How Bilateral Investment Treaties Impact on Foreign Direct Investment: A Meta-analysis of Public Policy +) By Christian Bellak *) Vienna

Transcription

1 How Bilateral Investment Treaties Impact on Foreign Direct Investment: A Meta-analysis of Public Policy +) By Christian Bellak *) Vienna Draft version August 2013 prepared for 2013 MAER Network Colloquium, University of Greenwich (London, UK) Please do not circulate! +) An earlier version of this paper has been presented at IIFT 2013 (Kolkata, India). *) Vienna University of Economics and B.A. Department of Economics bellak@wu.ac.at

2 Abstract The purpose of this study is to analyse the magnitude of the theoretically hypothesized effects of Bilateral Investment Treaties (BITs) on Foreign Direct Investment (FDI) and to explain the large between-study heterogeneity. The primary economic function of BITs is to act as a commitment device for the host government, by raising the ex-post costs of reneging the agreement. 33 studies, published between 1998 and 2012, including 825 single results on effect sizes, are analysed, of which 268 effect sizes are used in the meta-analysis. Descriptive results based on semi-elasticities show large differences in effect sizes for virtually all criteria applied, such as the publication media, endogeneity, empirical methodology and theoretical model applied. After correcting for outliers the mean effect size is about 17 per cent (standard deviation 37.4). More recent studies include more negatively signed and more varied coefficients. The most puzzling result is the similar effect size of the impact of BITs on FDI flows and FDI stocks. Preliminary results of the meta-analysis demonstrate substantial between-study heterogeneity and reject the H0 of zero effect size. Asymmetry tests reveal a substantial bias. Yet, bias-corrected estimates are close to zero and thus of no practical relevance. Keywords: Meta-analysis, Foreign Direct Investment; Bilateral Investment Treaties; International Investment Agreements; Public Policy. JEL codes: C83 (Survey Methods, Sampling Methods), K33 (International Law), F21 (International Investment, Long-term Capital Movements), 2

3 What can be taken away from these various studies? Considered collectively, econometric-minded analysts have failed to uncover any consistent evidence that BITs influence investment decisions if analysts try to identify that influence by looking for statistically significant, substantively meaningful correlations between the number of BITs a host state has signed and FDI inflows. (Yackee, 2011, Virginia Journal of International Law, p. 410) Introduction A notable feature of the on-going globalisation process of production and services via Foreign Direct Investment (FDI) has been the proliferation of International Investment Treaties and Bilateral Investment Treaties (BITs), in particular. In a very general way, BITs are agreements between two countries for the reciprocal encouragement, promotion and protection of investments in each other's territories by companies based in either country. 1 FDI reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor. (OECD 2008, p. 48) 2 Under the general objective of profit maximization, the motivation for FDI may be resource seeking, market seeking, strategic asset driven and efficiency seeking. The purpose of investment treaties is closely tied to the removal of obstacles that may stand in the way of allowing and channelling more foreign investment into the host states. (Dolzer and Schreuer 2009, p. 22) 3 This view has been clearly expressed by one of the EU officials currently in charge of the future European Union investment agreement 4, when he mentioned that the main purpose of the agreement is to attract FDI to the EU, which is currently channelled to Asia and other destinations aspx For a more concise definition, see e.g. Dolzer and Schreuer, (2008). 2 The official definition is 254 pages. 3 For an empirical assessment of infrastructure and taxes as determinants of FDI see Bellak et al. (2009). 4 Mr. L. Rubinacci, Head of Unit, Services and Investment (B1), DG Trade, European Commission, on 2nd March 2013 at the Diplomatic Academy, Vienna. 3

