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. 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 competition. The evidence suggests that potential hosts are more likely to sign BITs when their competitors have done so. We also control for diffusion via coercion, social learning, and cultural networks. 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.
Highlights
For useful comments on earlier drafts of this article, we thank Bill Bernhard, Bear Braumoeller, Frank Dobbin, Robert Franzese, Jeffry Frieden, Geoffrey Garrett, Tom Ginsburg, Jude Hays, Lisa Martin, Bob Pahre, Mark Ramsayer, Steven Ratner, Susan Rose-Ackerman, and John Sides+ For research assistance, we thank Elizabeth Burden, Raechel Groom, and Alexander Noonan+
Why the profusion of bilateral agreements? The popularity of BITs contrasts sharply with the collective resistance developing countries have shown toward proinvestment principles under customary international law and the failure of the international community to make progress on a multilateral investment agreement+3 On its face, this seems to suggest that BITs do not reflect the ready acceptance of dominant international property rights norms+ Our theory and findings support the competitive economic explanations described in the introduction to this symposium:4 the proliferation of BITs—and the liberal property rights regime they embody—is propelled in good part by the competition among potential host countries for credible property rights protections that direct investors require+
The article is organized as follows+ The first section describes the spread of BITs in some detail+ The second section presents a model of competition for investment that could lead to diffusion among competitors+ The third section discusses the methods we use to test our propositions ~and a range of alternatives!, and the fourth section discusses our findings+ Our data are consistent with competitive pressures for BIT proliferation: governments are influenced by competitors’ policies and by the mobility of FDI in manufactures, which tends to intensify competition among hosts+ We interpret our findings as evidence of pressure for certain governments to adopt capital-friendly policies in highly competitive global capital markets+
Summary
For useful comments on earlier drafts of this article, we thank Bill Bernhard, Bear Braumoeller, Frank Dobbin, Robert Franzese, Jeffry Frieden, Geoffrey Garrett, Tom Ginsburg, Jude Hays, Lisa Martin, Bob Pahre, Mark Ramsayer, Steven Ratner, Susan Rose-Ackerman, and John Sides+ For research assistance, we thank Elizabeth Burden, Raechel Groom, and Alexander Noonan+. The article is organized as follows+ The first section describes the spread of BITs in some detail+ The second section presents a model of competition for investment that could lead to diffusion among competitors+ The third section discusses the methods we use to test our propositions ~and a range of alternatives!, and the fourth section discusses our findings+ Our data are consistent with competitive pressures for BIT proliferation: governments are influenced by competitors’ policies and by the mobility of FDI in manufactures, which tends to intensify competition among hosts+ We interpret our findings as evidence of pressure for certain governments to adopt capital-friendly policies in highly competitive global capital markets+
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