@booklet {63311,
	title = {The Diffusion of Bilateral Investment Treaties: An Empirical Analysis},
	year = {2003},
	note = {},
	month = {Oct 30, 2003},
	abstract = {The process of globalization has been made possible by a series of technological, institutional, and policy changes over the course of the last several decades. As the introduction to this project suggests, governments have often made conscious policy adjustments in the face of innovations perceived as advantageous by competitors, new ideas of policy success, and sometimes as the result of explicit or implicit political pressures from powerful governments or international institutions. A very important part of this process involves government choices to alter the international legal structure in which economic transactions take place. The most salient accomplishments in the development of an international legal structure to further economic liberalization has clearly been in the trade of goods and services, where the World Trade Organization commands a focal presence. In the monetary and exchange rate area, a growing number of governments have committed themselves through Article VIII of the International Monetary Fund?s Articles of Agreement to keep their current accounts free from restrictions, assuring traders and lenders that hard currencies will be made available to pay for imports and service international debts. Interestingly, there has been very little multilateral development of the legal rules surrounding international investment, and in particular foreign direct investment (FDI). Nevertheless, such investment has grown substantially over the past several decades. According to the United Nations, total foreign direct investment inflows peaked at about 1,450 billion in 2000, before falling back to $735.1 billion in 2001. The growth in global FDI has far outstripped both world GDP and world trade growth. But direct investments are highly skewed geographically: developed countries account for over 93 per cent of outflows and 68 percent of inflows, and these shares have not changed too drastically over the past decade. The primary legal innovation in the area of foreign direct investment in the post{\textendash}world war two period has been the proliferation of bilateral agreements that seek to make explicit the contractual arrangements under which a firm invests in a local jurisdiction. Bilateral investment Treaties (BITs) are defined as an agreement establishing the terms and conditions for private investment by nationals and companies of one country in the jurisdiction of another. They are negotiated between governments precisely to create a legal environment to encourage foreign direct investment, typically in those jurisdictions that find it difficult to credibly commit to treat foreign capital in ways that are perceived by investors as transparent, fair, and predictable. These agreements are a way to tie the hands of the host country by agreeing to a wide range of pro{\textendash}investor terms. By surrendering part of its legal sovereignty {\textendash} notably the right to use its own courts to adjudicate any disagreements that may arise from a contract to invest {\textendash} developing countries hope to convince foreign firms that their investments will be safe and sound. As such, BITs should be understood as a part of the broader neo{\textendash}liberal project to encourage the free flow of goods, services, capital, and ideas across national borders. They typically include provisions requiring investing nationals of the BIT partner to be treated as well as national firms or as well as the most favored foreign firms (MFN treatment); establish limits on expropriations of investments and require compensation when it occurs; and guarantee investors? right to transfer funds into and out of the country using a market rate of exchange. Sometimes these agreements also explicitly prohibit "performance requirements" on the part of foreign investors, though such clauses are more typically found in US rather than European agreements. Thus, we view these agreements as consistent with the market{\textendash}oriented trend the editors of this volume have identified. This article seeks to explain why BITs have proliferated over time. The popularity of BITs is puzzling when contrasted with the collective resistance developing countries have shown toward pro{\textendash}investment principles under customary international law. Our central contention is that bilateral investment treaties intensify the inter{\textendash}state competition for foreign investment. Because signing a BIT gives a state an advantage in this competition we expect the probability of acceptance of a BIT by a state to increase when rival states sign such a treaty. The model we have in mind is squarely consistent with the competitive models laid out in the introductory chapter to this project. The article is organized as follows. The first section describes the BITs terrain in some detail: the history, rationale, and spread of these bilateral arrangements over time. The second section presents a model of competition for investment that could lead to the pattern of treaty diffusion we observe. In this model, one country exogenously "breaks ranks" and agrees to investors terms in order to enjoy the benefits of investment inflows. While competitors may not have preferred to do so, BITs effectively create a negative externality by presenting the prospect of diverting capital to hosts who agree to BITs. One obvious way to mitigate this outcome is to enter into a BIT as well. We entertain the possibility of more sociological explanations which may be plausible in explaining some investment treaties witnessed in more recent years. The third section reviews the evidence of competitive diffusion. Competitive pressures for BIT proliferation are consistent with the data, but even some of the non{\textendash}diffusion influences on the pattern of BITs suggest the broader reputational story we develop is apt. While socialization influences appears to be present in recent years, the most important explanations for the growing web of bilateral arrangements are those that postulate rational responses to the globalization of capital.},
	author = {Beth A. Simmons}
}
