European bilateral investment agreements is there a real value added?

Transcription

1 European bilateral investment agreements is there a real value added? Magdalena Słok-Wódkowska Katarzyna Śledziewska 1 prelimary version Abstract Our paper contributes to the discussion about economic effects of regional trade agreements (RTA) and bilateral investment treaties (BIT). The fundamental aim of our research is to investigate the influence of different agreements and their scope on EU FDI outflow. For an empirical test we use a data set covering the period from 2000 to Standard factors of FDI models have been tested, such as the size of the markets of trade partners or GDP per capita of trade partners using loglinear specification of the model. To control the effect of RTAs and BITs we add several dummy variables indicating the scope of cooperation. Positive effects of growing GDP and GDP per capita were expected by us, as usual. We also suppose that concluding RTA or BIT enhance FDI outflow from EU. To test for this hypothesis, and to exercise control over additional factors, we estimate a model based on panel data with the use of Hausman-Taylor method. 1. Introduction At the end of 2013, the European Union (EU) and China announced the start of negotiations on a bilateral investment agreement. This will be the first agreement concluded directly by the European Union as a partner, and not by its Member States. However, almost all member states of the European Union already have bilateral investment agreements with China already in force. This raises the question of the economic and legal added value of a new agreement negotiated by the European Union. Is the new agreement able to attract new investors? The EU has concluded many regional trade agreements which included also provisions on investment as part of liberalization of trade in services. Until 2009 the EU did not have a competence to cover also protection of investments, therefore investment agreements were concluded by its member states. In a Treaty of Lisbon the competence was extended. In our paper we would like primarily to raise an issue of consequences, both legal and economic, of the shift of competence in regulating foreign investments between the EU and its member states. Therefore, we would like to began with description of current landscape of the investment agreement. Traditional legal analysis of the legal basis and agreements concluded will be supplemented by economic analysis of investment flows and stocks. In this part it will be mainly statistical analysis. 1 Magdalena Słok-Wódkowska, Ph.D. Institute of International Law, Faculty of Law and Administration, University of Warsaw; Katarzyna Śledziewska, PH. D. Faculty of Economic Sciences, University of Warsaw project financed from resources of the National Science Center granted in a decision DEC-2013/09/D/HS5/01328.

2 In the second part of our paper we would like to discuss briefly legal implications and difficulties with regulating investment protection by the EU. We would also like to present an analysis of economic implications. Third and fourth sections are devoted to the presentation of the main economic analyses and tools. They contain the statistical description of FDI outflows and of the general econometric model that we use and its estimation method, namely the method of Hausman and Taylor. Empirical results and their interpretation are also given. The last section includes brief concluding remarks. The estimation results shown in the article are obtained with the use of Stata 11 software. 2. Competence of the EU in the field of investments The term investment has no legal, commonly agreed definition. There are also some differences, especially important in this study, between understanding of the notion by economists and lawyers. There is a broad consensus that the term covers a situation when an investor from one state buys or set up a company in another country. In economics, the term usually refers to foreign direct investments, which is only one category of defined as purchasing at least 10% of shares in a company. It is also of a great importance to differentiate between stock and inflow of FDI and outward and inward FDI 2. Outward direct investment is investment by a resident direct investor in a non-resident direct investment enterprise; the direction of the influence by the direct investor is outward for the reporting economy (also referred to as direct investment abroad). Inward direct investment is investment by a non resident direct investor in a direct investment enterprise resident in the host economy; the direction of the influence by the direct investor is inward for the reporting economy (also referred to as direct investment in the reporting economy). FDI stocks are the value of FDI assets (for outward FDI stocks) and FDI liabilities (for inward FDI stocks) at the end of the reference period. FDI flows are the net values of FDI from (or to) all countries of the world during the reference period in (or from) the reporting economy. In law, although we usually use a notion of investment, there are sometimes other provisions of international agreements which also refer to investing process. Therefore, various international agreements relating to the investments can be broadly divided into two categories those related directly to protection of foreign direct investments and those related to the process of establishing and/or purchasing company in another country and commercial presence there. First category forms international investment law sensu stricto. Second category forms a part of international trade law and is governed both by the WTO/GATS law as well as regional trade agreements. In the second category the notion of investment is not always present. We have to be though aware of the fact, that GATS s mode 3 of supply services commercial presence in fact relates to FDI. Also mode 4 movement of workers can influence also investors and 2 Based on definitions from: and