4 Over time, the views about the role and relevance of BITs concerning the objective of FDI attraction underwent substantial change and the only constant was that the view has never been uniform. Here, a few relatively recent examples should suffice to demonstrate this fact. (emphasis added in all cases) UNCTAD s World Investment Report (2003) held that BITs play a minor role in influencing global FDI flows. ( ) The policy framework is at best enabling, having by itself little or no effect on FDI flows. ( ) As a rule, IIAs tend to make the regulatory framework more transparent, stable, predictable and secure that is, they allow the economic determinants to assert themselves. And when IIAs reduce obstacles to FDI and the economic determinants are right, they can lead to more FDI. But it is difficult to identify the specific impact of the policy framework on FDI flows, given the interaction and relative importance of individual determinants. In 2009 Newcombe and Paradell concluded that Although later studies provide support for a more robust relationship between IIAs (International Investment Agreements, author) and FDI levels, the existence of a causal relationship and the strength of that relationship remain disputed. Nevertheless, even if empirical evidence of a causal relationship is inconclusive, there remains strong competitive pressure for developing states to enter into IIAs and thereby signal to foreign investors that an enabling environment for foreign investment exists. Büthe and Milner (2009, p. 187) develop a more direct link between BITs and FDI: In sum, enforcement procedures established by (or as a consequence of) BITs enable foreign governments and private actors to impose higher economic and political costs on governments that renege on their policy commitments and to do so more quickly than in the absence of BITs. By increasing the likelihood and the time-discounted magnitude of the punishment for reneging, international institutions should reduce the time-inconsistency problem posed by FDI for developing country governments. Busse et al. (2010) on the basis of their empirical analysis go even further and conclude that BITs may even substitute for domestic institutions. Tobin and Rose Ackerman (2011, p. 2) argue on the basis of empirical evidence that the global surge in BITs has weakened the treaties as a tool for attracting FDI to a particular country. So far, no meta-analysis exists in this field, which is particularly unfortunate, as BITs have become more visible in recent years not least because of the emergence of important investor - state arbitration cases on the basis of BITs. There are at least two types of motivations to deal with the question of how BITs affect FDI. 4

5 From a substantive viewpoint, the fact that empirical evidence is far from being conclusive as to the direction, but also to the magnitude and significance of the effect. From a policy point of view, the impact of BITs on FDI has gained renewed attention not only due to the strong increase in arbitration cases between a foreign investor and the host state, but also due to the envisaged inclusion of investment chapters in new regional trade agreements (EU Canada, EU India etc.). The aim of the meta-analysis is therefore, to establish a plausible effect of BITs on FDI and to explain the large between-study heterogeneity of results. In accordance with the MAER Network (Meta-Analysis of Economics Research Network) we report the following items: Research question and effect size Theoretical underpinning of the studies Measurement of the effect How the research literature was searched Studies used in the meta-analysis (full disclosure of the rules for study (or effect size) inclusion/exclusion) Descriptive evidence on the effect-sizes List of information coded for each study or estimate Summary statistics of variables used in the meta-analysis Bias: Funnel plots (all, journals and top journals) and tests Results of Meta analysis and tests for between study heterogeneity (Results of the multivariate Meta-regression: still to be carried out) (Sensitivity analysis: still to be carried out) The main contribution is to highlight the fact that this literature with few exceptions has compared empirical results only as to the sign of the coefficient and the statistical significance, but not as to the economic significance of BITs. While this 5

6 fact applies to many other fields in economics, too, it is particularly deplorable concerning BITs, as bilateral and regional investment treaty making is currently a crucial area of international policy making, but little is known about their effects. The paper is organized as follows: The theoretical part explains briefly, how BITs may increase FDI through investor protection. The following part discusses measurement issues, the derivation of the effect size and describes the approach used in this paper as well as the reporting requirements as listed on the MAER homepage. The data section presents descriptive statistics and provides details on the studies used. Results of the meta-analysis are discussed in the next section. A short summary concludes. Research question and effect size In an investment treaty, the host state deliberately renounces an element of its sovereignty in return for a certain new opportunity: the chance to better attract new foreign investments, which it would not have acquired in the absence of a treaty. It is true that this quid pro quo underlying the policy choice on the part of the host state is based on a policy judgement, the nature of which escapes precise abstract evaluation inasmuch as it is based upon assumptions about the effect of the treaty, which are objectively uncertain. (Dolzer and Schreuer, 2009, p. 23; emphasis added) Our research questions concern the evaluation of this policy measure in the field of FDI attraction: How large are theoretically hypothesized effects of BITs on FDI? More precisely, we ask: How much does (monadic or dyadic) FDI stock or FDI flow increase upon the conclusion of a new BIT? How is the large between-study heterogeneity in empirical studies addressing the impact of BITs on FDI explained? 6

