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ABSTRACT
This article examines the differentisal effects of specific provisions included in China’s bilateral investment treaties (BITs) in inducing foreign direct investment (FDI). Empirical analysis yields some evidence suggesting that while the signing of a BIT does not necessarily boost FDI, the entry into force of a BIT does exert a strong effect on investment flows. More importantly, we find substantial evidence that BITs with stronger investment protection provisions such as absolute and relative standards of treatment and dispute settlement procedures are more likely to induce greater FDI flows. These results suggest that the variation in the institutional design of bilateral investment treaties strongly influences FDI flows by shaping foreign investors’ expectations of their asset security and the overall stability of the host country investment environment.
Funding
Yue Lu would like to acknowledge the financial support provided by the Collaborative Innovation Center (project number 201502YY001B) and the National Natural Science Foundation of China (project number 71503048).
Notes
1 Specifically, national treatment refers to provisions granting foreign investors treatment “no less favorable than the treatment granted to domestic investors,” while MFN treatment provisions assure investors of one contracting party that their investment will not be given less favorable treatment than that given to investors from the other contracting party or of other third parties (Berger Citation2008).
2 For a full list of China’s concluded bilateral investment agreements, see UNCTAD’s International Investment Agreements Navigator (http://investmentpolicyhub.unctad.org/IIA).
3 Furthermore, it has been argued (Allee and Peinhardt Citation2011; Tobin and Rose-Ackerman Citation2011) that even if BITs do affect FDI, they only do so when there already exists a favorable investment environment in the host or if the government can honor its commitments and maintain its reputation as a reliable player in the eyes of global investors. It is also possible that the marginal effect of BITs may be decreasing due to the heightened competition for FDI arising from the global network of such agreements (Tobin and Busch Citation2010).
4 For example, the 1988 Sino-Japanese BIT allows for exemptions from national treatment on the grounds of public order, national security, and sound economic growth in order to retain the government’s discretion in the oversight of foreign investors (Schill Citation2007).
5 The 1998 China-Barbados BIT is the first to offer such provisions.
6 For example, six of the 12 decisions rendered by investor-state dispute settlement tribunals finding the state’s liability in 2012 was based on violations of the fair and equitable treatment provision (UNCTAD Citation2013).
7 For example, ICSID conventions prevent the investor from seeking diplomatic protection while the investor-state arbitration proceeding is pending.
8 Importantly, the results are robust to the use of alternative measures of the dependent variable. Measuring FDI as the share of FDI from a source country in China’s total inward FDI in a given year does not change the interpretation of the central results.
9 It should be noted that this variable assumes a value of 1 from the year of the signing or the entry into force of a BIT onward, not just in the specific year in which the treaty was signed or entered into force.
10 The database is available online: http://www.unctadxi.org/templates/DocSearch____779.aspx.
11 UNCTAD’s International Investment Agreements Navigator, which supersedes the Investment Instruments Online database, contains more up-to-date data than the latter.
12 It should be noted that 11 of these 20 BITs have never been enforced. Just as important, these 20 countries with no BIT data available also have miniscule levels of FDI in China, with the share of their FDI in China’s total FDI ranging from 0.00001% to 0.41% in 2010. In view of these countries’ relatively low level of FDI in China, it seems reasonable to suggest that the inclusion of these treaties in the analysis would have had relatively little impact on the results reported in this article.
13 Since the IIA Navigator does not provide information on all those treaties that have been renegotiated since their initial signing, we further supplement the data with those available from the Overview of China’s Bilateral Investment Treaties published by the Department of Treaty and Law of the Ministry of Commerce of the People’s Republic of China: http://tfs.mofcom.gov.cn/article/Nocategory/201111/20111107819474.shtml.
14 It is reasonable to expect that foreign investors may also be influenced by the level of economic development in China in their investment decisions because of their desire to capitalize on the greater purchasing power of local residents. However, the following analysis only includes GDP ratio due to the high level of correlation between GDP and GDP per capita. We do substitute GDP with GDP per capita as a main control variable in our robustness checks.
15 Data for this variable are drawn from the China Statistical Yearbook and the International Labor Organization’s Key Indicators of the Labor Market (KILM).
16 Data for both of these variables are from the CEPII database (2011), available at http://www.cepii.fr/CEPII/en/welcome.asp.
17 Data for both variables are drawn from the China Statistical Yearbook and are lagged by a year. Substituting these variables with the length of railways (in kilometers) and the number of secondary school graduates does not affect the main findings.
18 The Hausman test, which yields a statistically significant p value, leads us to reject the null hypotheses that the random effect and fixed effect estimators are both consistent and efficient, suggesting that the fixed effect specification is preferred over the random effect estimator.
19 Specifically, we use the World Bank classification of countries by region and include the following world regions in our analysis: East Asia and Pacific, Europe and Central Asia, Latin America and the Caribbean, Middle East and North Africa, North America, South Asia, and Sub-Saharan Africa. The World Bank classification of countries by region is available online at http://data.worldbank.org/about/country-and-lending-groups.
20 For example, US multinational corporations, represented by the US-China Business Council and US financial service firms, have pushed for the negotiation of a bilateral investment treaty with China in order to address investment barriers in that China (Rapoza Citation2014; Xinhuanet Citation2015).
21 We further experimented with the 2SLS approach by lagging the main independent variables by one year. Results of the 2SLS regressions, which are available from the authors upon request, are consistent with those reported earlier.
22 These results are available from the authors upon request.
23 While the United States pushes for preestablishment national treatment with a “negative list” approach that lists the sectors to be exempted from national treatment, China seeks to limit the agreement to postestablishment national treatment with a “positive list” approach that includes carve-outs for existing nonconforming measures. How the agreement will be designed will have profound market access implications. For detailed discussions of US-China BIT negotiations, see Kong Citation2012; Sauvant and Chen Citation2012.