Bilateral Investment Treaties (BITs) as a predictor for greater FDI and better trade relations for developing countries

Will be completed as a project for Part II of SNA Course

Abraham Cherian

Background:

A bilateral investment treaty (BIT) is an agreement establishing the terms and conditions for private investment by nationals and companies of one state in another state. This type of investment is called foreign direct investment (FDI).

BITs are established through trade pacts and close to 3000 bilateral investment treaties (BITs) have been concluded since 1959. Scholars and arbitrators have recognized that common principles underlie investment treaties. Among others, BITs typically provide for:

• Compensation in case of expropriation.
• Fair and equitable treatment of investment.
• Full protection and security.
• Non-discrimination (national and most-favored nation treatment).

At the UN Conference on Financing for Development in Monterrey, Mexico, in March 2002, Heads of State and Government propagated the view that FDI provides an important means to eradicate poverty in developing countries. According to the Monterrey Consensus, the central challenge is to overcome the concentration of FDI in a few (large and relatively advanced) developing countries so that poor countries would be able to reap the benefits of FDI

Hypothesis:

Linkages created between countries via BITs and other multilateral trade agreements result in higher FDI flows between countries, resulting in higher economic development for developing countries.

Primary Guiding Question:

Does signing of Bilateral Investment Treaties (BITs) lead to better FDI flows and improved economies  for Developing Countries?

Secondary Questions:

How does a combination of BITs and multilateral trade agreements affect trade relations and flows?

How do other shared attributes such as regional and military treaties, as well as power alignment affect trade relations and BITs?

Approach and Data:

Why use Social Network Analysis to study the effectiveness of trade agreements?  The fundamental piece of information about networks is the relationship between nodes, which, in this case are investment treaties. The implication of a structural view of such a network is that the relation between countries cannot be considered independent from that between either of these and a third country. Therefore the characteristic of interdependence is the hinge of trade networks.

Network analysis of trade agreements is suited for undirected one-mode networks containing ties that are either unweighted (i.e. bilateral trade agreements) or weighted (i.e. bilateral and multilateral trade agreements). This study will superimpose attribute data to examine the effect of country attributes, for example, FDI flow(positive if incoming), GDP (whether developing or developed country), region (Asia, Africa, Europe, North America, South America).

Data The research will begin by constructing an undirected valued network of countries and their connections with other countries through BITs, TIPs and multilateral agreements. Tie strength will be based on whether two countries are connected through BITs(signed, but not in force = 1, signed and in force = 2) and multilateral trade agreements (in force = 2, in addition to BIT with the same country = 3).

The attribute dataset will include FDI flows data, GDP, population, and a number of economic indicators to establish a relationship between trade agreements and economic well being. In addition, countries’ participation in regional and military pacts will also be reflected in attributes to examine their effect on FDI.

The following aspects of the effect of BITs and multilateral trade agreements will be examined using SNA:

• Network Centrality Measures Density of ties would indicate how deep and widespread existing trade relations are, as well as the potential for trade agreements in a network. For instance, density of a network limited to South Asia would indicate the potential for new agreements between these countries. Network Centrality could indicate who is investing, as well as who is garnering those investments, and if some countries are getting more than their fair share of investments.

• Cliques and Subgroups Subgroups of countries based on treaties will indicate trade affinities and groupings outside of trade agreements. This will also answer the question - is there any evidence of homophilly – are there any distinct networks based on other attributes?

• Node Centrality Measures Degree, Betweenness and Eigenvector could be used to identify leaders, brokers and influential countries, especially in combination with attribute data like GDP, power alignment and regional ties etc. Ego Networks can identify trade networks developed by specific countries and possible factors that led to these ties.

Sources:

There does not appear to be many previous instances of SNA analysis of trade relations using BITs and multilateral trade agreements. A study on world trade using SNA has been carried out earlier and the study paper is available at http://www.cepii.fr/PDF_PUB/wp/2013/wp2013-24.pdf . However, this paper does not examine the network effects of bilateral and multilateral trade agreements.

Data on BITs and multilateral agreements as well as attribute data is available from the UNCTAD website (http://unctadstat.unctad.org/EN/Index.html).