Bilateral Investment Treaties with Strong Investors’ Rights Protection and Outward Foreign Direct Investment: Evidence Based on Quasi-Experimental Data for Chinese Investment in Belt and Road Initiative Countries

Bilateral Investment Treaties (BITs) aim to solve the holdup problem in international investment by granting foreign investors substantive and procedural rights. The Investor-State Dispute Settlement Clause (ISDS), is the crucial stipulation from an economic and foreign investor’s viewpoint, as it provides the mechanism through which the substantive rules of BITs are enforced. A significant shift in China’s foreign investment policy provides a quasi-experimental setting for investigating the causal impact of strong ISDS BITs on Chinese outward Foreign Direct Investment (OFDI). China has made its BITs much more investor-friendly by enhancing substantive clauses and including a far-reaching ISDS clause in new and renegotiated BITs. We use the renewal of the China-Uzbekistan BIT as the treatment within a Synthetic Control approach to isolate the importance of strong ISDS BITs for Chinese OFDI in Belt and Road Initiative countries. Our findings, robust to several sensitivity analyses, indicate that Chinese OFDI to Uzbekistan increased significantly with the ratification of the renegotiated BIT and, thus, even before other policies conducive to FDI were introduced by Uzbekistan. The results underscore the importance of strong ISDS BITs for FDI and highlight that they are an essential intermediate step in creating a firm property rights protection system.