BITs, but the relationship loses significance in the models that account
for the contingent relationship between political risk and BITs. Natural resources and GDP are
not significant in any of our specifications. Most importantly, political risk and BITs (modeled
as either the total number of treaties signed or only looking at those treaties signed with high-
income countries) are not significant when included without the contingent relationship.
Although it seems counter-intuitive that political risk does not seem to be a determining factor
for investment flows, it is also interesting that BITs by themselves do not determine the flows.
One reason for the result might be the lack of variation in this variable within countries over
time. However, the more likely rationale is that as a tool for attracting FDI, BITs do not work in
isolation.
When we control for the fact that BITs effect on FDI inflows may be conditional on the level of
political risk in the country, both variables gain significance. Our discussion of BITs posits that
the relationship between BITs and FDI should be contingent on the level of political risk in the
host country, so this result is important for our analysis.
The coefficient estimates in Table 1 are approximate at best. Table 2 helps one to better
understand the interactive effect of BITs and political risk on FDI. It shows the conditional
effect of both the total number of BITs and the number of high-income BITs signed by the host
country at all levels of political risk, with separate coefficient estimates and standard errors for
each level of political risk. These estimates are generated from the coefficient estimates and the
variance-covariance matrices from the regressions in columns (4) and (5) of Table 1. Columns
(a) and (b) distinguish between the effects of total BITs and high income BITs alone with the
latter having a slightly stronger effect on FDI inflows. In both cases, BITs have a negative effect
on FDI inflows at high levels of political risk and this negative effect grows smaller as a country
becomes less risky. Column (a), shows that for a country with a very high level of risk, signing a
BIT actually decreases their FDI inflows as a percentage of FDI flows to all developing
countries. For example Haiti in the period 1990-1995 had a political risk level of 25, so that
according to our estimation, for each additional BIT, Haitis portion of all developing country
FDI would decrease by 4.1 percent. This negative result remains true through levels of political
risk up to 50. After this point, at middle levels of risk, BITs seem to have no effect FDI inflows
until risk levels of 65 where the effect turns positive. Thus, a country like Brazil, with a risk
level of 65 in the period 1990-1995, could expect to see each additional BIT increase its portion
of developing country FDI by 0.46 percent. At levels of political risk above 65 this positive
association continues to increase, but as our data set is focused on developing countries, we have
few observations at such low levels of political risk (and no observations above 81).
23
It does seem questionable that BITs might actually discourage FDI flows. It is more likely the
case that at these high levels of political risk BITs simply have no effect on a countrys ability to
attract FDI. It is only once a country achieves some minimally low level of political risk that
BITs may become important for host countries to attract FDI. Nevertheless, this negative sign is
significant, and should be taken into account when encouraging risky countries to sign BITs.
Overall, the insignificant effect of BITs on FDI without the interaction with political risk
indicates that the effect of BITs on FDI is highly dependent on the level of political risk present
in the host country. Interestingly, this relationship runs counter to the hypothesis that arises from
our discussion of BITs. As a country becomes riskier, BITs do less to encourage FDI inflows. In
fact, BITs do not seem to encourage FDI except at low levels of political risk.
It is important to contrast these results with the results obtained in other studies of the effect of
BITs on FDI mentioned above. Neumayer and Spess (2004) find that the more BITs a country
signs, the greater the FDI flows to that country. Their contrasting result could, as the authors
point out, be a result of the difference in our sample size as well as the extended time period of
their study. Their study includes 119 countries and goes back as far as 1970; we have only 63
countries in our study, and our time period is limited to after 1984 because of the limited
availability of political risk data. Furthermore, a number of countries (such as Korea, China, and
countries in Central and Eastern Europe) were omitted from our study because of data
limitations, but may be important to a full understanding of the role of BITs. In contrast,
however, Neumayer and Spess include a number of very small island countries and that may also
be skewing their results. It is also unclear how they have dealt with the transition from socialism
that occurred in Europe during the period. This regime change was surely a more important
structural shift than the signing of BITs and their BITs data may be picking up that phenomenon.
More importantly, their use of year-to-year data across such a long time period is likely to skew
their results. Year-to-year variation in FDI inflows to developing countries, especially small
developing countries, tends to be large, so that averaging over the period appears to a more
appropriate technique.
Salacuse and Sullivan (2004) find a strong correlation between US BITs and overall FDI inflows
to a country, but they find that BITs with OECD members have no impact. We have a number of
questions about their methodology. First, like our criticism of Neumeyer and Spess, the one-year
lag they employ seems too short. Second, by using overall flows instead of shares, they may be
compounding time trends with the impact of BITs. Third, fixed country effects may be
important. We experimented with both a random effects model and a fixed effects model. The
dummy for Latin America had explanatory power in the random effects regression, a region with
a number of US BITs. Overall, it is likely that there is omitted variable bias in the Salacuse and
Sullivan estimates. In this portion of their study the authors do not estimate a fixed effects model
and do not compensate by including country-specific factors that may not change substantially
from year to year. Finally, the different sample composition may have an effect here as well.
Our analysis includes 63 countries while they include only 30.
