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《国际政治经济学》文献资料（Institutions and International Political Economy）Contingent Credibility The Impact of Investment Treaty Violations on Foreign Direct Investment

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Contingent Credibility:The Impact of Investment Treaty Violations on Foreign Direct Investment Todd Allee and Clint Peinhardt Abstract 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 cred- ibly 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 com- ply with the treaties.BITs allow investors to pursue alleged treaty violations through arbitration venues like the International Centre for the Settlement of Investment Dis- putes (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 country's 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 coun- tries 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. For developing countries,signing bilateral investment treaties (BITs)has become an attractive way to try to stimulate greater inward foreign direct investment(FDI). By granting numerous substantive rights to investors and allowing for inter- national arbitration of any disputes that arise,signatory governments signal their For helpful comments on this article we thank Tana Johnson,Kris Miler,Irfan Nooruddin,Stephanie Rickard,seminar participants at Ohio State University and Texas A&M University,as well as panel participants at the 2008 American Political Science Association conference,the 2d Annual Conference on the Political Economy of International Organizations,and the 2009 Midwest Political Science Asso- ciation conference. International Organization 65,Summer 2011,pp.401-32 2011 by The IO Foundation. do:10.1017/S0020818311000099

Contingent Credibility: The Impact of Investment Treaty Violations on Foreign Direct Investment Todd Allee and Clint Peinhardt Abstract 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 country’s 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+ For developing countries, signing bilateral investment treaties ~BITs! has become an attractive way to try to stimulate greater inward foreign direct investment ~FDI!+ By granting numerous substantive rights to investors and allowing for international arbitration of any disputes that arise, signatory governments signal their For helpful comments on this article we thank Tana Johnson, Kris Miler, Irfan Nooruddin, Stephanie Rickard, seminar participants at Ohio State University and Texas A&M University, as well as panel participants at the 2008 American Political Science Association conference, the 2d Annual Conference on the Political Economy of International Organizations, and the 2009 Midwest Political Science Association conference+ International Organization 65, Summer 2011, pp+ 401–32 © 2011 by The IO Foundation+ doi:10+10170S0020818311000099

402 International Organization receptiveness to outside investment and commit to protect whatever investment they receive.In turn,foreign investors should be more willing to invest in coun- tries who have signed BITs because of these additional protections.This is the standard account advanced in existing scholarship on the effects of BITs on FDI. Yet the investment-treaty story does not end once an agreement is signed.Instead, investors will look to see whether the promises made in the treaties are being upheld and will reevaluate their investment decisions as new information is revealed.Gov- ernments that sign BITs,then,could receive more or less investment in the years after they sign the treaties. To provide a more complete answer to the central question of whether these treaties are effective in generating greater investment,we shift the study of BIT effects in an important new direction by emphasizing compliance,or lack thereof, with the treaties.We inject an important,overlooked caveat to the claim that BITs should be beneficial:governments who sign BITs should receive greater FDI,but only if they are not later revealed to have violated their treaty commitments.Exist- ing studies typically record when a state signs a BIT and then examine whether more FDI flows to that state from that point onward.In effect,ongoing future compliance with the treaties is assumed.Yet this assumption is rendered problem- atic by the emergence of a significant number of investor-state disputes in which an investor explicitly claims that a BIT signatory is not complying with its treaty obligations.Therefore,compliance with the treaties,as revealed by the presence or absence of subsequent treaty-related disputes,should be a critical determinant of BITs'ability to stimulate greater investment. Our central claim is that the net investment effect of BITs is contingent upon the future behavior of the governments who sign them.Investment treaties should stimulate greater investment flows into signatories provided that no new informa- tion arises that contradicts the investor-friendliness signified by the treaty.How- ever,given the substantial uncertainty that surrounds investment decisions,any new information that reveals a weak host-state commitment to respect FDI could damage that state's reputation in the eyes of investors.Once an investment dispute emerges,investors will rethink their assessments of political risk in the "defen- dant"country and be less likely to invest in a country with a now questionable track record. The key cog in this theoretical account is the international arbitration institu- tion,which reveals information to investors about whether governments are uphold- ing the terms of the treaties.These legal institutions,which are largely neglected in FDI studies within political science and economics,generate new information that is salient to investors as long as the cases taken before them are observable and legal judgments are not rendered confidentially.Most disputes arising from BITs are taken before the International Centre for the Settlement of Investment Disputes (ICSID),a prominent and heavily utilized arbitral institution affiliated with the World Bank.The ICSID arbitration process transmits information to global investors and thus has the potential to reduce future investment in two ways.First, the mere appearance of a government before an arbitration venue like ICSID sends

