Bilateral investment treaties (BITs) have become increasingly popular as a means of encouraging foreign direct investment (FDI) from developed to developing countries. We adopt a difference‐in‐difference analysis to deal with the problem of self‐selection when estimating the effects of BITs on FDI flows from a sample of OECD countries to a broader sample of lesser developed countries. Our results indicate that forming a BIT with a developed country significantly increases FDI inflows to developing countries. We further find that the development of new FDI flows and the reinvigoration of deteriorating FDI relationships accounts for the majority of the increase in FDI flows due to BIT formation.