Perils of Success? The Case of International Investment Protection

28 Pages Posted: 14 Oct 2007 Last revised: 16 Jul 2014

See all articles by Anne van Aaken

Anne van Aaken

University of Hamburg, Law School; Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods

Date Written: October 2007,

Abstract

Foreign direct investment forms an ever more important part of globalised market structures, and international investment law has become one of the most successful and judicialised areas of public international law. In order to attract investment, States commit themselves to treaties that restrict their regulatory sovereignty in ways that are sometimes unpredictable, owing to vague terms in the treaties and the broad use by investment tribunals of their delegated discretion.

This article uses economic contract theory in order to understand whether the commitment problem ex ante and the flexibility problem ex post are optimally solved. It is hypothesised that the participation constraints on States may be overlooked by investment tribunals, thereby leading to an undesired weakening of protection of investors in the long run due to reactions by States. First, States may opt out of the system, for example by exiting treaties or by non-compliance. Second, they may also water down the substantive or procedural protections. Third, whereas investment treaties were seen in the beginning as a restraint on developing countries, investment increasingly flows to equally highly regulated developed countries. As legal protection is reciprocal but the capital flows used to be unilateral, developed countries might also react to their restriction of sovereignty, as the United States has already done, for example. These perils could lead to a backlash in international investment protection of which indications are already visible.

Keywords: International Investment Law, Contract Theory, Fragmentation, Mechanism Design

JEL Classification: K33, F21, F23, F53, F 59

Suggested Citation

van Aaken, Anne, Perils of Success? The Case of International Investment Protection (October 2007,). Published in: European Business Organization Law Review (EBOR) (2008) 9(1), pp. 1-27.; U. of St. Gallen Law & Economics Working Paper No. 2007-29. Available at SSRN: https://ssrn.com/abstract=1020959 or http://dx.doi.org/10.2139/ssrn.1020959

Anne Van Aaken (Contact Author)

University of Hamburg, Law School ( email )

Johnsallee 35
Hamburg, 20148
Germany

Max Planck Society for the Advancement of the Sciences - Max Planck Institute for Research on Collective Goods ( email )

Kurt-Schumacher-Str. 10
D-53113 Bonn, 53113
Germany

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