Do Trade and Investment Agreements Lead to More FDI? Accounting for Key Provisions Inside the Black Box

The previous literature provides a highly ambiguous picture on the impact of trade and investment agreements on FDI.

Most empirical studies ignore the actual content of BITs and RTAs, treating them as "black boxes", despite the diversity of investment provisions constituting the essence of these agreements. We overcome this serious limitation by analyzing the impact of modalities on the admission of FDI and dispute settlement mechanisms in both RTAs and BITs on bilateral FDI flows between 1978 and 2004. We find that FDI reacts positively to RTAs only if they offer liberal admission rules. Dispute settlement provisions play a minor role. While RTAs without strong investment provisions may even discourage FDI, the reactions to BITs are less discriminate with foreign investors responding favourably to the mere existence of BITs.

No: ERSD-2010-13

Axel Berger — German Development Institute, Bonn, Germany
Matthias Busse — Ruhr-University of Bochum, Germany
Peter Nunnenkamp — Kiel Institute for the World Economy, Germany
Martin Roy — WTO

Manuscript date: September 2010

Key Words:

foreign direct investment, bilateral investment treaties, regional trade agreements, admission rules, investor-state dispute settlement

JEL classification numbers:

F21; F23; K33


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This is a working paper, and hence it represents research in progress. This paper represents the opinions of the author, and is the product of professional research. It is not meant to represent the position or opinions of the WTO or its Members, nor the official position of any staff members. Any errors are the fault of the author. Copies of working papers can be requested from the divisional secretariat by writing to: Economic Research and Statistics Division, World Trade Organization, Rue de Lausanne 154, CH 1211 Geneva 21, Switzerland. Please request papers by number and title.

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