Can foreign direct investments be increased through international investment agreements?

Foreign direct investment (FDI) is hailed as an important source of external financing for many developing countries. Improving developing countries’ access to global FDI flows is thus a central aim of the international community. International investment agreements (IIAs) are mentioned as effective policy instruments to promote FDI flows. In fact, many developing countries signed IIAs to attract FDI and, in turn, promote economic development. This standard justification is increasingly being questioned by critics of IIAs. An increasing number of policy-makers, scholars and non-governmental organisations argue that IIAs, by and large, have not resulted in increased FDI flows and, worse still, they fear that IIAs excessively restrict host countries’ ability to adopt public policies aimed at promoting sustainable development.

The overview of the empirical evidence in my policy paper on the effects of IIAs on FDI flows suggests that this scepticism is well justified. Although various studies find a positive impact of IIAs on FDI, in light of methodological challenges to actually measure this impact and alternative evidence, these results should be interpreted with great caution. Policy-makers in developing countries hoping to attract FDI should therefore pay closer attention to the actual design of IIAs. The empirical evidence suggests that they have some room to improve the compatibility of IIAs and national policy objectives by reformulating the standards of investment protection

 

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