Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000

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.

Keywords: Bilateral investment treaties, investment, FDI, diffusion

JEL Classification: F00, F02, F20, F21, F23, K33