7 Effect size The effect size is defined as semi-elasticity, i.e. the percentage change of the dependent variable FDI and an independent variable BIT. Table 1 shows the results of a simple head-count. ************************* Table 1. Head count ************************* Figure 1 shows that a wide range of effect sizes remains, even after extreme observations have been excluded. (See below for a description which effect sizes have been excluded.) In particular, the negative effect sizes are a puzzle, as they are counterintuitive from a theoretical point of view (see next section). *********************** Figure 1. Histogram *********************** Figure 2 shows the evolution of semi-elasticities over time as more diverse, larger and more negative estimates emerge in more recent studies. This is against conventional wisdom, that early estimates in a certain research area are often exaggerated, and more plausible results emerge only in later studies. On the other hand, larger effect sizes may be reported, since arbitration on the basis of BITs has become more visible recently and thus BITs have gained importance as a location determinant for investors in later periods. ******************************************************* Figure 2. Semi-elasticities (effect sizes) over time ******************************************************* 7

8 Theoretical underpinning of the studies This part of the paper explains briefly how and why BITs may increase FDI through investor protection. The economic justification of BITs is derived from two arguments, which explain the fact that sometimes investment policies lack credibility. As a consequence of the lack of credibility, an efficient investment, which would otherwise have taken place, is not carried out in the absence of a BIT. These arguments pertain to the existence of adverse selection and time inconsistency, also known as hold-up problem (e.g. Tomz 1997, Guzman 1998). As both are well known in the literature on economic policy, a brief exposition suffices here: How does the credibility problem derive from these two arguments and are BITs an appropriate (efficient) answer to this problem? We discuss these problems here in light of the obsolescing bargain, i.e. once a firm undertakes a foreign direct investment, some bargaining power shifts to the host country government, which has an incentive to change the terms of the investment to reap a greater share of the benefits. (Büthe and Milner, 2008, p. 743) Given the obsolescing bargain argument, it is noteworthy at the outset that this is neither a necessary, nor a sufficient precondition for the credibility problem to arise, as there need not be an intent to deceive on the part of the host. Rather, adverse selection and time inconsistency aggravate the obsolescing bargain. 5 Adverse selection is based on a micro-economic perspective and refers to the fact that information about the true intentions of a government may be private, i.e. when observers lack information about the beliefs and values that are motivating a government to pursue ( ) (Tomz, 1997, p. 2) a certain policy, e.g. liberalizing of capital flows. Kerner (2009, p. 74) uses the term beliefs over a state s intentions. This can be even more pronounced, if the government in question is a foreign government of the potential host country of FDI, where information may be scarce, 5 While Büthe and Milner (2008, p. 743) argue that time-inconsistency aggravates the obsolescing bargain, Bonnitcha and Aisbett (2012, p. 688, FN 26) mention that these terms are used interchangably. 8

9 especially when dealing with countries that lack credible institutions, e.g. some developing countries. Time inconsistency (also called dynamic inconsistency problem) has first been developed with regard to macro-economic policies (e.g. Kydland and Prescott, 1977). It introduces a time-element into the discussion, namely a short-term versus a long-term perspective. The key issue here is that there is no long-term credible commitment possible from the side of the host country, no matter, whether the host country government has good intentions or not: the host country government will always have in the short run incentives to change the terms of existing foreign investments when the short-run benefits exceed the long-term costs. (Büthe and Milner, 2008, p. 743) Thus, the dynamic inconsistency problem arises, because the government s conduct changes once the investment is in place, i.e. sunk. Short-term welfare maximisation may thus dominate long-term welfare maximization / efficiency. 6 Viewed from the (potential) foreign investor s perspective, no conduct of the government can be credible, once these incentives exist. An investor will not undertake an investment or be able to enter into an efficient agreement with the host country. 7,8 Thus, whatever the agreement, it is not possible for a country to make its commitment fully credible even if it enters into an agreement. (Guzman, 1998, p. 79) 6 This may be aggravated in developing countries, as Büthe and Milner (2009, p. 743) argue that resourcestrapped developing country governments may have an even greater incentive than governments in advanced industrialized countries to discount the long term. Tomz (1997, p. 4) lists a number of reasons, why a government could be prompted to seek protectionism in trade policy ex post, even though free trade was superior ex ante. For example, a program of commercial liberalization could conflict with the objective of fiscal retrenchment. (ibidem) A similar problem in case could be a deteriorating current account. Tomz (ibidem) concludes: Thus, the temptation for true reformers to escalate tariffs may prove irresistible once investors have committed themselves. This type of reasoning can easily be transferred to the realm of investment policy: For example, a government could aim to liberalize capital flows and free transfer of funds, but could revert to capital controls later on; or raise tariffs on re-exported goods and intermediate services, despite a liberalizing policy approach in general. 7 Examples for agreements about the division of surplus (see, e.g. Guzman, 1989, p. 80) are: concessions and commitments on the part of each party, e.g. the host might agree to offer certain tax advantages to the investor, agree to allow the repatriation of profits, and waive certain import restrictions. The firm, on the other hand, might bind itself to providing a certain level of employment, certain transfers of technology, local content / value-added etc. 8 There are many ways how the host country government may shift the distribution of surplus / profit from the investor to the host state: raising tax levels, raising tariff levels, changes in regulation, fees, selective law enforcement, imposing new labour requirements etc. The most extreme ones are expropriation (Guzman 1998, p. 81). Yet, as Büthe and Milner (2009) argue, the likelihood of expropriation is low for investments that are part of a firm s global production chain, as they leave an expropriating government with essentially worthless assets. In addition, the competence to run an expropriated production facility may be low on the side of the host-country government. 9

