Self-Interest, Foreign Need and Good Governance: Are Bilateral Investment Treaty Programs Similar to Aid Allocation?

Foreign Policy Analysis, Vol. 2, No. 3, 2006

48 Pages Posted: 17 Jan 2005 Last revised: 23 Feb 2009

See all articles by Eric Neumayer

Eric Neumayer

London School of Economics and Political Science (LSE)

Date Written: November 1, 2005

Abstract

Bilateral investment treaties (BITs) have become the most important legal mechanism for the encouragement and governance of foreign direct investment (FDI) in developing countries. Yet practically no systematic evidence exists on what motivates capital-exporting developed countries to sign BITs earlier with some developing countries than with others, if at all. The theoretical framework from the aid allocation literature suggests that developed countries pursue a mixture of self-interest, foreign need and, possibly, good governance. We find evidence that both economic interests of developed countries' foreign investors and political interests of developed countries determine their scheduling of BITs. However, foreign need as measured by per capita income is also a factor, whereas good governance by and large does not matter. These results suggest that BIT programs can be explained employing the same framework successfully applied to the allocation of aid. At the same time, self-interest seems to be substantively more important than developing country need when it comes to BITs.

Suggested Citation

Neumayer, Eric, Self-Interest, Foreign Need and Good Governance: Are Bilateral Investment Treaty Programs Similar to Aid Allocation? (November 1, 2005). Foreign Policy Analysis, Vol. 2, No. 3, 2006. Available at SSRN: https://ssrn.com/abstract=648503 or http://dx.doi.org/10.2139/ssrn.648503

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