The Impact of Investment Treaties and ISDS Provisions on Foreign Direct Investment: A Baseline Econometric Analysis

Based on an interdisciplinary and cross-institutional research project (2014-7) assessing international investment treaty dispute management more broadly, this paper (abridged from a related project) introduces part of our joint project examining key questions around the effect of investment treaties and some of their provisions on direct investment flows. It focuses on the vexed question of whether offering treaty-based Investor-State Dispute Settlement (‘ISDS’) leads to significant increases in inbound foreign direct investment (FDI), in light of the persistent public debate about the merits of this procedural option for enforcing substantive commitments made by host states. Overall, our econometric analysis generates complex implications for policy-makers reassessing the historical impact of ISDS in order to decide whether and how to include different forms of such procedural provisions in future investment treaties. Skeptics can point to counter-intuitive results indicating that weaker-form ISDS and/or substantive provisions seem to have stronger and more robust impact, especially since the turn of this century. Proponents can point to results indicating that there has still been a positive and significant impact from stronger provisions, including from full-scale ISDS provisions in promptly ratified treaties concluded between OECD and non-OECD countries. Although our baseline model specification has generally dealt effectively with the endogeneity problem characteristic of this field, further variables impacting on FDI may be investigated (notably, double tax treaties) and data limitations remain (notably, FDI outflows from non-OECD countries and sectoral-level data). This econometric analysis can therefore be usefully complemented by the qualitative research component of our ongoing project.