10 It should be noted, that the dynamic-inconsistency problem remains, even if the information asymmetry is completely avoided, i.e. all information is public. Let us return to our question above and still continue to analyse a situation with no BIT in place. One might ask, Isn t it the case that there are forces at work, so that governments will have enough incentives not to exploit their increased bargaining power, once the investment is sunk? The argument usually put forward is that governments may resist the temptation to seize assets today in order to create or maintain a reputation that will attract future investment (Guzman 1998). Yet, this applies only, if the long-term is not discounted too much in favour of the short-term, the hold-up problem. So, self-control of the government is unlikely to work. Besides, international law does not remedy the situation, because the mechanisms for the enforcement of a contract between a country and a private firm are at best extremely weak and at worst completely non-existent. (Guzman, 1998, p. 79) Now enter a BIT and return to our original question: How does the BIT remedy the credibility problem and generate a credible expectation? Kerner (2009) argues that there are two possibilities: First, ex-ante costs (signals) and second, ex-post costs (commitments). The interplay between these two is important: In a setting of imperfect information, all commitments are signals but not all signals are commitments. (Tomz, 1997, p. 5) Signalling in the case of BITs and FDI may be defined as sending a broadly received signal that a country is trustworthy. (Kerner, 2009, p. 74) In other words, doubts about the true intentions of the host country government stemming from the information asymmetry -- can be reduced at the side of the investors, as they update their beliefs when the host country signs / ratifies a BIT. Hands-tying of ratifying host states is manifested when BITs present significant expost costs to signatory states that violate the agreement. (Kerner, 2009, p. 74) In this view, a BIT is a commitment device. 9 Since a BIT includes a number of 9 How do commitments raise ex-post costs? According to Büthe and Milner (2009, p. 745) formal agreements, such as treaties, make them more visible. For example, most BITs can easily be downloaded from the web. In addition, organizations like UNCTAD publish reports on investment policies of (some of) their member states. 10

11 commitments between two sovereign governments, violating a BIT, i.e. deviating from announced policy (Tomz, 1997, p. 5) constitutes a breach of international commitments, which should make those commitments more costly to break. (Büthe and Milner, p. 744, emphasis added) 10 Summarizing, commitments such as BITs have the potential to overcome the problems of time-inconsistency and adverse selection (through signalling) simultaneously. An efficient agreement between the host state and the investor can be reached, because the hands-tying and the signalling mechanism enable that commitments by the host state are seen as credible by the investor and help to overcome the credibility problem arising from the information asymmetry and hold-up problem. As Jandhyala and Weiner (2012, p. 11) mention, BITs provide greater certainty about the future treatment of assets by the state which allow firms to appropriate higher returns from their foreign assets. Thus, efficient location choices can be made and hence BITs should have a positive effect on FDI. 11 There are certain limitations to this view, which are discussed in the concluding section. In addition to the theoretical reasoning above, Jandhyala et al. (2011) argue convincingly on the basis of empirical evidence that the motives for BITs have changed over time: As the density of BITs among peer countries increased, more countries signed them in order to gain legitimacy and acceptance without a full understanding of their costs and competencies. (p. 1047) Thus, a plausible prior may be that the effects of BITs may have changed over time in parallel with the motives. Which are the threats to investors, against BITs may provide protection? Generally, BITs may provide protection against all measures by the host government that may Also, Multinational Enterprises who benefit from BITs, have an incentive to make violations of BITs public. Reasons like the aforementioned make thus commitments more credible and hence should lead to more FDI. Yet, by far the most important reason, why BITs make commitments more credible is that there is a mechanism that makes it easier to bring costly pressure on governments if they do not carry through on those promises. (Büthe and Milner, 2008, p. 746) This is the investor-state dispute settlement mechanism. 10 Note the difference between the first and the second argument, which is due to the fact that the first argument refers to all investors, including those not covered by the BIT in question, while the second refers only to investors covered by the BIT. 11 The impact of substantive protections provided by IITs (International Investment Treaties) on the efficiency of decisions made by investors are analysed conceptually in Bonnitcha and Aisbett (2012). 11