To conclude, although we can point to some possible reasons for our differing results compared
to these two studies, clearly, more work is needed to sort out the underlying factors at work.
However, according to our results, BITs do not seem to be a strong determinant of FDI, and may
in some cases have a negative effect. Additionally, it could be that in order for BITs to be
24
credible to investors, some minimum level of property rights protection needs to be in place.
This suggests that, contrary to the studies summarized above, the total number of BITs signed by
a host country does not signal an improved climate for investment, except in cases where the
investment climate may already be stable. Rather, BITs may only benefit investors from
signatory countries. Our next step, therefore, is to look at this possibility.
C. Bilateral Analysis
Our general analysis investigates how signing BITs affects overall FDI flows into a country. If,
as our results indicate above, the total number of BITs signed has little impact on a countrys
ability to attract overall FDI, it may, nevertheless, be the case that BITs have a more direct
impact, that is, they serve to attract FDI from the home country. To explore this direct
relationship, we turn to an analysis of US BITs and related outflows of US FDI.
a. Specification
Our bilateral specification for FDI from the United States to host developing countries takes the
following form:
) 3 (
, 7 , 6 , 5 , 4 , 3 , 2 , 1 0 it i t t i t i t i t i t i t i t i it
v y + + + + + + + + + + = n g p s r i b
In this case, we examine the dependent variable (y) in two different ways, first, as total inflows
from the US to a given country in a period, and second, as inflows to a country as a percentage of
all US inflows to developing countries. We report the results of both models below. Each
measure of (y) , depends upon US BIT, a dummy variable, (b), the log of the average level of
income of the host country(i), the level of political risk in the host country (r), the degree of
openness of the host country economy (s), the natural log of the population of the host country
(p), economic growth (g), natural resources (n), exchange rate stability (x), the difference in the
level of education between the host country and the United States (e), time effects (), some
random error (v), and fixed country effects (). Each of the variables is indexed by country (i)
and time period (t). Those variables that differ from the general analysis are described in further
detail below.
We again wish to test whether the effect of signing a BIT on FDI inflows is dependent on the
level of institutional risk present in the host country. As in our general analysis, we include an
additional specification that contains a series of interactions between whether a host country has
signed a BIT with the US (b) and political risk (r). Again, as in our general analysis we initially
estimate equation (3) by OLS. It is possible that the endogeneity problem in our general model
is not a concern in the case of US FDI flows. Blonigen and Davies(2001), in their work on
bilateral tax treaties with the US, point out that the U.S. does not limit tax treaties only to
countries that have high FDI activity. Similarly, Appendix F demonstrates that there is little
correlation between the levels of inflows of US FDI and the date that BITs are signed. In fact, in
many cases, the US has signed treaties with host countries with very low FDI inflows.
Nevertheless, we may still believe that US investors with significant FDI flows in developing
countries may advocate for the US to sign a BIT with that host country. Following Hallward-
Driemeier (2003), we instrument for a country having signed a US BIT with the number of BITs
signed with other high-income countries in the same time period. As with our general model, we
25
need again to test that the instrument is correlated with the endogenous variable and orthogonal
to the error process. The correlation between other high-income BITs and our US BIT variable
is 0.31 while its correlation with FDI is 0.08. The F-statistic of all first stage regressions is well
above the 99-percent confidence level and in no regression do we fail to reject the null
hypothesis or the Hansen test, suggesting the validity of the instrument.
Finally, as in our general analysis, each model is run using fixed effects. A Hausman
specification test again rejected the assumption that the error component from a random effects
model was uncorrelated with the error in that model. Thus, our random effects model will be
less efficient then our fixed effects model and we feel confident with the results of the fixed
effects model.
40
b. Variables and Data
i. variables
The most comprehensive source for FDI data is the U.S. International Transactions Accounts
Data, produced yearly by the United States Bureau of Economic Analysis (BEA).
41
The data
comprise two broad areas covering all US FDI operations from 1950 through the present. The
BEA reports balance of payments and direct investment data on transactions between US parents
and their foreign affiliates abroad, and financial and operating data covering the foreign
operations of US-based multinational corporations. The BEAs data generally conform to
international reporting standards and are available with substantial country and industry detail.
Thus, for understanding the bilateral relationship between FDI inflows and BITs, the BEA data
would seem ideal. According to the UNCTAD database on FDI, US-based MNCs accounted for
twelve percent of outward world FDI flows in 2000 and 21 per cent of FDI outward stock.
Further, more than half of U.S. FDI is directed towards the European Union. Nevertheless, the
breadth and quality of the BEA data give a strong indication of the relationship between US BITs
and US FDI flows (Quijano 1990; Mataloni 1995; Lipsey 2001; UNCTAD 2001).
We measure FDI flows in two ways. First, as net capital outflows from the United States in
millions of US dollars. In this case, we are interested in changes in overall US capital stock as a
result of signing a BIT with the US. In other words, we care only about how signing a BIT with
the US affects US FDI flows to that specific country. FDI flows are the best indicator of yearly
changes in US capital stock in our countries of interest. Second, we measure FDI flows as
outflows from the United States as a percentage of all US outflows to developing countries. In
this case, we are able to control for the possibility that signing a BIT may divert flows away from
other developing countries. This way we are able to observe how a countrys fraction of US-
developing country FDI changes based on the signing of a BIT with the US.
