Locating the External Source of Enforceability: Alliances, Bilateral Investment Treaties, and Foreign Direct Investment

ObjectiveWe theorize that alliances play a role as an external source of enforceability of bilateral investment treaties (BITs), and they do this by limiting the policy opportunism in foreign direct investment (FDI) host countries. We attempt to demonstrate that being party to common BITs and common alliances substantially raises the accumulation of FDI. MethodsUsing econometric techniques including panel-corrected standard error, fixed effect, and dynamic pooled models, we analyze panel data on dyadic FDI stock from 1978 to 2003. ResultsWe find that BITs increase FDI stock and that alliances magnify this positive effect of BITs by a substantial margin. ConclusionBeing embedded in alliances strengthens the impact of BITs on FDI. This study contributes to the extant literature on the efficacy of BITs in particular and that on international institutions in general.