3 investments. There are also certain other provisions in the RTA, that can be qualified as law related to investment, therefore investment law sensu largo. The actual meaning of these provisions depends on to which family of agreements a given RTA belongs 3. In the majority of the EU agreements there is a term establishment used for describing ability to open and conduct commercial presence in another country. Trade agreements refer also to free movement of capital as a way of transferring capital resources between countries. All of these terms may relate to investments. Therefore, there is a broad agreement, that the EU (formerly European Economic Community EEC and European Community EC) was always competent to conclude agreements related to trade aspects of investments. These were a part of a European trade policy, usually qualified as an exclusive competence of the EEC/EC 4. Competence to conclude agreements related to commercial presence, even though there were no doubts already at that time, was directly confirmed in the European Court of Justice 5 (ECJ) advisory opinion 2/94 concerning the EC membership in the WTO 6. The ECJ though confirmed also, that in relation to trade in services as well as intellectual property rights such a competence is not exclusive. It resulted in a fact, that trade agreements which include provisions related to trade in services, so called Economic Integration Agreements (EIA) have been concluded as so called mixed agreements, together by the EU and its member states. Such a conclusion has been made by the ECJ based on the previous wording of the Treaty provision Article 133(1) of the Treaty establishing European Community, This article did not refer directly to investment nor to its protection. Such wording led to following practice: The EU covered some aspects of investments in its trade agreements, such as right to establishment of commercial presence or free movement of capital. Member states retained their competence in the field of promotion and protection of investments. Therefore, member states have concluded bilateral investment agreements (BITs) with third countries. A new Article 207 par 1 of the Treaty on the Functioning of the European Union (TFEU), which replaced article 133 in the Treaty of Lisbon, was heavily changed. According to the Article 207, common commercial policy is based on uniform principles, particularly with regard to changes in tariff rates, the conclusion of tariff and trade agreements relating to trade in goods and services, and the commercial aspects of intellectual property, foreign direct investment, the achievement of uniformity in measures of liberalisation, export policy and measures to protect trade such as those to be taken in the event of dumping or subsidies. New wording refers directly to all aspects of the WTO law as well as to foreign direct investment without clarifying or narrowing the scope of coverage within this field. Such wording implies that the EU exclusive competence to conclude international agreements related to all aspects of investments possibility of investing in the EU, as well as promotion and protection of investment, as common commercial policy is expressly qualified 3 P. Larille, J. Lee, Services in Regional Trade Agreements. How Diverse and how creative as compared to the GATS Multilateral Rules?, (2012) WTO Staff Working Paper, (access: ). 4 Which was confirmed in the ECJ advisory opinion 1/75, [1975] ECR Since the official name is Court of Justice of the European Union, but for greater clarity we will use ECJ in subsequent part of this paper. 6 Advisory opinion 1/94, [1994] ECR I-5267.

4 as an exclusive competence of the EU in the Article 3 (1e) TFEU. As a result, member states formally ceased to have a competence to conclude BITs unless they are empowered by the Union or for the implementation of Union acts (Article 2 (1) TFEU). Because of the change of competence, there was a need to determine the future and status of numerous BITs between the EU member states and third countries. In July 2010 the Commission presented its communication Towards a comprehensive European international investment policy 7 in which Commission presented its future actions within this field. It also explained the reasons why the Commission think the EU BIT can be better to protect and promote investments they should be more modern, and provide higher level of protection BITs concluded by the EU member states throughout past fifty years. The Commission revealed that it is not going to prepare the EU model BIT, and is going to negotiate a BIT with any third country separately in order to conclude an agreement possibly best-suited to a partner and specific negotiating context. Already in that communication the Commission stated that China and Russia are its first possible targets of such negotiations. In 2010 the Commission presented also a proposal for binding rules solving the problem of already existing BITs proposal of a regulation, which after two years of negotiations entered into force in January Regulation (EU) No 1219/2012 of the European Parliament and the Council of 12 December 2012 establishing transitional arrangements for bilateral investment agreements between Member States and third countries provides, that BITs concluded by member states and notified in accordance with the Regulation may be maintained in force (Article 3). Key element here is a notification process, which covers all BITs concluded by a member state with a third country both before and after entry into force of the Lisbon Treaty and require providing the Commission detailed information on a BIT as well as an assessment procedure pursued by the Commission. According to the chapter III of the Regulation, member states of the EU are authorised to conclude new and modify existing BITs, unless it is inconsistent with the EU law, principles or plans to open negotiations with the same partners on the EU level. A member states which intend to open negotiations should be authorised by the Commission. The chapter is crucial for current landscape of the EU investment agreements as it effectively changed division of competence between the EU and its member states. The competence remained de facto shared, although the EU gained a solid mandate for negotiating its own BITs on the EU level. Moreover, such a division of competence make it even more important to determine factors which should be taken into account by the Commission while taking a decision to start negotiations of an investment treaty. 3. Investments in the EU trade agreements - current situation The change in the EU competence in the field of foreign investment was relatively recent. In order to assess the impact of such a change we have to analyse already existing obligations of the EU. We have to take into account, that different aspect of investment were covered not only by the GATS, but also by the RTA concluded by the EU. 7 COM(2010)343.