40
We ran each model using random effects, controlling for distance of the capital of each host country from
Washington, DC, as well as continent dummies.
41
The BEAs U.S. International Transactions Accounts Data are available on line for interactive analysis at:
http://www.bea.doc.gov/bea/di/di1fdibal.htm
26
Our BIT variable is a dummy equal to 1 in the year that a BIT was signed between the host
country and the US and each year thereafter and a 0 in each year that there is no BIT with the
US.
42
In addition to the variables used in the general analysis, we include a measure of exchange rate
stability of the host country, as well a variable to measure the difference in average years of
schooling between the US and the host country to proxy for skill differences between the host
and investing country. Theoretical analysis posits that the greater the difference in skill level
between countries, the lower the level of investment (Carr, Markusen et al. 2002). Specifically,
we use the difference in total mean years of education between the United States and the host
country as our measure of skill difference. Of course, because of our fixed effects formulation
this variable wil only matter if some there have been changes over time in this variable.
Theoretically, exchange rate levels and stability have an important influence on FDI flows, but
their impact is ambiguous. Exchange rate stability could increase investment in low productivity
investment or investment for production in the local market while decreasing investment in
industries with high entry costs or investment tended for re-export (Bnassy-Qur, Fontagn et
al. 1999).
43
ii. Data
Again, as in our general analysis, we would like to avoid the impact of year-to year variation in
FDI flows as well as to create a window around the signing of the treaty to include anticipatory
and subsequent investment inflows. Data limitations necessitated three-year averages rather than
the five-year averages that we used in our general analysis
44
. To account for FDI reflecting past
levels of income and economic growth, our models lag all of our economic variables to account
for greater changes over time.
45
<<Insert Table 3 about here>>
<<Insert Table 4 about here>>
<<Insert Table 5 about here>>
42
Of course this is only true of the BIT variable in the OLS regressions. In our 2SLS regressions, the BIT variable
is equal to the fitted values obtained from the first-stage regression.
43
In our pooled analysis, we include a measure of distance between the US and the host country government.
Distance serves as a proxy for the transport and trade costs that affect the firms decision to invest, and thus we
assume that the greater the distance between a host country and the US, the lower the probability of US investment.
44
Differences between 3-year averages and 5-year averages were insignificant for the results of the analyses.
45
Differences between lagged and non-lagged models were insignificant in all analyses.
27
Table 3
FDI and Bilateral Investment Treaties:
Bilateral Relationship with the United States (1980-2000)
Dependent Variable: US FDI outflows to host country in thousands of
constant US dollars
OLS 2SLS
Base Case Equation 3 Equation 4 Equation 3 Equation 4
BIT signed with
US -122.20 241.84 -117.07 2089.07
(147.43) (376.39) (496.84) (14980.14)
Ln GDP per capita
315.78* 322.07* 322.76*
321.79* 320.74*
(174.33) (177.63) (177.33) (178.76) (179.85)
Political Risk 1.72 0.74 2.08 0.77 9.34
(4.83) (4.51) (5.55) (4.85) (59.64)
Risk* -6.90 -39.93
US BIT (8.94) (267.83)
Growth -247.47 -217.81 -251.76 -219.06 -439.50
(533.78) (507.86) (543.52) (465.81) (1520.89)
Population 0.0007** 0.0007** 0.0007** 0.0007** 0.0007**
(0.0003) (0.0003) (0.0003) (0.0003) (0.0003)
Natural Resources -0.66 -0.83 -0.79 -0.82 -0.47
(2.31) (2.45) (2.42) (2.64) (2.11)
Openness -2.74 -2.86 -2.85 -2.86 -2.74
(1.85) (1.92) (1.92) (2.05) (0.46)
Exchange Rate -0.46* -0.45* -0.46* -0.45* -0.50
Stability (0.26) (0.27) (0.26) (0.28) (0.46)
Skill Difference 30.40 31.33 31.54 31.26 31.76
(67.99) (68.41) (68.20) (67.64) (66.37)
Time Counter 33.38*** 37.11*** 36.96*** 36.98** 33.06
(9.34) (11.86) (11.79) (19.01) (34.81)
Intercept -68704.85*** -76110.23*** -75882.82*** -75853.71** -68526.69
(19762.88) (24863.12) (24746.73) (38450.62) (67254.15)
Country N 54 54 54 54 54
Wald Chi2 79.20 76.50 84.26 76.60 92.07
Prob > Chi2 0.00 0.00 0.00 0.00 0.00
Hansen test (P-value)
0.91 0.99
**indicates significant at .05 level, *indicates significant at .10 level
Heteroskedasticity consistent standard errors given in parentheses
The null hypothesis is that the instruments are not correlated with the residuals.
