Bilateral investment treaties (BITs), signed by developing countries explicitly state the objective of promoting foreign direct investment (FDI). The rapid increase in the number of BITs and the concurrent increase in worldwide flows of FDI between 1980 and 2003 suggest that BITs are an effective strategy toward this goal. Recent studies provide some empirical support for this link. However, FDI flows into specific countries from 1980 to 2003 reveals the puzzling behavior for flows to increase soon after country starts signing BITs, followed by fluctuations with either a downward trend or no noticeable trend at all. Our main contribution is to explain this behavior by explicitly incorporating the impact of treaty violations, as evidenced by treaty disputes arbitrated by the International Centre for Settlement of Investment Disputes, on FDI flows. We find that while BITs are effective in attracting investment, disputes tend to decrease future investment flows.