Clint Peinhardt

Contingent Credibility: The Impact of Investment Treaty Violations on Foreign Direct Investment

During the past few decades governments have signed nearly 2,700 bilateral investment treaties (BITs) with one another in an attempt to attract greater levels of foreign direct investment (FDI). By signing BITs, which contain strong enforcement provisions, investment-seeking governments are thought to more credibly commit to protecting whatever FDI they receive, which in turn should lead to increased confidence among investors and ultimately greater FDI inflows. Our unique argument is that the ability of BITs to increase FDI is contingent on the subsequent good behavior of the governments who sign them. BITs should increase FDI only if governments actually follow through on their BIT commitments; that is, if they comply with the treaties. BITs allow investors to pursue alleged treaty violations through arbitration venues like the International Centre for the Settlement of Investment Disputes (ICSID), a heavily utilized and widely observed arbitral institution that is part of the World Bank. Being taken before ICSID, then, conveys negative information about a host countrys behavior to the broader investment community, which could result in a sizeable loss of future FDI into that country. We test these contingent effects of BITs using cross-sectional, time-series analyses on all non-OECD countries during a period spanning 1984–2007. We find that BITs do increase FDI into countries that sign them, but only if those countries are not subsequently challenged before ICSID. On the other hand, governments suffer notable losses of FDI when they are taken before ICSID and suffer even greater losses when they lose an ICSID dispute.

Evaluating Three Explanations for the Design of Bilateral Investment Treaties

Although many features of bilateral investment treaties (bit s) are consistent from one agreement to the next, a closer look reveals that the treaties exhibit considerable variation in terms of their enforcement provisions, which legal scholars have singled out as the central component of the treaties. An original data set is compiled that captures three important treaty-design differences: whether the parties consent in advance to international arbitration, whether they allow treaty obligations to be enforced before an institutionalized arbitration body, and how many arbitration options are specified for enforcement. Drawing upon several relevant literatures on international institutions, three potentially generalizable explanations for this important treaty variation are articulated and tested. The strongest support is found for the theoretical perspective that emphasizes the bargaining power and preferences of capital-exporting states, which use the treaties to codify strong, credible investor protections in all their treaties. Empirical tests consistently reveal that treaties contain strong enforcement provisions—in which the parties preconsent to multiple, often institutionalized arbitration options—when the capital-exporting treaty partner has considerable bargaining power and contains domestic actors that prefer such arrangements, such as large multinational corporations or right-wing governments. In contrast, there is no evidence to support the popular hands-tying explanation, which predicts that investment-seeking states with the most severe credibility problems, due to poor reputations or weak domestic institutions, will bind themselves to treaties with stronger investment protections. Likewise, little support is found for explanations derived from the project on the rational design of international institutions, which discounts the identities and preferences of the treaty partners and instead emphasizes the structural conditions they jointly face. In sum, this foundational study of differences across investment treaties suggests that the design of treaties is driven by powerful states, which include elements in the treaties that serve their interests, regardless of the treaty partner or the current strategic setting.

Failure to Deliver: The Investment Effects of US Preferential Economic Agreements

Global trade and investment rules are increasingly determined by bilateral and regional agreements, which are widely expected to increase economic ties between the signatories. Even though the United States is a relative newcomer to these narrower economic agreements, it has signed several different types with dozens of partner countries. These agreements, which often require partners to make costly policy changes, are nonetheless attractive because they provide preferential access to the US market and promise increased inward investment. In this paper, we compare the investment effects of three different types of agreements and find little evidence that existing international agreements (trade and investment framework agreements, bilateral investment treaties or preferential trade agreements) tend to increase investment from the United States. After exploring other potential explanations, we conclude that US treaty partners may have unrealistic expectations for agreements to increase direct investment.

Withdrawing from Investment Treaties but Protecting Investment

A backlash against Investor State Dispute Settlement (ISDS), in which multinational corporations can sue governments, has led some states to unilaterally withdraw from some of the thousands of investment treaties that facilitate ISDS. But thanks to redundancies in the dense, decentralized network of investment treaties, states can reject some treaty commitments to ISDS and maintain most (if not all) international legal protections for foreign investors. In this article, we explain the source of redundancies, document the group of states that have taken advantage of unilateral withdrawal, and demonstrate that states can recalibrate their international legal commitments without eschewing contemporary international investment law.

Learning and the Precision of International Investment Agreements

ABSTRACT The international regime for the promotion and protection of foreign investment consists of a multitude of close to 3,000 bilateral investment treaties (BITs) and related international investment agreements (IIAs). Yet, despite a growing body of research on IIAs, scholars in political economy have paid little attention to the legal language in the treaties themselves. In this research note, we draw on the conceptual apparatus of the legalization literature and focus on legal precision in BITs. We use a new data set created through quantitative text analysis to develop an index measuring legal precision. We then investigate the causes of the pronounced increase in precision in BITs and the considerable variation across treaties. We argue that capital-exporting countries are the primary drivers of change, and that they are motivated because they learn the implications of existing legal language from two sources: First, from the growing number of arbitration proceedings, and second, when they themselves are targeted by such claims. We provide statistical tests of our hypotheses and find ample support.