28
Table 4
FDI and Bilateral Investment Treaties:
Bilateral Relationship with the United States (1980-2000)
Dependent Variable: US FDI outflows to host country/
Total US FDI outflows to developing countries
OLS 2SLS
Base Case Equation 3 Equation 4 Equation 3 Equation 4
BIT signed with US -0.36 2.05 -1.24 -5.54
0.62 1.77 2.26 64.87
Ln GDP per capita 1.20* 1.22* 1.23* 1.27* 1.24*
0.68 0.70 0.69 0.70 0.73
Political Risk 0.02 0.02 0.02 0.01 0.00
0.03 0.03 0.03 0.02 0.26
Risk* -0.05 0.09
US BIT 0.04 1.16
Growth -1.46 -1.37 -1.60 -1.16 -0.82
2.47 2.38 2.53 2.09 6.81
Population 0.000003** 0.000003** 0.000003** 0.000003** 0.000003**
0.000001 0.000001 0.000001 0.000001 0.000001
Natural Resources -0.002 -0.002 -0.002 -0.004 -0.003
0.009 0.010 0.010 0.011 0.015
Openness -0.01 -0.01 -0.01 -0.01 -0.01
0.01 0.01 0.01 0.01 0.01
Exchange Rate
Stability -0.01*** -0.01*** -0.01*** -0.01*** -0.01***
0.00 0.00 0.00 0.00 0.00
Skill Difference 0.10 0.10 0.10 0.11 0.10
0.28 0.28 0.28 0.28 0.28
Time Counter 0.09** 0.10** 0.10** 0.13* 0.11
0.04 0.04 0.04 0.07 0.15
Intercept -188.17** -210.27** -208.76** -260.67* -236.62
77.70 91.96 91.45 137.75 289.80
Country N 54 54 54 54 54
Wald Chi2 97.65 107.50 111.54 87.4 81.18
Prob > Chi2 0.00 0.00 0.00 0.00 0.00
Hansen test(P-value)
0.89 0.75
**indicates significant at .05 level, *indicates significant at .10 level
Heteroskedasticity consistent standard errors given in parentheses
The null hypothesis is that the instruments are not correlated with the residuals.
29
Table 5
Conditional Effects of BITs on FDI inflows
Range of Political Risk
Conditional effect
Countries in range
0 (high risk) -5.54
(64.87)
5 -5.09
(59.08)
10 -4.64
(53.29)
15 -4.19
(47.49)
20 -3.74
(41.70)
25 -3.29 1
(35.91)
30 -2.84 7
(30.12)
35 -2.39 6
(24.33)
40 -1.94 18
(18.55)
45 -1.49 18
(12.76)
50 -1.04 28
(6.99)
55 -0.59 19
(1.38)
60 -0.14 49
(4.70)
65 0.31 46
(10.46)
70 0.76 32
(16.24)
75 1.21 14
(22.02)
80 1.66 3
(27.81)
85 2.11
(33.60)
90 2.56
(39.39)
95 3.01
(45.18)
100 (low risk) 3.46
(50.98)
30
Our results from this more detailed analysis are somewhat similar to the general analysis. In all
cases, GDP and population, both measures of the market size of the host economy, are
significant and have positive effects on FDI flows. In nearly all cases, time is significant and
positive while exchange rate stability has a negative relationship with US FDI flows (indicating
that the more stable the host countrys exchange rate, the greater the flows of FDI). For our
purposes, the most interesting result is the lack of significance for both BITs and political risk.
Neither factor seems to have an effect on FDI flows, either in general, or as a percentage of
developing country flows. This may indicate that a US BIT does not act as a signal to US
investors of a stronger or of a better protected investment environment.
Table 5 looks at the conditional effect of the interaction. In no case was this interaction
significantly different from zero. Nevertheless, we include the interaction to get an idea of the
relationship between BITs and FDI flows across various levels of political risk. In all cases
where the interaction was included, the result was nearly identical, so we include only the two-
stage least squares estimates where the dependent variable is inflows as a percentage of all US
developing country inflows. The results are strikingly similar to the case of our general analysis.
At the highest levels of risk, the conditional effect of signing a BIT with the US on FDI inflows
to the host country is negative. As a country gets less risky, this negative effect lessens, turning
to zero at political risk levels of about 60 (Peru in 1999) and becoming positive at levels of 65
and higher. As in our general analysis, it could be that in order for BITs to be credible to
investors, some minimum level of property rights protection needs to be in place. Unfortunately,
in this case we cannot be certain of this result.
These results are similar to those found by Hallward-Driemeier (2003) who finds little evidence
of a connection between BITs and bilateral FDI flows. By contrast, Salacuse and Sullivan (2004)
find a strong correlation between US BITs and US FDI flows. There are a number of possible
explanations for the differences in our results. First, our data comes from US BEA statistics
which is the most comprehensive data available on US FDI outflows. Salacuse and Sullivan use
OECD data which accounts for their low sample size (our analysis includes 54 countries while
Salacuse and Sullivan include only 30). Second, although Salacuse and Sullivan do used a fixed
effects model to account for stable inter-country differences, they do not include other variables
that shift over time such as openness, political risk, and skill differences. Finally, their data only
covers the period 1991-2000 while we extend the analysis back to 1980 before the first US BIT
was signed in 1982.