receptiveness to outside investment and commit to protect whatever investment they receive+ In turn, foreign investors should be more willing to invest in countries who have signed BITs because of these additional protections+ This is the standard account advanced in existing scholarship on the effects of BITs on FDI+ Yet the investment-treaty story does not end once an agreement is signed+ Instead, investors will look to see whether the promises made in the treaties are being upheld and will reevaluate their investment decisions as new information is revealed+ Governments that sign BITs, then, could receive more or less investment in the years after they sign the treaties+ To provide a more complete answer to the central question of whether these treaties are effective in generating greater investment, we shift the study of BIT effects in an important new direction by emphasizing compliance, or lack thereof, with the treaties+ We inject an important, overlooked caveat to the claim that BITs should be beneficial: governments who sign BITs should receive greater FDI, but only if they are not later revealed to have violated their treaty commitments+ Existing studies typically record when a state signs a BIT and then examine whether more FDI flows to that state from that point onward+ In effect, ongoing future compliance with the treaties is assumed+ Yet this assumption is rendered problematic by the emergence of a significant number of investor-state disputes in which an investor explicitly claims that a BIT signatory is not complying with its treaty obligations+ Therefore, compliance with the treaties, as revealed by the presence or absence of subsequent treaty-related disputes, should be a critical determinant of BITs’ ability to stimulate greater investment+ Our central claim is that the net investment effect of BITs is contingent upon the future behavior of the governments who sign them+ Investment treaties should stimulate greater investment flows into signatories provided that no new information arises that contradicts the investor-friendliness signified by the treaty+ However, given the substantial uncertainty that surrounds investment decisions, any new information that reveals a weak host-state commitment to respect FDI could damage that state’s reputation in the eyes of investors+ Once an investment dispute emerges, investors will rethink their assessments of political risk in the “defendant” country and be less likely to invest in a country with a now questionable track record+ The key cog in this theoretical account is the international arbitration institution, which reveals information to investors about whether governments are upholding the terms of the treaties+ These legal institutions, which are largely neglected in FDI studies within political science and economics, generate new information that is salient to investors as long as the cases taken before them are observable and legal judgments are not rendered confidentially+ Most disputes arising from BITs are taken before the International Centre for the Settlement of Investment Disputes ~ICSID!, a prominent and heavily utilized arbitral institution affiliated with the World Bank+ The ICSID arbitration process transmits information to global investors and thus has the potential to reduce future investment in two ways+ First, the mere appearance of a government before an arbitration venue like ICSID sends 402 International Organization

The Impact of Investment Treaty Violations on Foreign Direct Investment 403 a negative but noisy signal to investors that could make them hesitant to direct future investment into that country.Second,losing an arbitral panel ruling should be particularly damaging,since it provides more precise information to investors about what a government has done and the definitive illegality of its actions. Our empirical tests reveal robust support for these hypothesized relationships between investment dispute activity and future FDI inflows.We find that signing BITs is associated with greater future investment,ceteris paribus,but BIT-signatory governments whose policies are challenged before an international arbitration body consistently receive less FDI afterwards.If the government ultimately loses the dispute,it suffers an even greater loss in inward FDI,which can more than offset any gains received from signing even multiple BITs.Overall,the empirical evi- dence reveals that BITs,through their provisions for dispute resolution,help those governments who steer clear of treaty violations but harm those who fail to com- ply with the terms of the treaties. Theoretical Development BITs arose a half-century ago to govern and stimulate investment between con- tracting parties and now serve as the primary international vehicle by which FDI is regulated.According to recent estimates from the United Nations Conference on Trade and Development(UNCTAD),179 countries are parties to at least one BIT,and these countries have signed a total of 2,676 BITs with one another.'Coun- tries as diverse as Germany,Italy,China,and Egypt have signed more than 100 BITs with various partners,which attests to the widespread global coverage of the treaties.2 Irrespective of the identity of the signatories,a defining feature of BITs is that they historically have been signed between a capital-rich"home"country, which is the likely source of any investment,and a developing"host"country that seeks to attract greater investment from investors in the home country.3 BITs represent the latest and most widespread attempt by governments to address the pervasive time inconsistency problem that plagues much foreign investment.4 Before any investment is made,investors from the home country have consider- able bargaining leverage over potential host governments who seek to attract the investment.But once the investment is made and costs are sunk,bargaining lever- age shifts to the host government,who then may face political and/or economic 1.See UNCTAD 2008a,2-3,and 2009,1. 2.UNCTAD2009.3. 3.South-South BITs represent a relatively small percentage (26 percent)of all BITs,and this per- centage is declining.UNCTAD(2009,5)reports that only thirteen out of fifty-nine (22 percent)of BITs signed in 2008 were between developing countries. 4.Vernon 1971 describes the fundamental "obsolescing bargain"problem,in which the host state cannot credibly promise to refrain from trying to extract a greater share of the return from an invest- ment once it is sunk

