Have BITs driven FDI between ECOWAS countries and EU?

• Published date: 14 June 2013
• Pages: 130-153
• Date: 14 June 2013
• DOI: https://doi.org/10.1108/JITLP-Apr-2012-0008
• Author: Abiodun S. Bankole,Adeolu O. Adewuyi
• Subject Matter: Economics

Have BITs driven FDI between

ECOWAS countries and EU?

Abiodun S. Bankole and Adeolu O. Adewuyi

Trade Policy Research and Training Programme, Department of Economics,

University of Ibadan, Ibadan, Nigeria

Abstract

Purpose – Given the inconclusive evidence in the literature on the impact of Bilateral Investment

Treaties (BITs) on Foreign Direct Investment (FDI) flows, as well as dearth of literature on this subject

matter as regards West Africa and the European Union (EU), the purpose of this paper is to investigate

the extent to which BITs and preferential trade and investment agreements (PTIAs) triggered foreign

investment flows particularly between the Economic Community of West African States (ECOWAS)

countries and the EU.

Design/methodology/approach – Trend analysis was used to trace the link between FDI and

BITs, while panel regression models were used to investigate the impact of BITs on FDI during

1980-2010.

Findings – Econometric results indicate that, as in most previous studies, BITshave strong positive

impact on FDI in West Africa, with this impact significant at a higher level (1 per cent) for FDI flow than

stock (5 per cent). The impactof BITs on FDI is significant even with the state of internal factors (such as

capital account liberalisation, trade openness, high inflation rate and poor governance) in West African

countries. The findings suggest that in the absence of BITs, West African countries would have suffered

adversely from poor FDI inflows given their poor macroeconomic stability and governance. On the

contrary, the PTIAs did not have significant impact on both FDI flows and stock. The results also show

that FDI inflow to West Africa is both market and resources seeking.

Research limitations/implications – Sensitivity analysis may not have been sufficient. For

instance, not tested was the impact of the signalling effect of BIT, as well as other vertical FDI such as

those from the USA.

Practical implications – Theimplication of the findings is that West Africa countries need to design

policies and programmes that will enable them to maximise the technological spill-over from FDI in

order not to be perpetual suppliers of primary products and purchasers of manufactured goods. Further,

they have to maintain macroeconomic stability and good governance. They need to understand the type

of provisions in the BITs that constituent states signed and compare with the provisions of the PTIAs,

with a view to discerning what is responsible for the superior response of FDI to BITs.

Originality/value – Given the absence of literature on the impact of BITs on FDI flows between

West Africa and EU, it becomes imperative to investigate this issue with a view to motivating the

investment component of the EPA, as investment is one of the Singapore issues that were removed

from WTO’s Doha Round.

Keywords European Union,West Africa, International economicpolicies, International investments,

Bilateral investment treaties, Foreigndirect investment, ECOWAS countries, Panel data estimation,

Economic partnership agreement

Paper type Research paper

The current issue and full text archive of this journal is available at

www.emeraldinsight.com/1477-0024.htm

JEL classification – F21

The authors are grateful for the support of their research students (Afolabi Olowookere,

Ebenezer Olubiyi and Damilola Arawomo).

Journal of International Trade Law

and Policy

Vol. 12 No. 2, 2013

pp. 130-153

qEmerald Group Publishing Limited

1477-0024

DOI 10.1108/JITLP-Apr-2012-0008

JITLP

12,2

130

I. Introduction

Owing to the increasing importance of foreign real and financial (FRF) flows[1] to the

developing countries which are characterisedby fiscal and balance of payments deficits,

it is imperativefor these countries to embarkon various initiatives at all levels[2]to attract

more FRF flows. It is againstthis background that the developing countries entered into

different international agreements (IAs) and pursue unilateral policy and institutional

reforms. However, of particular interest to international business stakeholders is the

impact of these IAs on foreigninvestment flows to these countries, particularly whether

their impacts are significant, complementary, spill-over, competitive and stable.

Therefore, a case of interest in this paper is the impact of bilateral investment treaties

(BITs) signed betweenthe European Union (EU) and West African countries.

There are many related reasons why this type of study is important. First,

West African countries were among their developing country cohorts that have largely

cultivated, and competed for, foreign direct investment (FDI)[3] inflows to bridge their

domestic saving-investment gap and therefore augment the available funds to fina nce

own development process through bilateral investment agreements. Since May 1961 and

December of the same year when Togo and Liberia signed the first and second BITs,

respectively, all West African countries have signed BITs with different interests

particularly since the early 1990s. Despite this development, few studies exist on West

Africa that examined the impact of BITs, while many studies have been done for the

developed world and Asia.

Currently, West African countries are engaged in trade and investment negotiations

with the EU to make their economic cooperation of over three decades reciprocal

within the context of an economic partnership agreements (EPA). During the Lome

conventions which previously characterised Africa, Caribbean and Pacific (ACP)-EU

relations, BITs constituted one of the instruments of economic relations that West

African countries individually signed with their EU counterparts. The purpose of

signing these BITs was to access cutting-edge technologies alongside unilaterally

liberalising their investment regimes as well as participating in the preferential trade

and investment agreements (PTIAs) component of the Lome conventions.

A second and related point is that despite various BITs signed by West African

countries and other policy initiatives, the magnitude and rate[4] of FDI are low

(The World Bank, 2007; Adewuyi and Akpokodje, 2009; Oyejide et al., 2005). Besides,

there are contemplations from the various quarters about what should be the position of

West African countries in the negotiation of the investment component of the EPA. This

is necessary so that such position will not affect the existing flow of FDI from EU or even

outflow of FDI.

The third point has to do with the impact of BITs on FDI flow, evidence on which

remains controversial in the literature. Recent studies buttressed this inconclusive

evidence. While a class of studies has suggested that BITs impact positively on FDI

flows (Blomstrom and Kokko, 1998; Gastanaga et al., 1998; Globerman and Shapiro,

1999; Neumayer and Spess, 2005; Salacuse and Sullivan, 2005), others report a negative

or no impact of BIT on FDI, particularly in the presence of very high risks

(Hallward-Driemeier, 2003; Tobin and Rose-Ackerman, 2003).

Notwithstanding the controversial impact of BITs and PTIAs on FDI flows in the

literature, it is expected that BITs signed with EU countries attracted investment

more than from other non-EU countries, while PTIAs should similarly increase FDI

Have BITs

driven FDI?

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