Overall, our results indicate that signing a BIT with the US does not correspond to increased FDI
inflows from US firms (while this may be an exception for countries that already have low levels
of risk we can not be certain of the conditional impact). It does not appear that the US BIT
alleviates political risk factors for investors based in the US. Although it is important to replicate
this analysis for other investor countries, our results suggest that BITs, by themselves, do not
serve as a signal of a secure investment environment in host countries.
31
V. Conclusions
With the advent of BITs, foreign investors might seem to be assured of a binding property rights
system outlined in international or industrialized country law. According to their proponents,
BITs should substitute for a weak investment environment and help countries with high levels of
political risk to attract FDI. Thus, if BITs work in their intended way, we should find that
countries that sign BITs should be more attractive for FDI, or, at least, that they should attract
more FDI from the home country partner. Further, the riskier a country (until risk obviates all
other factors), the more that a BIT should work to attract FDI. Using statistical techniques
designed to deal with the causal difficulties of studying the role of BITs in promoting FDI,our
analysis finds that these presumed connections do not hold.
Overall, we conclude that the relationship between BITs and FDI is weak. In general, BITs, by
themselves, appear to have little impact on FDI. There does appear to be a complex interaction
between the level of political risk, BITs, and FDI, but the results leave one uncertain about the
exact mechanism involved. The mechanism is apparently different in different countries, but our
analysis seems to show that a country must have some minimum level of political stability before
BITs have a positive effect on their ability to attract FDI. Similarly, in our analysis of US
investment we find little relationship between the existence of a BIT with the United States and
the level of US FDI. Again, we find that for high-risk countries where there is a relationship, it
is weakly negative.
Obviously, much work needs to be done to assess the repercussions of BITs. Further work needs
to disaggregate investment decisions to see if different types of FDI are more or less affected by
BITs and, perhaps more importantly, to determine if differences in the content of BITs affect the
overall business environment. Beyond that, because our results indicate that BITs do not
produce their positive intended results, it will be important to go further and study some of the
negative implications suggested by our theoretical analysis.
The reasons behind stalled reform and weak law enforcement in developing countries are
numerous, and BITs are certainly not the primary cause. At the same time, it appears that a tool
designed to reduce risk and increase foreign investment to low- and middle-income countries has
no measurable impact on FDI flows or on the overall investment environment. BITs can have
both costs and benefits for emerging economies. Our analysis takes a first step towards
understanding the conflicting impacts of BITs on the domestic business environment.
32
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37
Figure 1
Developing Country FDI Inflows
0
50000
100000
150000
200000
250000
300000
1994 1996 1998 2000 2002
M
i
l
l
i
o
n
s
o
f
D
o
l
l
a
r
s
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
Developing countries
Developing Country Inflows/World
Inflows
Source: UNCTAD FDI database
38
Figure 2
Gross FDI Inflows by Economy/Region
0
200000
400000
600000
800000
1000000
1200000
1400000
1600000
1994 1995 1996 1997 1998 1999 2000 2001 2002
M
i
l
l
i
o
n
s
o
f
D
o
l
l
a
r
s
Developing countries: Oceania
Developing countries: Africa
Developing countries: Central
and Eastern Europe
Developing countries: America
Developing countries: Asia
Developed countries
Source: UNCTAD FDI database
39
Figure 3
Source: IMF International Financial Statistics.
Non FDI Flows include portfolio flows and commercial bank loans
*Percentage measured relative to GDP of all developing countries as a group.
Private net resource flows to Developing Countries
(as a percentage of GDP*)
0
1
2
3
4
5
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001
Non-FDI flows
FDI flows
40
Figure 4
Yearly, new BITs signed
0
50
100
150
200
250
300
350
1
9
5
9
1
9
6
3
1
9
6
7
1
9
7
1
1
9
7
5
1
9
7
9
1
9
8
3
1
9
8
7
1
9
9
1
1
9
9
5
1
9
9
9
N
u
m
b
e
r
s
o
f
B
I
T
s
s
i
g
n
e
d
/
y
e
a
r
highincomet
lowincomet
allbits
Source: UNCTAD BITS database
Running total of all BITs signed
0
500
1000
1500
2000
2500
3000
1
9
6
0
1
9
6
3
1
9
6
6
1
9
6
9
1
9
7
2
1
9
7
5
1
9
7
8
1
9
8
1
1
9
8
4
1
9
8
7
1
9
9
0
1
9
9
3
1
9
9
6
1
9
9
9
C
u
m
u
l
a
t
i
v
e
t
o
t
a
l
B
I
T
s
s
i
g
n
e
d
BITs signed between
high- and low-income
countries
BITs signed between
low-income countries
Total BITs
Source: UNCTAD BITS database
41
Figure 5
Number of New BITs Concluded by
Developing Countries, by decade
65
69
125
477
3 6
31
436
0
4
19
230
0
100
200
300
400
500
600
1960s 1970s 1980s 1990s
With Developed
Countries
With Developing
Countries
With Central and Eastern
European Countries
Source: UNCTAD BITS database
42
Appendix A: ICRG Political Risk Rating
The aim of the political risk rating is to provide a means of assessing the political stability of the
countries covered by ICRG on a comparable basis. This is done by assigning risk points to a pre-set group
of factors, termed political risk components. The minimum number of points that can be assigned to each
component is zero, while the maximum number of points depends on the fixed weight that component is
given in the overall political risk assessment. In every case the lower the risk point total, the higher the
risk, and the higher the risk point total the lower the risk.