a negative but noisy signal to investors that could make them hesitant to direct future investment into that country+ Second, losing an arbitral panel ruling should be particularly damaging, since it provides more precise information to investors about what a government has done and the definitive illegality of its actions+ Our empirical tests reveal robust support for these hypothesized relationships between investment dispute activity and future FDI inflows+ We find that signing BITs is associated with greater future investment, ceteris paribus, but BIT-signatory governments whose policies are challenged before an international arbitration body consistently receive less FDI afterwards+ If the government ultimately loses the dispute, it suffers an even greater loss in inward FDI, which can more than offset any gains received from signing even multiple BITs+ Overall, the empirical evidence reveals that BITs, through their provisions for dispute resolution, help those governments who steer clear of treaty violations but harm those who fail to comply with the terms of the treaties+ Theoretical Development BITs arose a half-century ago to govern and stimulate investment between contracting parties and now serve as the primary international vehicle by which FDI is regulated+ According to recent estimates from the United Nations Conference on Trade and Development ~UNCTAD!, 179 countries are parties to at least one BIT, and these countries have signed a total of 2,676 BITs with one another+ 1 Countries as diverse as Germany, Italy, China, and Egypt have signed more than 100 BITs with various partners, which attests to the widespread global coverage of the treaties+ 2 Irrespective of the identity of the signatories, a defining feature of BITs is that they historically have been signed between a capital-rich “home” country, which is the likely source of any investment, and a developing “host” country that seeks to attract greater investment from investors in the home country+ 3 BITs represent the latest and most widespread attempt by governments to address the pervasive time inconsistency problem that plagues much foreign investment+ 4 Before any investment is made, investors from the home country have considerable bargaining leverage over potential host governments who seek to attract the investment+ But once the investment is made and costs are sunk, bargaining leverage shifts to the host government, who then may face political and0or economic 1+ See UNCTAD 2008a, 2–3, and 2009, 1+ 2+ UNCTAD 2009, 3+ 3+ South-South BITs represent a relatively small percentage ~26 percent! of all BITs, and this percentage is declining+ UNCTAD ~2009, 5! reports that only thirteen out of fifty-nine ~22 percent! of BITs signed in 2008 were between developing countries+ 4+ Vernon 1971 describes the fundamental “obsolescing bargain” problem, in which the host state cannot credibly promise to refrain from trying to extract a greater share of the return from an investment once it is sunk+ The Impact of Investment Treaty Violations on Foreign Direct Investment 403

