Rev World Econ (2010) 146:147–177 DOI -009-0046-x ORIGINAL PAPER FDI promotion through bilateral investment treaties: more than a bit? Matthias Busse • Jens Ko¨niger • Peter Nunnenkamp Published online: 2 February 2010 Ó Kiel Institute 2010 Abstract Policy makers in developing countries have increasingly pinned their hopes on bilateral investment treaties (BITs) in order to improve their chances in the petition for foreign direct investment (FDI). However, the effective- ness of BITs in inducing higher FDI inflows is still open to debate. It is in several ways that we attempt to clarify the inconclusive empirical findings of earlier studies. We cover a much larger sample of host and source countries by drawing on an extensive data set on bilateral FDI flows. Furthermore, we account for unilateral FDI liberal- ization, in order not to overestimate the effect of BITs, as well as for the potential endogeneity of BITs. Employing a gravity-type model and various model specifica- tions, including an instrumental variable approach, we find that BITs do promote FDI flows to developing countries. BITs may even substitute for weak domestic institu- tions, though probably not for unilateral capital account liberalization. Keywords FDI Á Multinational corporations Á Bilateral investment treaties JEL Classification C33 Á F21 Á F23 1 Introduction Foreign direct investment (FDI) inflows are widely perceived to be superior to other types of capital inflows. Apart from offering additional investment resources, FDI may help host countries foster economic development by offering access to M. Busse Á J. Ko¨niger Department of Economics, Ruhr University Bochum, Universita¨tsstrasse 150, 44801 Bochum, Germany P. Nunnenkamp (&) Kiel Institute for the World Economy, Hindenburgufer 66, 24105 Kiel, Germany e-mail: peter.******@ifw- 123 148 M. Busse et al. internationally available technologies and managerial know-how, rendering it easier f