To ensure consistency, both between countries and over time, points are assigned by ICRG editors on the
basis of a series of pre-set questions for each risk component.
ICRG Political Risk Components
Component Definition Maximum Points
Government Stability: Ability to stay in office and to carry out its declared
programs, based on measures of government unity,
legislative strength and popular support
12
Socioeconomic Conditions: that may constrain government action: unemployment,
consumer confidence, poverty
12
Investment Profile: Contract viability/expropriation, profits repatriation, and
payment delays
12
Internal Conflict: impact of political violence on governance: civil
war/terrorism/political violence, civil disorder
12
External Conflict: risk to government of external actions from non-violent
external pressure such as trade restrictions or withholding of
aid to violent pressure, based on war, cross-border conflict,
foreign pressures 12
Corruption: Financial corruption such as bribes connected with licenses,
regulation and taxes, focuses more on "actual or potential
corruption in the form of excessive patronage, nepotism, job
reservations, favor for favors, secret party funding, and
suspiciously close ties between politics and business.
6
Military in Politics
6
Religious Tensions
6
Law and Order: strength and impartiality of the legal system and popular
observance of the law
6
Ethnic Tensions: racial, nationality of language divisions
6
Democratic Accountability
6
Bureaucracy Quality
4
Total
100
43
Appendix B: Countries included in regressions
Countries included in General Analysis
ALGERIA KENYA
ARGENTINA KOREA, SOUTH
BANGLADESH MADAGASCAR
BOLIVIA MALAWI
BOTSWANA MALAYSIA
BRAZIL MALI
BURKINA FASO MEXICO
CAMEROON MOROCCO
CHILE NICARAGUA
CHINA NIGER
COLOMBIA NIGERIA
CONGO, REP. PAKISTAN
COSTA RICA PANAMA
COTE D'IVOIRE PAPUA NEW GUINEA
ECUADOR PARAGUAY
EGYPT, ARAB
REP. PERU
EL SALVADOR PHILIPPINES
ETHIOPIA SENEGAL
GABON SIERRA LEONE
GAMBIA, THE SOUTH AFRICA
GHANA SRI LANKA
GUATEMALA
SYRIAN ARAB
REPUBLIC
GUYANA THAILAND
HAITI TOGO
HONDURAS
TRINIDAD AND
TOBAGO
HUNGARY TUNISIA
INDIA TURKEY
INDONESIA UGANDA
IRAN, ISLAMIC
REP. URUGUAY
J AMAICA VENEZUELA, RB
J ORDAN ZAMBIA
ZIMBABWE
Total: 63
44
Appendix B (Contd.)
Countries included in Bilateral Analysis
ALGERIA MALAWI
ARGENTINA MALAYSIA
BANGLADESH MALI
BOLIVIA MEXICO
BOTSWANA NICARAGUA
BRAZIL NIGER
CAMEROON PAKISTAN
CHILE PANAMA
CHINA
PAPUA NEW
GUINEA
COLOMBIA PARAGUAY
COSTA RICA PERU
DOMINICAN
REPUBLIC PHILIPPINES
ECUADOR SENEGAL
EGYPT SIERRA LEONE
EL SALVADOR SOUTH AFRICA
GHANA SRI LANKA
GUATEMALA SYRIA
GUYANA THAILAND
HAITI TOGO
HONDURAS
TRINIDAD &
TOBAGO
HUNGARY TUNISIA
INDIA TURKEY
INDONESIA UGANDA
IRAN URUGUAY
J AMAICA VENEZUELA
J ORDAN ZAMBIA
KENYA ZIMBABWE
Total: 54
45
Appendix C: Description of Variables
Description of variables
Variable Name Description and Source
Dependent Variables
Measures the total US dollar amounts of foreign direct investment
flowing into a country each year, divided by the total amount of
developing country FDI inflows that year in constant 1995 dollars.
General:
Foreign Direct Investment
(Developing Country Inflows)
Source: UNCTAD database on FDI
Bilateral:
Foreign Direct Investment
(US Outflows)
FDI flows as net capital outflows from the United States to the host
country in thousands of constant 1995 US dollars and as a percentage of
US outflows to developing countries.
Independent Variables
Equal to the number of treaties signed with high-income countries up to
that particular year, average over the five-year period.
Bilateral Investment Treaties,
with developed countries
Source: UNCTAD database on bilateral investment treaties.
Equal to the number of treaties signed with low-income developing
countries up to a particular year, average over the five-year period.
Bilateral Investment Treaties, with
developing countries
Source: UNCTAD database on bilateral investment treaties.
Bilateral Investment Treaty, with
the United States
Equal to 1 in the year that a BIT was signed between the host country
and the US and each year thereafter and a 0 in each year that there is no
BIT with the US.
