The Economics of Investment Treaty Protection and the Evolving Empirical Research Agenda

Abstract

Investment treaties entitle foreign investors to compensation for certain classes of loss caused by a host State. Several recent papers have considered the economics of investment treaty protection. They have generally concluded that the economic justifications for such legal protection are weaker than supposed, and that the ability of investment treaties to deliver economic benefits depends on the existence of certain conditions in the States that are bound by them. This paper does not attempt to further develop economic arguments that have been made elsewhere. Rather, the purpose of this paper is to consider the implications of this economic analysis in defining questions for future empirical research. I argue that (theoretical) economic analysis suggests that future empirical research should be less focused on the relationship between signing a BIT and foreign direct investment (FDI), and more focused on the impact of investment treaties on the decision-making of host States and foreign investors. This paper comprises five sections. Section B briefly introduces the economic approach to analysis of legal rules. This is likely to be familiar to most readers. Section C provides an overview of the economic benefits that might plausibly flow from investment treaties. It argues that legal protections contained in investment treaties might improve efficiency by solving problems of discrimination, cost/benefit internalisation or risk aversion. The extent to which any of these three problems exists is an empirical question, which is likely to vary between States and investors. The extent to which other legal or market-based substitutes are able to solve each of these problems is also an empirical question. In light of this economic analysis, Section D suggests that empirical research into the link between BITs and FDI flows may be less useful than is generally supposed. Section E outlines a different empirical research agenda, one informed by an economic analysis of investment treaties.