12 change the division of surplus / profit from the investment between the investor and the host state. For example, expropriation: direct and indirect unfair treatment discriminatory treatment: national / international restrictions on transfer of funds performance requirements by the host state. 12 Measurement of the effect Careful definition of the dependent and independent variable is a sine qua non for meta-analysis, especially when there are various ways of measurement of the dependent and independent variable. Definition of independent variable of main interest: Dyadic data: the existence of a BIT between two countries Non-dyadic data: the cumulated stock of BITs of a single home or host country Distinguishing between ratification and signing of BITs is another important indicator, as there is a theoretical prior that the effects on FDI should differ. Definition of dependent variable: Inward FDI Dyadic data: o Dyadic FDI stocks: inward FDI stocks from a single home country in a single host country 12 Please note, that the provisions addressing these threats will not be described here in detail, as they are quite complex and require a good deal of legal understanding. Rather, the interested reader is referred to the following excellent texts: Schreuer (online, see references section for web link) and Dolzer and Schreuer (2008). 12

13 o Dyadic FDI flows: inward FDI flows from a single home country into a single host country Non-dyadic data: o Aggregate FDI stocks: inward FDI stocks from all home countries of a single host country o Aggregate FDI flows: inward FDI flows from all home countries into a single host country Outward FDI 13 (same as for inward FDI above) This results in 2 (FDI inward / outward) * 2 (BIT dummy / cumulative) * 4 (FDI aggregate stocks / FDI aggregate flows / FDI dyadic stock / FDI dyadic flow / 4 different FDI ratios) = 64 possible combinations and all variables can appear in level or log form. Yet, not all combinations are relevant here and not every combination has actually been used in empirical studies so far. Most importantly, with dyadic datasets (BIT dummy), non-dyadic data can be included as well (BIT cumulative), but not vice versa. Interpretation Dyadic FDI data: If a host country j concludes a BIT with the home country i, the BIT increases bilateral inflows / outflows / instocks / outstocks from the home country i to host country j, which is a signatory to the BIT by x per cent (and vice versa). From a substantive point of view, this reflects the commitment effect, but not the signalling effect. Note that contrary to widespread belief - it does matter, whether one uses inward or outward FDI flows or stocks, even when dyadic data are used, as these may differ widely and thus the mirror statistics 14 do not match. 13 Note that the only study that uses firm-level data on FDI is Egger and Merlo (2012). 14 Mirror statistics is a term used in the FDI literature to note that the bilateral flows or stocks between country A and B may appear differently in the outward statistics of country A and the inward statistics of country B. The reason for such differences are manifold, among the most important are valuation differences, 13

14 Non-dyadic FDI data: If a host country j increases its total number of BITs by one BIT (no matter with which home country) or concludes a new BIT, the BIT increases total inflows / inward stocks of FDI from all home countries, which are or are not signatories of a BIT with host country j. (And vice versa, if country j is the home country.) From a substantive point of view, this reflects the commitment effect as well as the signalling effect of BITs on third-country investors. The choice between dyadic and non-dyadic data is motivated by data availability, econometric considerations (e.g. treatment of zeros, negative net FDI flows) and theoretical underpinning. Derivation of semi-elasticities The first task for the meta-analyst is to convert the published coefficients into semielasticities. As insufficient information has been found in several of the papers, authors have been contacted via and some have delivered the missing information that allowed us to include their study into our analysis. (See below: Studies used in the meta-analysis ) The general form of regression models used is represented by the following simplified equation: FDI = a + b BIT + cx + u Where a is the intercept, BIT is the variable of interest with estimated coefficient b, X is a matrix of the other independent variables that expectedly have an influence on FDI, c is a vector of coefficients that belong to the variables of matrix X, u is the error term and FDI represents the dependent variable. In the reduced form of this regression model, other independent variables and the error term are disregarded here. Coefficients have been converted into semi-elasticities as described in Table 2 and Appendix A. the inclusion or exclusion of reinvested earnings etc. On these issues see Bellak (1998) and Bellak and Cantwell (1998). 14