5 The EU has notified to the WTO 35 8 regional trade agreements. With 41 countries (both independent states and territories) the EU forms free trade areas covering trade in goods, with 3 of them custom unions (Turkey, San Marino and Andorra). Only 11 agreements have been notified to the WTO as economic integration agreement (EIA) under article V GATS, although these agreements cover 31 countries. Theoretically, the latter are the most important agreements for an analyses of investments, as they always cover trade in services, which includes some aspects of investments. There is only one agreement notified exclusively as EIA Agreement on the European Economic Area. The Agreement on EEA established common market between the EU member states and European Free Trade Agreements (EFTA) member states Iceland, Liechtenstein and Norway. As a result the Agreement provides for free movement of services, right to establishment, free movement of capital and free movement of people. It is the most comprehensive EIA. Switzerland despite being a party of EFTA, is not an EEA member. It concluded a series of separate bilateral agreements with the EU. Though, an agreement which provides for the rights related to investments has not been notified as EIA to the WTO. EIAs have usually formed a part of Stabilisation and Association Agreements (SAAs) 9 and Economic Partnership Agreement (EPA) 10 provided that they are not interim agreements. SAAs agreements provide a right to establishment in certain sectors. They usually cover also free movement of capital and some forms of facilitation of movement of workers. SAAs contain also provisions on regulatory cooperation, although it means that non-eu party is obliged to adjust to the EU legislation in order to achieve further concessions. Similar elements can be found in the EPA, although there are no provisions on regulatory cooperation. EIA are also a part of other, relatively modern Association Agreements, concluded with partners such as Central America 11, Andean Community (Peru and Columbia), Mexico, Chile and South Korea. All of this agreements enable partners to establish a company in the party, they provide for some facilitation of movement of natural persons for economic reasons (e.g. usually as a personnel of a foreign company). They usually refer to movement of capital, but explicitly enable only transfer of money for direct investments (excluding portfolio investments). All of them except the EU Korea Agreement oblige parties to promote investments in the other party. Even though the number of agreements notified as EIA is relatively modest compared to the total number of the EU agreements it is worth to note, that some provisions related to investments may be found also in other EU RTAs, especially in the Euromediterranean 8 The number can be higher if we take into account also RTA notified to the WTO which are no longer in force because a party joined the EU. Such agreements were not taken into account in our further analyses. For the purpose of further analyses we excluded also some of existing agreements: with Syria an agreement is not applicable due to political reasons; Faroe Island and Overseas Countries and Territories as well as Palestinian Autonomy are not independent countries, therefore member states are not usually concluding investment agreements with them; San Marino and Andorra are too small and can interfere the outcome of economic analyses. 9 The only Interim SAA in force is EU-Bosnia and Herzegovina Agreement, while there are full SAA with Serbia, Montenegro, Albania and FYROM. 10 There is only one full EPA (EU-CARIFORUM), other agreements with ACP countries are Interim EPAs. 11 Provisionally applied since 1st August 2013 with Honduras, Nicaragua and Panama, since 1st October 2013 with Costa Rica and El Salvador, and since 1 December with Guatemala.

