Relationship Between FDI Inflows and Bilateral Investment Treaties/International Investment Treaties in Developing Economies: An Empirical Analysis

37 Pages Posted: 20 Feb 2011

See all articles by Aishwarya Padmanabhan

Aishwarya Padmanabhan

West Bengal National University of Juridical Sciences

Date Written: February 19, 2011


Bilateral Investment Treaties (BITs) or International Investment Agreements (IIAs) - often perceived as admission tickets to investments - are agreements signed between two countries under which each country binds itself to offer treaty based protection to investments and investors of the other country. This treaty based protection includes not expropriating foreign investment unless there is a public purpose and accompanied by compensation; national treatment; most favoured nation treatment; treating investors and investments in a fair and equitable manner; allowing free repatriation of profits; and providing an investor-state dispute settlement system (also known as investment treaty arbitration) under which foreign investors can directly bring a case at an international arbitral tribunal like the International Convention for the Settlement of Investment Disputes (ICSID) without the consent of their state if the investor feels that the host country violated the BIT or IIA.

Large numbers of BITs/IIAs are being signed with great alacrity by developing countries, like India and other developing countries, in a bid to attract more FDI inflows. The rationale behind signing these treaties is that it is believed by these countries that they will result in increased foreign investment flows into the country.

This paper attempts to see if there is a positive and direct correlation between signing BITs/IIAs and foreign investment inflows in developing countries like India, South American and Asian countries. This hypothesis would be either proved or disproved by the researcher. Data would be collected for this purpose from the Ministry of Trade and Commerce, Foreign Ministry of the respective countries. Further, even after assuming that there is a direct and positive relationship, it would also be studied whether it is prudent for developing economies to be overly-enthusiastic in signing BITs/IIAs given the restriction on policy space accorded to the host nations because majority of BITs/IIAs are structured purely from the perspective of foreign investors, granting them extensive rights without recognizing the right of sovereign states to regulate in the national interest leaving limited manoeuvrability to the host state. This warrants a detailed discussion in order to understand the serious consequences of the investment treaty obligations on host countries. This need has been augmented in light of the increasing number of investor-state treaty disputes and arbitrations at the ICSID and how it has become important for these developing countries to learn lessons and be cautious while negotiating their BITs or IIAs by considering adding adequate safeguards that will allow them to deviate from their treaty obligations in case a situation arises and thus, avoid potential protracted litigations that could cost millions as in the famous CMS v. Argentina case in the 1990s.

Thus, the paper would conclude by not only understanding whether the hypothesis proposed was validated or not, but also provide prescriptive arguments in favour of carefully assessing the impact of BITs on foreign investment inflow before entering into negotiations and signing them by the developing countries and to also adequately reserve its right to regulate foreign investments in the BIT in view of its national interest in light of the preceding case studies in this area.

Keywords: Investment Treaty, ICSID, Foreign Direct Investment (FDI) Flow, Developing Economies, Host Nations, UNCTAD, Bilateral Investment Treaty (BIT)

JEL Classification: F2, F20, F21, F23, F24, F29

Suggested Citation

Padmanabhan, Aishwarya, Relationship Between FDI Inflows and Bilateral Investment Treaties/International Investment Treaties in Developing Economies: An Empirical Analysis (February 19, 2011). Available at SSRN: or

Aishwarya Padmanabhan (Contact Author)

West Bengal National University of Juridical Sciences ( email )

12, LB Block, Sector III
Salt Lake City
Kolkata, West Bengal 700 064

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