15 ************************************************************************************************ Table 2. Summary of the derivation of semi-elasticities from coefficients b and number of studies using respective effect sizes ************************************************************************************************ How the research literature was searched The literature was searched via google and google scholar as well as by contacts to key colleagues involved in research on FDI and partly BITs. The search has been repeated several times and the last search was done on 21st July As the terms used in the search routine Bilateral Investment Treaties and its acronym BIT are very specific and the empirical research on the subject started only in the mid-1990ies, we are confident to covering a very large share of all studies available in the field. The total number of studies identified is 37, thereof 33 have been used in this metaanalysis so far. The studies have been published in scientific journals (20, thereof 4 in top journals 15 ), in books (4), in Working Paper / Discussion Paper form or other unpublished works (8) as well as PhD thesis (1). Thus, it is a notable feature that a large share of the empirical material used here has not been published in economics journals. 15 Top according to the citation index in web of knowledge among the top 20 per cent: This yielded the following results: Economics: World Development, law: Harvard International Law Journal, political science: American Journal of Political Science. In addition the Haftel (2010) paper, published in the Review of International Political Economy has been classified as a top journal. Yet, as the web of knowledge is no longer accessible, it is based on the ranking by Halkos and Tzeremes (2012). This also shows how much this issue spans across the disciplines. 15

16 Studies used in the meta-analysis (full disclosure of the rules for study (or effect size) inclusion/exclusion) For a number of reasons, not all of the results published could be included in the analysis so far. In particular, for now we have excluded the following studies / effect sizes (see Table 3): A. Studies PhD dissertations o Siegmann (2008) has not yet been included, as it contains the largest number of results (184 single effect sizes) and it is difficult to judge which ones are the preferred ones by this author. As the number of results used in this meta-analysis is small (at least compared to many other meta-analyses), we intend to use some of these results in the future. o Tortian (2012), a conference paper, which seems to be part of a PhD, still has to be included. Also, the fact that some papers included insufficient information for the derivation of semi-elasticities resulted in a loss of effect sizes. Despite the authors were contacted, they did not bother to reply at all or they replied in a very general way that did not provide the information we were looking for: Hicks (2008), Hallward-Driemeier (2003); and Sullivan and Salacuse (2005). These studies or some of the effect sizes therein could not be included in further analysis. The study by Tobin and Rose-Ackerman (2011) will still be included, as the replication files for their study are now available on the Journal s website. UNCTAD (1998) is not available on the web anymore and has - for the time being - been excluded. If an earlier working paper version has been published in a journal later the earlier working paper version has been dropped: Peinhart and Allee (2008: 9 coefficients, 2012: 29 coefficients). Haftel (2007) published as Haftel (2010); Sokchea (2006) published in The very preliminary 2007 version of Jandhyala, Henisz and Mansfield included coefficients on BITs, which, however, did not appear in the later 16

17 versions (2010 WP and published in 2012). Expectedly, the authors did not want us to include these preliminary results of 2007 in our study. The study of Vandevelde et al. (1998, 1 coefficient) still has to be included. The study of Büthe and Milner (2014, forthcoming) still has to be included. The inclusion of additional studies may yield approximately 100 additional effect sizes. B. Effect sizes If effect sizes relate to other BITs, defined as the whole BIT network of a country, this coefficient has been dropped, as other BITs measures a different effect than the dyadic BIT variable. We have employed a standard outlier analysis to the semi-elasticities, i.e. discarded values smaller or larger 3 standard deviations. (3-sigma rule) Alternatively, we have applied the 3-sigma rule on a study by study basis. We have arbitrarily introduced an upper and lower bound of semi-elasticities at < 300 and < as these results do not make sense, neither from an economic point of view nor from a political science point of view. Moreover, the largest results would imply a huge bias to all descriptive statistics and graphs as they are so much larger than all of the rest. Treatment of interaction-terms with BIT variable 16 : Consider the following model, I = a + b BIT + cstab + d(bit STAB) + u, where STAB stands for political stability of the host country. b is the coefficient on the BIT variable and gives the effect of BIT on FDI when STAB is zero, which is unlikely. Therefore, interaction terms including the BIT variable have only been included, if they have been derived on the basis of a FE model (as all variables were demeaned) and thus, the effect of BIT on FDI is evaluated when the interacting variable STAB is evaluated at its mean value. In this case the effect is b + d(stab). 16 See for example Mekasha and Tarp (2011, p. 17) showing the significance of the interaction term for the partial effects in a replication meta-study. 17