6 Agreements 12 concluded with Israel, Jordan, Lebanon, Morocco and Tunisia. All of them except the EU Algeria Agreements invoke GATS. They establish some forms of regulatory cooperation (adjusting requirements in the non-eu party to the EU law). All of them refer to promoting investment. 4. Bilateral agreements concluded by member states During the same period of time when the EU (EC/EEC) concluded regional trade agreements that included chapters on investments, the EU member states concluded separately bilateral trade agreements covering promotion and protection of investments. From to 2013 the EU member states concluded 1326 bilateral investments agreements (BITs) signed with third countries 14. Newest BITs have been signed already after entry into force of the Treaty of Lisbon. Analysis of all BITs concluded by member states showed a few trends. In nineteen sixties the trend was emerging. There were only few agreements concluded by Germany, as well as France, the Netherlands, Italy and Sweden. In nineteen seventies also Great Britain joined the group of countries who wanted to protect investments, while France became more active with 12 BITs signed. In nineteen eighties all of developed countries mentioned above as well as Belgium (together with Luxemburg) signed over ten BITs each. But the real increase in number of concluded BITs can be observed between 1988 and Afterwards the number of new BITs signed started to decrease again. Figure 1 shows the number of BIT signed in a particular year (the figure does not show BITs that have been terminated). Figure 1. Number of BITs signed in a particular year. 12 The Euromediterranean Agreements are going to be replaced by more modern deep and comprehensive free trade agreements, presumably notified also as EIA and containing chapters on right to establishment and investments. 13 Date of conclusion of first BIT in the world, 14 The analysis was based on the UNCTAD datebase (access: III 2014), present database is accessible on In our research we excluded BITs concluded between EU member states (usually before the date of accession of one of them) so called intra EU BITs. The number of actual BITs in force might be higher.

7 Source: Data from UNCAD. Such an increase can be explained not only by a growing popularity of BITs but also by the fact the former-communist countries joined the process after 1989, but they had never become leaders in negotiating BITs. The highest number of BITs in force have still countries exporting investments Germany (121), United Kingdom (91) and France (90). Other highly developed countries with high number of BITs are respectively Italy 87, the Netherlands 84, Belgium and Luxembourg 80 and Spain 73. The only EU member state that does not conclude BITs is Ireland, which signed only one BIT with Czech Republic. The highest number of BITs the EU members concluded are with China and Turkey, the only one which do not have a BIT in force with them is Ireland. Over 20 BITs are concluded with also Albania, Belarus, Egypt, Jordan, Moldova, Morocco, Serbia, Ukraine and Uzbekistan as well as India, Russia and South Korea. Also Kuwait and Vietnam have BITs with majority of the EU member states. 5. Trends of FDI stocks In the previous chapters we presented agreements concluded by EU countries. Based on this analyses we propose the empirical study of the impact of BITs and RTAs on outflows of foreign direct investments from EU countries. First we study trends in outward investment stocks of EU member states (MS) in country groups according to the type of agreements concluded. Partner countries are grouped into: EU (for intra-eu investment), BIT (for countries which have concluded bilateral investment treaties), FTA&AIE (group of countries having FTA and AIE signed with EU) and ROW (representing countries with no investment agreement signed with EU that we call rest of the world). According to our analyze the main receivers of EU FDI flows are EU MS. EU countries invest mainly on the internal market. In 2012, the share of internal investments accounted for almost 60% of total FDI stocks of EU countries and have increased since 2000 more than

8 twice and reached 3.5 trillion of euros in 2012 (see Figure 2). Meanwhile the stock of FDI in ROW countries reached 2.5 trillion, in group of BIT countries 0.6 billion and only 0.2 trillion of euros for FTA&EIA countries. Figure 2. Stock of FDI in 4 analysed groups of EU partner countries, values in current prices, billions of euros UE ROW BIT FTA&EIA Source: Own presentation based on data from Eurostat The growth rate in recent years is less significant for the main EU s FDI receivers than for countries that signed BIT and FTA&EIA. Since 2000, the stock of FDI in the FTA&EIA and BIT countries increased more than 4-times (see Figure 3) comparing to only twice for other groups. Figure 3. The dynamics of growth of the FDI stocks in EU partner countries, 2000= UE ROW BIT FTA&EIA - Source: Own presentation based on data from Eurostat