Source: US Trade Compliance Center
Political Risk Assessment of the political stability of the countries covered by ICRG
on a comparable basis, by assigning risk points to a pre- set group of
risk components. The minimum number of points assigned to each
component is zero, while the maximum number of points is a function of
the components weight in the overall political risk assessment. The risk
components (and maximum points) are: Government stability (e. g.,
popular support) (12), Socioeconomic conditions (e. g., poverty) (12),
Investment profile (e. g., expropriation) (12), Internal conflict (e. g.,
terrorism or civil war) (12), External conflict (e. g., war) (12),
Corruption (6), Military in politics (6), Religion in politics (6), Law and
order (6), Ethnic tensions (6), Democratic accountability (6) and
Bureaucracy Quality (4). Scale from zero to 100; low scores indicate
high political risk.
source: International Country Risk Guide
46
Appendix C (Contd)
Variable Name Description and Source
Logarithm of GDP per capita expressed in constant (1995) U.S. dollars
for the period 1970-1995.
Log GDP Per Capita
Source: WDI.
Growth Growth rate of per capita GDP, measured as the percent change per year
in GDP
Source: World Development Indicators.
The absolute value of the latitude of the country, scaled to take values
between 0 and 1.
Latitude
Source: CIA 1996.
Data from the US Census and a supplementary list of cities around the
world calculating the distance between both capital cities (as the crow
flies) based on measures of latitude and longitude
Distance
http://www.indo.com/distance/
Natural Resources Measures total US dollar amounts of natural fuels and ores exported
from the host country as a percentage of all merchandise exports.
Source: IMFs International Financial Statistics Database.
Black Market Premium Ratio of black market exchange rate and official exchange rate minus
one.
Source:Levine-Loayza-Beck Dataset, World Bank
Inflation The log difference of the Consumer Price Index.
Source: International Financial Statistics
Population Log of total population in a country each year in millions.
Source: World Development Indicators.
Socio-economic indicator Rating of socio-economic conditions in a country such as poverty levels
and unemployment as part of the political risk measure.
Source: ICRG
Openness
Exports plus Imports divided by real gross domestic product per capita.
Source : Penn World Tables Version 6.1
Exchange Rate Stability
The appreciation (depreciation) of the host country currency against the
US dollar over a calendar year, calculated as a percentage change.
Source: ICRG
Skill Difference
Difference between mean years of education for adults over age 25.
Barro-Lee Data Set, extrapolated by Blonigen and Davies (2004)
47
Appendix D: Summary Statistics
Summary Statistics: General Regressions
Variable Obs Mean
Std.
Dev. Min Max
FDI 211 1.25 3.04 -0.83842 24.67618
Log of High Income BITs 211 1.05 1.04 0 3.161247
Log of Total BITs 211 1.37 1.26 0 4.440296
Ln GDP per capita 211 8.00 0.76 6.269462 9.514336
GDP Growth 211 1.28 4.34 -12.9 35.8
Politcal Risk 211 55.53 10.99 27.2 81.2
Inflation 211 55.30 219.26 0.74 2096.16
Natural Resources 211 21.53 26.60 0 98.606
Log of Population 211 58734 175858 738.396 1203324
Time 211 22.39 10.10 9 36
Level of Democracy 211 0.81 6.72 -9.8 10
Summary Statistics: Bilateral Regressions
Variable Obs Mean
Std.
Dev. Min Max
US FDI flows 242 249.68 679.99 -532.33 6083.67
US FDI flows/Developing Country
Flows 242 1.11 2.94 -3.81 22.49
BIT with US 242 0.17 0.37 0 1
Ln GDP per capita 242 7.09 0.94 4.93 8.96
Politcal Risk 242 55.71 11.73 25.67 81.67
GDP Growth 242 0.08 0.09 -0.13 0.57
Log of Population 242 71593 206830 754 1249134
Natural Resources 242 17.60 23.85 0.00 97.29
Openness 242 62.63 35.54 10.94 253.30
Exchange Rate Stability 242 -23.30 92.79 -1119.00 22.50
Skill Difference 242 7.41 1.80 3.33 11.49
High Income BITs 242 5.61 5.36 0 24
48
Appendix E : Correlations
