International Journal of Business, Management & Economics e-ISSN 2746-1351 Vol. 1 No. 2, November 2021 Published by Page 53 Bilateral Investment Treaty and Foreign Direct Investment in India: A Dynamic Panel GMM Estimation of Causal Effects Lakshmanasamy T University of Madras, India tlsamy@yahoo.co.in Abstract India has one of the largest Bilateral Investment Treaty (BIT) networks with other counties around the world. The BITs is to promote foreign investment by increasing investor confidence, empowering individual private parties to take international arbitral proceedings against the threat of appropriation by the government of the host country. This paper analyses the effect of BITs on FDI inflows in India using panel data for 76 countries for the time period 2000-2016 applying a dynamic panel generalised method of moments instrumental variable estimation method. The differenced GMM and system GMM estimates show a significant negative effect of bilateral investment treaties on the FDI inflows in India. While the lagged FDI has a significant positive effect, the financial openness of the source nations is reducing FDI inflows to India. The POLCON index shows that the countries with lesser political constraints have positive FDI outflow towards India. As opposed to domestic variables, the Chinn-Ito and POLCON indices have a greater share of change in FDI inflows to India. It seems that the BITs is not efficient enough to create investor confidence to invest in India. Keywords: Bilateral Investment Treaty, Foreign Direct Investment, Generalised Method Of Moments 1. Introduction Foreign direct investment (FDI) is recognised as the most powerful engine of the recent trends in economic growth. The FDI inflows enable capital-poor countries to bridge the gap of domestic savings and investment and build up physical capital in third world countries. The FDI also create employment opportunities, develop productive capacity, enhance skills of local labour through the transfer of technology and managerial know-how, and integrate the domestic economy with the global economy. The FDI is an integral part of the introduction and familiarisation of modern technology and management skills from developed countries. Thus, it is in the interest of every nation to boost its FDI inflows. For effective and substantial FDI inflows, sustained economic growth of either the source nation or the host nation is vital. Further, the macroeconomic environment has an impact on the FDI inflows. The variables like GDP, growth rate, inflation, political stability, international trade and technology transfer agreements, exchange rate, skilled labour are the most important factors that influence the flows of FDI to an economy. There also may be some factors that are difficult to be controlled by the governments in determining the FDI inflows.