9 Due to the high dynamics of FDI stocks in FTA&EIA or BITcountries, we observe the growing importance of these groups in the EU's external investments (Figure 3). In the analyzed period, the importance of BIT countries (in total EU s external FDI stock), has grown from 10 percent to more than 25% and for FTA & EIA countries - from 3.2% to 4.7%. Meanwhile the share of FDI in ROW countries has decreased. These observations permit to raise a question about the impact of BIT and FTA&EIA agreements on FDI outward stocks. Figure 2. Comparison of 2000 and 2012, shares and changes in percentage points. The share of FDI outward in total EU extra-eu FDI outward, %, years (5.00) (10.00) ROW BIT FTA&EIA Source: Own presentation based on data from Eurostat /00 6. Potential determinants of FDI To verify if the BIT or FTA&EIA agreements play any role in increasing of the EU FDI outward stocks, we propose a standard semi-gravity model with dummy variables representing BIT and RTA agreements. We propose to include standard macroeconomic factors that determine the location and magnitude of FDI. They range from inflation and taxes, to factors that are likely more endogenous with FDI activity, such as trade protection and trade flows and finally agreement signed by EU countries. The main theoretical determinants of FDI explain why companies would want to supply foreign markets through affiliate production rather than through exporting or licensing arrangements. Dunning(1993) outlines four motives for a firm to engage in FDI: access to

10 resources, access to markets, efficiency gains, and acquisition of strategic assets. These motives can be influence by: macroeconomic variables like the size the host market: Market size is expected to have a positive impact on FDI inflows, since investors opt to capture a domestic market share. Moreover, larger host economies promote economies of scale due to larger potential demand and lower costs due to scale economies 15. In our analyse we measure market size by real GDP of partner country. We also take into consideration the level of development which is measured by real GDP of partner country but also the difference in GDP per capita between partner and reporter country, economic stability: Surveys of investors have indicated that political and macroeconomic stability is one of the key concerns of potential foreign investors 16. We propose inflation as a proxy for macroeconomic stability. taxes: Effects of taxes on FDI have been considerably focused by both international and public economists. An obvious hypothesis is that higher taxes discourage FDI 17. the degree of openness of the host economy: In our analyse it is measured by the ratio of total trade to GDP and FDI to GDP, but also we take into consideration the bilateral imports and exports between reporter and partner country 18, the quality of institutions: The quality of institutions is likely an important determinant of FDI activity, particularly for less-developed countries. Poor legal protection of assets increases the chance of expropriation of a firm s assets making investment less likely 19. In our analysis, the quality of institutions is represented by the measure of rule of law that captures perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence 15 after Bhavan, T., Xu, Changsheng., &Zhong, C. Determinants and Growth Effect of FDI in South Asian Economies:Evidencefrom a Panel Data Analysis, International Business Research, 4(1) (2011) 46; Walsh J., Yu J., 2010 page 10) 16 Jadhav P., Determinants of foreign direct investment in BRICS economies: Analysis of economic, institutional and political factor, Procedia - Social and Behavioral Sciences 37 pages 5 14, (2012) 9, Campos, Nauro and Yuko Kinoshita, Why Does FDI Go Where It Goes? New Evidence from the Transition Economy, IMF Working Paper 03/228, Washington: International Monetary Fund, (2003) 10, Walsh J., Yu J., Determinants of Foreign Direct Investment: A Sectoral and Institutional Approach, IMF Working Paper, WP/10/187, (2010) Blonigen B., A Review of the Empirical Literature on FDI Determinants, NBERWorking Paper No , (2005) 9 18 Bhavan, T., Xu, Changsheng., &Zhong, C. Determinants and Growth Effect of FDI in South Asian Economies:Evidencefrom a Panel Data Analysis, International Business Research, 4(1) (2011) 46; Jadhav P., Determinants of foreign direct investment in BRICS economies: Analysis of economic, institutional and political factor, Procedia - Social and Behavioral Sciences 37 pages 5 14, (2012) 9, Walsh J., Yu J., Determinants of Foreign Direct Investment: A Sectoral and Institutional Approach, IMF Working Paper, WP/10/187, (2010) ); Jadhav P., Determinants of foreign direct investment in BRICS economies: Analysis of economic, institutional and political factor, Procedia - Social and Behavioral Sciences 37 pages 5 14, (2012) 9, Campos, Nauro and Yuko Kinoshita, Why Does FDI Go Where It Goes? New Evidence from the Transition Economy, IMF Working Paper 03/228, Washington: International Monetary Fund, (2003) 11, Blonigen B., A Review of the Empirical Literature on FDI Determinants, NBERWorking Paper No , (2005) 9