Correlations Between Variables: General Analysis
FDI
Log of
High
Income
BITs
Log of
Total
BITs
Ln
GDP
per
capita
GDP
Growth
Politcal
Risk Inflation
Natural
Resources
Log of
Population
Level of
Democracy
FDI 1
Log of High Income BITs 0.2133 1
Log of Total BITs 0.2263 0.9589 1
Ln GDP per capita 0.2285 0.1864 0.2203 1
GDP Growth 0.1478 0.2246 0.2676 0.0116 1
Politcal Risk 0.2734 0.3209 0.3828 0.4302 0.1082 1
Inflation 0.0252 -0.1488 -0.1368 0.0594 -0.0903 -0.0665 1
Natural Resources 0.036 -0.0534 -0.0896 0.2239 -0.1055 -0.0864 0.0091 1
Log of Population 0.5908 0.1161 0.1573 -0.1008 0.1848 0.0663 -0.0141 -0.0874 1
Level of Democracy -0.0375 0.0395 0.0786 0.3588 0.1259 0.3979 0.1159 -0.0824 -0.0154 1
49
Appendix E (Contd)
Correlations Between Variables: Bilateral Analysis
US FDI
flows
US FDI
flows/
Developing
Country
Flows
BIT
with
US
Ln GDP
per
capita
Politcal
Risk
GDP
Growth
Log of
Population
Natural
Resources Openness
Exchange
Rate
Stability
Skill
Difference
High
Income
BITs
US FDI flows/
Developing
Country
Flows 0.94
BIT with US -0.04 -0.05
Ln GDP per
capita 0.33 0.35 -0.03
Politcal Risk 0.28 0.26 -0.07 0.50
GDP Growth 0.04 0.03 0.02 0.01 0.16
Log of
Population 0.13 0.12 -0.10 -0.26 0.08 0.26
Natural
Resources 0.05 0.06 -0.11 0.20 0.06 -0.22 -0.09
Openness -0.14 -0.17 -0.05 0.07 0.27 0.01 -0.26 -0.12
Exchange
Rate Stability -0.10 -0.31 0.04 -0.11 0.03 -0.03 -0.01 0.02 0.17
Skill
Difference -0.21 -0.20 0.06 -0.70 -0.45 -0.04 0.01 -0.08 -0.24 -0.07
High Income
BITs 0.16 0.08 0.30 0.15 0.39 0.24 0.30 -0.04 0.09 0.13 -0.34
Level of
Democracy 0.13 0.13 -0.03 0.33 0.25 0.08 0.00 0.14 0.01 -0.07 -0.17 -0.05
50
Appendix F: Correlations between US FDI inflows and BIT signing
Country Date of Signature
Rank of Country in FDI inflows
out of all developing countries at
year of signing the treaty
Number of countries
ahead in ranking without
treaty in place
Panama 27-Oct-82 6 5
Senegal 6-Dec-83 24 22
Haiti 13-Dec-83 64 62
Democratic
Republic of Congo
3-Aug-84
77 74
Morocco 22-Jul-85 36 33
Turkey 3-Dec-85 19 18
Cameroon 26-Feb-86 99 91
Egypt 11-Mar-86 80 72
Bangladesh 12-Mar-86 50 45
Grenada 2-May-86 39 35
Poland 21-Mar-90 47 40
Tunisia 15-May-90 35 30
Sri Lanka 20-Sep-91 49 38
Czech Republic 22-Oct-91 112 97
Slovakia 22-Oct-91 135 119
Argentina 14-Nov-91 8 6
Kazakhstan 19-May-92 122 102
Romania 28-May-92 36 28
Russia 17-Jun-92 33 27
Armenia 23-Sep-92 97 81
Bulgaria 23-Sep-92 53 42
Ecuador 27-Aug-93 16 12
Belarus 15-Jan-94 73 53
Jamaica 4-Feb-94 21 16
Ukraine 4-Mar-94 137 109
Georgia 7-Mar-94 79 58
Estonia 19-Apr-94 113 87
Trinidad & Tobago 26-Sep-94 28 20
Mongolia 6-Oct-94 126 98
Uzbekistan 16-Dec-94 140 111
Albania 11-Jan-95 74 55
Latvia 13-Jan-95 118 88
Honduras 1-Jul-95 84 61
Nicaragua 1-Jul-95 126 95
Croatia 13-Jul-96 112 82
Jordan 2-Jul-97 120 86
Azerbaijan 1-Aug-97 13 11
Lithuania 14-Jan-98 80 53
Bolivia 17-Apr-98 32 20
Mozambique 1-Dec-98 58 36
El Salvador 10-Mar-99 23 13
51
Appendix G: First-Stage Regressions
First-Stage Regressions for Instrumental Variables Analyses
General Analysis Bilateral Analysis
Total Bits High Income Bits
Time 0.05*** 0.04***
(0.01) (0.01)
Level of Democracy 0.01 0.01
(0.01) (0.01)
Other High Income BITs 0.03***
(0.01)
Ln GDP per capita 0.71* 0.12 0.04
(0.43) (0.42) (0.04)
Political Risk 0.02** 0.01 -0.01***
(0.01) (0.01) (0.003)
Growth 0.003 0.01 -0.07
(0.01) (0.01) (0.28)
Population 0.000002 0.0000004 -0. 0000004**
(0.000004) (0.000004) (0.0000001)
Natural Resources 0.003 -0.001 -0.002*
(0.004) (0.004) (0.001)
Inflation -0.0005* -0.001**
(0.0002) (0.0002)
Openness -0.001
(0.001)
Exchange Rate 0.000007
Stability (0.0002)
Skill Difference 0.03*
(0.02)
Time Counter 0.02**
(0.01)
Intercept -6.71** -1.28 -30.65**
(3.36) (3.25) (13.57)
Country N 63 63 54
R-square 0.64 0.48 0.24
Prob > F 0.00 0.00 0.00
*indicates significant at .10 level ,**indicates significant at .05 level, ***indicates
significant at .01 level
Heteroskedasticity consistent standard errors given in parentheses