Three Waves of BITs

Abstract

Bilateral investment treaties (BITs), agreements that provide extensive rights and protection to foreign investors, were first adopted in the 1960s, proliferated in the late 1980s and 1990s, especially among developing countries, and seemingly fell out of fashion after 2001. To explain this life cycle of diffusion across the international state system, we argue that BIT signing followed a traditional logic of diffusion for an innovation albeit here in the policy realm. In the first period, BITs provided a solution to the time inconsistency problem facing host governments and foreign investors. In the second period, these treaties became the global standard governing foreign investment. As the density of BITs among peer countries increased, more countries signed them in order to gain legitimacy and acceptance without a full understanding of their costs and competencies. More recently, as the potential legal liabilities involved in BIT signing have become more broadly understood, the pattern of adoption has reverted to a more competitive and rational logic. Our empirical tests of BIT signing over four decades provide evidence for such a three-stage model.