A BIT does go a long way: the positive effect of bilateral investment treaties on China's foreign direct investment inflows

Abstract

Existing literature on China’s Bilateral Investment Treaties (BITs) and their impacts on its Foreign Direct Investment (FDI) inflows has been understudied (Chen et al., 2017; Y. Li & Zhang, 2015; Tai & Liu, 2014; K. Zeng & Lu, 2016; L. Zhang & Feng, 2009). Empirical challenges in the causal inference lie in China’s strategic selection and the existence of time-varying and country-specific confounders in its BIT conclusion. Employing Liu et al. (2021)’s counterfactual estimation framework to account for time-trends, staggered adoptions, and various confounding variables, this study identifies the overall positive effects of China’s BITs on its FDI inflows from 1978 to 2020. The positive effects are robust to various model specifications. However, a further analysis reveals that the average positive effect of China’s BITs on its FDI inflows are significantly influenced by BITs signed between China and its partner countries in the 1980s. Such heterogeneous treatment effects suggest that China’s BIT policy in the 1980s was a strategic one – it selectively concluded BITs with the most promising economic partners in the early period of its BIT regime. It then gradually broadened the BIT network to more partner countries as its diplomatic relations expanded over time.