11 the gravity variables (like distance between countries, contiguity, common language, historical relations like being the ex-colony):these variables represent the transaction costs that are expected to increase with the distance, the language problems and etc. 20. economic integration: Trade liberalization resulting in removal of trade controls, as trade flows are often a complement to FDI flows, should intensify FDI flows between countries with more liberalised trade regimes 21. But also lower restrictions on FDI flows should imply higher FDI flows between integrating countries 22. These arguments motivated us to add dummy variables for EU integration for reporter and partner country but also for all regional trade agreements and BITs. To analyse the impact of different areas covered by RTAs we introduced dummy variables to control approximation of law, capital liberalisation, free movement of labour and promotion of investments. The complete list of the variables used in the model is presented in Table 1. Table 1. Variables used in the model. Explanatory Variables Market Size Indicators GDP_diff (-) Expec ted sign Description Log of the difference of the GDP per capita of two partners in absolute terms GDPreal (+) GDP (constant 2005 US$) WDI GDPreal_rep (+) GDP (constant 2005 US$) of reporter country WDI Macroeconomic Stability inflation (-) Inflation, GDP deflator (annual %) WDI Trade openness open (+) Exports and imports of goods and services (% of GDP) WDI Imp_bilat (+) log of Bilateral imports 1000 USD WITS Ex_bilat (+) log of Bilateral exports 1000 USD WITS FDIgdp (+) Foreign direct investment, net inflows (% of GDP) WDI Policy Variables Tax_gdp (-) Taxes on income, profits and capital gains % of GDP WDI EU membership gravity variables EU (+) EU dummy EU_partner (+) EU dummy for partner contig (+) Contiguity CEPII comlang (+) Common Ethnical Language CEPII colony (+) Colonial heritage CEPII distw (-) Weighted Distance CEPII Institutional Variables RL_EST (+) Rule of Law WGI Integration - agreements FTA (+) dummy variable, =1 if FTA signed with partner country WTO EIA (+) dummy variable, =1 if CU signed with partner country WTO Data Sources WDI 20 Bhavan, T., Xu, Changsheng., &Zhong, C. Determinants and Growth Effect of FDI in South Asian Economies:Evidencefrom a Panel Data Analysis, International Business Research, 4(1) (2011) Campos, Nauro and Yuko Kinoshita, Why Does FDI Go Where It Goes? New Evidence from the Transition Economy, IMF Working Paper 03/228, Washington: International Monetary Fund, (2003) 11,. Blonigen B., 2005 page Campos, Nauro and Yuko Kinoshita, Why Does FDI Go Where It Goes? New Evidence from the Transition Economy, IMF Working Paper 03/228, Washington: International Monetary Fund, (2003) 11

12 CU (+) dummy variable, =1 if EIA signed with partner country WTO BIT (+) dummy variable, =1 if BIT signed with partner country treaties Establishment (+) Right to establishment (right to establish a company) agreements Approximation (+) Information exchange; Development of legal frameworks; agreements Harmonization and simplification of procedures; establishment of mechanisms for the settlement of disputes. Capital (FDI) (+) Free movement of capital relating to direct investments right to agreements move freely yield from investments and profits. Labor_facilitation (+) All kinds of facilitation of movement of workers. agreements Promotion (+) Promotion of investments agreements One can conclude that we propose as determinaning factors ranging from inflation and taxes, to factors that are likely more endogenous with FDI activity, such as trade protection and trade flows and finally agreement signed by EU countries. Our study examines how exogenous macroeconomic factors affect the firm s FDI decision Based on defined FDI determinants we construct an extended model using a panel in which each unit is a pair of countries, while each period is one year. We estimate a model based on panel data with the use of Hausman-Taylor method. This solution allows for both, including time-constant variables in the model and allowing for correlation of individual effects and independent variables. This method is based on firstly estimating parameters standing by the time varying variables with the use of fixed effects estimator and then using instrumental variables method to estimate parameters standing by the time invariant variables. We could thus schematically write the model as follows: t ij t t t ( x ) β + α + λ ε ln FDI = β 0 + ' + where: ij ij ij t x ij is a vector of independent variables for a pair of i-th country (reporter) and j-th country (partner) in year t (including variables typically included in FDI models and further variables), α is an individual effect in the pair of i-th country and j-th country, ij t λ is a time effect for all pairs of countries in year t, t ε ij is an error term for a pair of i-th country and j-th country in year t. Table 2. Results of Hausman Taylor regressions HT1 HT2 HT3 gdp_diff * * * (0.029) (0.029) (0.029) GDPreal 1.307*** 1.266*** 1.262*** (0.065) (0.066) (0.066) GDPreal_rep 1.990*** 1.939*** 1.939*** (0.091) (0.090) (0.090)

