What determines BITs?

Similar to bilateral or regional preferential trade agreements (PTAs), bilateral investment treaties (BITs) have proliferated over the past 50 years. The purpose of this study is to provide the first systematic empirical analysis of the economic determinants of BITs and of the likelihood of BITs between pairs of countries using a qualitative choice model, in a manner consistent with explaining PTAs. We develop the econometric specification for explaining the two based upon a general equilibrium model of world trade and foreign direct investment with three factors, two products, and trade and investment costs among multiple countries in the presence of national and multinational firms. The empirical model for BITs and PTAs is bivariate in nature and supports a set of hypotheses drawn from the general equilibrium model. Using the preferred empirical model for a sample of 12,880 country-pairs in the year 2000, we predict correctly 88% of all pairs with a BIT and a PTA, 81% with a BIT but no PTA, and 84% with a PTA but no BIT. (C) 2012 Elsevier B.V. All rights reserved.