Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000

Over the past forty-five years, bilateral investment treaties (BITs) have become the most important international legal mechanism for the encouragement and governance of foreign direct investment. Their proliferation over the past two decades in particular has been phenomenal. These intergovernmental treaties typically grant extensive rights to foreign investors, including protection of contractual rights and the right to international arbitration in the event of an investment dispute. How can we explain the diffusion of BITs? We argue that the spread of BITs is driven by international competition among potential host countries typically developing countries for foreign direct investment. We design and test three different measures of economic competition. We also look for indirect evidence of competitive pressures on the host to sign BITs. The evidence suggests that potential hosts are more likely to sign BITs when their competitors have done so. We find some evidence that coercion plays a role, but less support for learning or cultural explanations. Our main finding is that diffusion in this case is associated with competitive economic pressures among developing countries to capture a share of foreign investment. We are agnostic at this point about the benefits of this competition for development. Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000 Zachary Elkins Department of Political Science University of Illinois [email protected] Andrew Guzman Boalt Hall School of Law University of California at Berkeley [email protected] Beth Simmons Government Department Harvard University [email protected] Abstract Over the past forty-five years, bilateral investment treaties (BITs) have become the most important international legal mechanism for the encouragement and governance of foreign direct investment. Their proliferation over the past two decades in particular has been phenomenal. These intergovernmental treaties typically grant extensive rights to foreign investors, including protection of contractual rights and the right to international arbitration in the event of an investment dispute. How can we explain the diffusion of BITs? We argue that the spread of BITs is driven by international competition among potential host countries – typically developing countries – for foreign direct investment. We design and test three different measures of economic competition. We also look for indirect evidence of competitive pressures on the host to sign BITs. The evidence suggests that potential hosts are more likely to sign BITs when their competitors have done so. We find some evidence that coercion plays a role, but less support for learning or cultural explanations. Our main finding is that diffusion in this case is associated with competitive economic pressures among developing countries to capture a share of foreign investment. We are agnostic at this point about the benefits of this competition for development.Over the past forty-five years, bilateral investment treaties (BITs) have become the most important international legal mechanism for the encouragement and governance of foreign direct investment. Their proliferation over the past two decades in particular has been phenomenal. These intergovernmental treaties typically grant extensive rights to foreign investors, including protection of contractual rights and the right to international arbitration in the event of an investment dispute. How can we explain the diffusion of BITs? We argue that the spread of BITs is driven by international competition among potential host countries – typically developing countries – for foreign direct investment. We design and test three different measures of economic competition. We also look for indirect evidence of competitive pressures on the host to sign BITs. The evidence suggests that potential hosts are more likely to sign BITs when their competitors have done so. We find some evidence that coercion plays a role, but less support for learning or cultural explanations. Our main finding is that diffusion in this case is associated with competitive economic pressures among developing countries to capture a share of foreign investment. We are agnostic at this point about the benefits of this competition for development. Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000 The global market for productive capital is more integrated than ever before. The growth of Foreign Direct Investment (FDI) is a clear example. According to World Bank Data, gross foreign direct investment as a percentage of total world production increased seven-fold from 1.2% to 8.9% between 1970 and 2000. Though such investments tend to be highly skewed geographically – developed countries account for over 93 per cent of outflows and 68 percent of inflows foreign capital has come to play a much more visible role in many more countries world wide. It is widely recognized that economic globalization requires market-supporting institutions to flourish. But unlike trade and monetary relations, no multilateral rules for FDI exist. Direct investments in developing countries are overwhelmingly governed by bilateral investment treaties (BITs). BITs are agreements establishing the terms and conditions for private investment by nationals and companies of one country in the jurisdiction of another. Virtually all BITs cover four substantive areas: FDI admission, treatment, expropriation, and the settlement of disputes. These bilateral arrangements have proliferated over the past forty-five years, and especially in the past fifteen, even as political controversies have plagued efforts to establish a multilateral regime for FDI. Why the profusion of bilateral agreements? The popularity of BITs is puzzling when contrasted with the collective resistance developing countries have shown toward pro-investment 1 UNCTAD, http://r0.unctad.org/en/subsites/dite/fdistats_files/Annextables/Annextab02.pdf 2 For a review of the relevant legal literature see Dolzer 1981; Minor 1994; Sornarajah 1994; Vagts 1987. 3 Automated System for Customs Data (AYSCUDA) , http://www.asycuda.org/cuglossa