18 In addition, we have performed our analyses after statistically significant negatively signed coefficients have been excluded, which resulted in a loss of another 6 observations. ***************************************** Table 3. Number of effect sizes used ***************************************** The grouping of the effect sizes by definition of the dependent and independent variables as described above resulted in eight different semi-elasticities, out of which several included too few observations to be used neither for the meta-analysis, nor the meta-regression. (see Table 4 below) Descriptive evidence on the effect-sizes Descriptive evidence on the effect-sizes is given in Table 4, distinguishing between various definitions of the dependent and independent variable. ************************************************************************************************ Table 4. Number of semi-elasticities, mean value and standard deviation by characteristics of dependent and independent variable (and by specification) ************************************************************************************************ Finally, these are summarized into four semi-elasticities (see Table 5), by combining inward and outward FDI in the case of dyadic FDI data: semi1 and semi3 = semi_a 18

19 in the case of aggregate inward and outward FDI flows: semi2 and semi4 = semi_b in the case of dyadic FDI stocks semi5 and semi7 = semi_c in the case of aggregate inward and outward FDI stocks: semi6 = semi_d Note: semi8 has zero observations and is therefore not grouped. ****************************************************************************************** Table 5. Summary of 4 types of semi-elasticities (by dep and indep variable definition) ******************************************************************************************* The unweighted mean value of the effect size of semi_a is 17.6 percent (standard deviation: 37.4). Effect sizes are almost equal for subsamples semi_a and semi_c that use FDI flows and FDI stocks, respectively as the dependent variable. More recent studies yield more negatively signed coefficients and also larger estimates (see Figure 2). As Tables 6a and 6b show, there are large differences in effect sizes, no matter which criteria are applied (such as endogeneity controlled, journals vs. other publication; single home country etc.). Some are plausible, some are counterintuitive and some are inconclusive. For example, it is quite plausible, that semi_b has a much larger mean value than semi_a, which may be explained by the fact that BITs are used cumulatively and thus also cover signalling effects - as FDI is aggregate FDI - in addition to commitment effects. It is counter-intuitive, for example, that comparing semi_a and semi_c leads to the striking result that the mean value of both semi-elasticities is almost equal (17.6 : 16.5). Yet, the first one is based on flows, while the latter is based on stocks, while the measurement of BITs and of other FDI characteristics is held constant. As an example for inconclusive descriptive evidence, take studies analysing FDI of the US as a single home country in other countries: this leads to a much lower semi-elasticity for semi_a, which may be explained by the fact that the commitment effect of the BIT is low, as there is no 19

20 credibility problem with a powerful government like the US, as the US is able to protect its MNEs outside the US even without a BIT. Yet, this effect is the opposite, when semi_b is used: The US as a home country leads to a much higher mean value of the semi-elasticity, which may reflect the total network of BITs of the US (which is, however, rather small). Note, that these results are partly due to the low number of effect sizes when the semi-elasticities semi_a semi_d are split into two or more categories. ********************************************************************** Table 6a. Semi-elasticities by various characteristics, semi_a Table 6b. Semi-elasticities by various characteristics, semi_a ********************************************************************** Table 7 presents unweighted means of the four semi-elasticities, of which semi_a and semi_b are further analysed, due to the low number of observations for semi_c and semi_d. ******************************************* Table 7. Unweighted means (OLS) ******************************************* Bias: Funnel plots and tests of bias (FAT, PET, PEESE) As the purpose of this research is an unbiased assessment of the underlying empirical phenomenon, we start the meta-analysis by analysing potential bias. Potential bias may have a number of sources, yet bias arising from publication selection is a primary concern in empirical economics. As has become apparent from the descriptive evidence, statistical significance seems to be favoured over economic 20