13 inflation ( ) ( ) ( ) open (0.038) (0.038) (0.038) Imp_bilat *** *** *** (0.018) (0.018) (0.018) Ex_bilat 0.268*** 0.274*** 0.277*** (0.024) (0.024) (0.024) FDIgdp * (0.0012) (0.0012) (0.0012) Tax_gdp *** *** *** (0.53) (0.53) (0.53) EU 0.640*** 0.628*** 0.637*** (0.046) (0.046) (0.046) EU_partner 0.259*** 0.274*** 0.263*** (0.048) (0.049) (0.049) contig (0.69) (0.69) (0.69) comlang (0.69) (0.68) (0.68) colony (0.71) (0.71) (0.71) distw * * * (0.16) (0.16) (0.16) RL_EST 0.235** 0.251*** 0.263*** (0.072) (0.072) (0.073) FTA 0.361*** (0.10) EIA 0.310** (0.10) CU (1.25) BIT (0.078) (0.077) Approximation (0.25) Investment (0.21) Capital (FDI) (0.34)

14 Labor_facilitation 0.581* (0.24) Promotion (0.21) _cons *** *** *** (3.19) (3.18) (3.20) N Standard errors in parentheses * p< 0.05, ** p< 0.01, *** p< Table 2. contains the results of regressions of the two-way model (time fixed effects included as a set o dummy variables) estimated with the use of Hausman-Taylor estimator. The estimated parameters on variables derived from the theory and other empirical studies (table 2, column 1) in most cases are statistically significantly different from zero and their signs are just as we expected. Distance, the difference of GDP per capita, taxes ratio to GDP in partner country have negative impact on FDI, while the impact of GDPs of reporter and partner countries, bilateral trade as well as rule of law in partner country are positive. Also both reporter and partner countries being the EU member will positively affect FDI. The most important, for our research, are the results represented in column 2 and 3 were we added variables representing the economic integration process and BIT. The variables indicating the impact of free trade agreements and economic integration agreements are statistically significant at least at the 5% significance level as a regressor for the value of logarithmized FDI stocks. Results show the estimated expected ceteris paribus differences between FDI stocks in partner who is tightening the business relations by signing FTA and EIA to the partner, with whom there is no such agreement signed Results also indicate that CU does not have any statistically significant impact on FDI. Surprising results we received are for the areas covered by trade agreements. According to them most of indicated areas are statistically insignificant and only labour facilitation has a positive impact on FDI flows. Conclusions The main goal of the research was to contribute to the discussion on regional trade agreements and bilateral investment treaties impact on FDI flows. We used the model with standard FDI determinants which we extended by RTAs and BITs dummy variables. We tested if concluding RTA or BIT enhance FDI outflows from EU. Surprisingly, we found that although the impact of signing the RTA is significant and positive; the role of BIT is not so evident. According to our research BITs do not impact EU investors decisions. Their decisions are influenced more by the integration process within the EU MS and with FTA and EIA countries. More detailed analysis on areas covered by EIA showed that the most important issue for EU investors is the implementation of facilitating workers movement to the agreements.

15 References Bhavan, T., Xu, Changsheng., &Zhong, C. Determinants and Growth Effect of FDI in South Asian Economies:Evidencefrom a Panel Data Analysis, International Business Research, 4(1) (2011) Blonigen B., A Review of the Empirical Literature on FDI Determinants, NBERWorking Paper No , (2005) Campos, Nauro and Yuko Kinoshita, Why Does FDI Go Where It Goes? New Evidence from the Transition Economy, IMF Working Paper 03/228, Washington: International Monetary Fund, (2003) Dolzer, R., M. Stevens, Bilateral Investment Treaties, Martinus Nijhoff Publishers, 1995, Dunning, J.H. Multinational Enterprises and the Global Economy, Addison-Wesley Publishing Company: Reading, MA, (1993). Guzman A. T., Sykes A. O., Research Handbook in International Economic Law, Edward Elgar Publishing, (2007) Jadhav P., Determinants of foreign direct investment in BRICS economies: Analysis of economic, institutional and political factor, Procedia - Social and Behavioral Sciences 37 pages 5 14, (2012) Resmini, L., The Determinants of Foreign Direct Investment in the CEEC, Economics of Transition, Vol. 8 (3), pp , (2000) Walsh J., Yu J., Determinants of Foreign Direct Investment: A Sectoral and Institutional Approach, IMF Working Paper, WP/10/187, (2010)