The impact of unilateral BIT terminations on FDI: Quasi-experimental evidence from India

• Published in: Review of International Organizations Vol. 18; no. 2; pp. 259 - 296
• Main Authors: Hartmann, Simon, Spruk, Rok
• Format: Journal Article
• Language: English
• Published: New York Springer US 01-04-2023; Springer Nature B.V
• Subjects: Economics; Foreign investment; International organizations; Investors; Legal institutions; Mergers; Political Science; Public officials; Quasi-experimental methods; Research methodology; Social Sciences; Treaties; Unilateralism; India; Quasi-experimental; Bilateral FDI; BIT terminations; Heterogeneous timing; Firm-level; Difference-in-differences; India
• ISSN: 1559-7431; 1559-744X
• DOI: 10.1007/s11558-022-09471-3

This study identifies the impact of Bilateral Investment Treaties (BITs) on foreign direct investments (FDI) by taking advantage of the random timing of 44 unilateral BIT terminations in India between 2013 and 2019. Using quarterly bilateral data of 138 foreign investors’ home countries (FIHCs), our difference-in-differences (DD) estimates uncover a significant reduction in FDI inflows to India in response to BIT terminations by more than 30 percent compared to countries without terminations. We identify the sudden break with investor protection for new investments as the major transmission channel. Further investigations suggest that investors do not necessarily abandon India in response to BIT terminations but apparently reroute FDI via FIHCs with BITs. Evidence from firm-level data reveals that investors revoke or reroute mainly deals (e.g. mergers and acquisitions) rather than own new projects. Moreover, similarity of some legal institutions with India offsets the negative effect of BIT terminations.