404 International Organization incentives to renege on the contract.It is therefore difficult for investors to deter- mine ex ante a host government's true,long-term commitment to foreign partici- pation in the domestic market. Existing Research on the FDI Effects of BITs BITs reassure fearful investors in two ways.5 First,signing BITs is a way for host governments to signal their true intention to refrain from interfering with foreign investment.According to this "signaling"logic,negotiating a BIT is a way for an investment-seeking government to convey its seriousness about protecting inward investment.Governments that sign multiple treaties may be able to send a more effective signal,and this accumulation of numerous treaties demonstrates a stronger general commitment to protect investment and to promote a healthy investment climate for all foreign investors.To be effective,however,the signals must be "costly,"or informative enough to differentiate committed liberalizers from gov- ernments with other intentions.The major worry for investors is that an initial signal to protect investment may turn out to be"cheap talk,"if a government later changes course and behaves in ways that are hostile toward investment. A second line of argument is that BITs increase the credibility of host states' promises to abide by the terms of a contract,which then should stimulate greater inward FDI.BITs provide significant protections to foreign investors because they include provisions on national treatment,most-favored nation status,the ability to repatriate profits,and appropriate compensation in the event of a taking.Most importantly,these promises are made credible due to investor-state dispute settle- ment clauses that allow aggrieved investors to challenge via international arbitra- tion any policies of host governments that violate these BIT commitments.3 A government that violates its treaty commitments and is challenged by investors through international arbitration would suffer direct financial costs of contesting the litigation,reputational costs associated with being a defendant,and the pay- ment of a potentially sizable arbitration award.Therefore,a BIT signatory is likely to uphold the treaty's terms because of the prospect of these self-inflicted costs, which in turn should reassure investors,who then are more likely to invest in the country.Many scholars utilize some type of credibility-based logic to argue that BITs should lead greater FDI to flow into signatories.Several studies provide 5.For an excellent review and discussion of the arguments that have been applied to BITs,see Buthe and Milner 2009. 6.Neumayer and Spess 2005.Also see Egger and Pfaffermayr 2004;Haftel 2010;and Salacuse and Sullivan 2005. 7.For recent discussions of the contents of bilateral investment treaties,see Dolzer and Schreuer 2008;and Muchlinski 2009. 8.Allee and Peinhardt 2010. 9.See Bubb and Rose-Ackerman 2007;Buithe and Milner 2009;Egger and Pfaffermayr 2004;Haf- tel 2010:Hallward-Driemeier 2003;Kerner 2009;and Salacuse and Sullivan 2005.For a contrasting view,see Yackee 2009

incentives to renege on the contract+ It is therefore difficult for investors to determine ex ante a host government’s true, long-term commitment to foreign participation in the domestic market+ Existing Research on the FDI Effects of BITs BITs reassure fearful investors in two ways+ 5 First, signing BITs is a way for host governments to signal their true intention to refrain from interfering with foreign investment+ According to this “signaling” logic, negotiating a BIT is a way for an investment-seeking government to convey its seriousness about protecting inward investment+ 6 Governments that sign multiple treaties may be able to send a more effective signal, and this accumulation of numerous treaties demonstrates a stronger general commitment to protect investment and to promote a healthy investment climate for all foreign investors+ To be effective, however, the signals must be “costly,” or informative enough to differentiate committed liberalizers from governments with other intentions+ The major worry for investors is that an initial signal to protect investment may turn out to be “cheap talk,” if a government later changes course and behaves in ways that are hostile toward investment+ A second line of argument is that BITs increase the credibility of host states’ promises to abide by the terms of a contract, which then should stimulate greater inward FDI+ BITs provide significant protections to foreign investors because they include provisions on national treatment, most-favored nation status, the ability to repatriate profits, and appropriate compensation in the event of a taking+ 7 Most importantly, these promises are made credible due to investor-state dispute settlement clauses that allow aggrieved investors to challenge via international arbitration any policies of host governments that violate these BIT commitments+ 8 A government that violates its treaty commitments and is challenged by investors through international arbitration would suffer direct financial costs of contesting the litigation, reputational costs associated with being a defendant, and the payment of a potentially sizable arbitration award+ Therefore, a BIT signatory is likely to uphold the treaty’s terms because of the prospect of these self-inflicted costs, which in turn should reassure investors, who then are more likely to invest in the country+ Many scholars utilize some type of credibility-based logic to argue that BITs should lead greater FDI to flow into signatories+ 9 Several studies provide 5+ For an excellent review and discussion of the arguments that have been applied to BITs, see Büthe and Milner 2009+ 6+ Neumayer and Spess 2005+ Also see Egger and Pfaffermayr 2004; Haftel 2010; and Salacuse and Sullivan 2005+ 7+ For recent discussions of the contents of bilateral investment treaties, see Dolzer and Schreuer 2008; and Muchlinski 2009+ 8+ Allee and Peinhardt 2010+ 9+ See Bubb and Rose-Ackerman 2007; Büthe and Milner 2009; Egger and Pfaffermayr 2004; Haftel 2010; Hallward-Driemeier 2003; Kerner 2009; and Salacuse and Sullivan 2005+ For a contrasting view, see Yackee 2009+ 404 International Organization

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