Learning and the Precision of International Investment Agreements

ABSTRACT

The international regime for the promotion and protection of foreign investment consists of a multitude of close to 3,000 bilateral investment treaties (BITs) and related international investment agreements (IIAs). Yet, despite a growing body of research on IIAs, scholars in political economy have paid little attention to the legal language in the treaties themselves. In this research note, we draw on the conceptual apparatus of the legalization literature and focus on legal precision in BITs. We use a new data set created through quantitative text analysis to develop an index measuring legal precision. We then investigate the causes of the pronounced increase in precision in BITs and the considerable variation across treaties. We argue that capital-exporting countries are the primary drivers of change, and that they are motivated because they learn the implications of existing legal language from two sources: First, from the growing number of arbitration proceedings, and second, when they themselves are targeted by such claims. We provide statistical tests of our hypotheses and find ample support.

KEYWORDS:

• Bilateral investment treaties
• foreign direct investment
• investment agreements
• legalization

Acknowledgments

We thank Vincent Arel-Bundock, Yoel Furman and Shoikat Roy for outstanding research assistance. All remaining errors remain our own. Replication data for all analyses and figures are available at http://dvn.iq.harvard.edu/dvn/dv/internationalinteractions. All queries regarding the replication and files should be directed to the authors.

Funding

This research was partially funded by European Commission FP-7 Grant PIRG05-GA-2009-247836 and by British Academy Small Grant SG100550.

Supplementary material

Supplemental data for this article can be accessed on the publisher’s website.

Notes

¹ In contrast, Blake (2013) gives more credit to signatories of IIAs. He finds strong evidence that the more far-sighted governments are (in the sense of more institutionalized, longer lived governing parties), the more they will pay attention to excluding key policy areas from investor protections.

² See for example Tillmann Neuscheler, “Die Angst frisst TTIP auf,” Frankfurter Allgemeine Zeitung, February 6, 2015.

³ See Australia’s Department of Health website for specifics: http://www.health.gov.au/tobaccopp (accessed December 12, 2015).

⁴ The article also allows signatory states that have not elected to deny ISDS to tobacco control provisions to do so during the proceedings, and that any such proceeding should then be dismissed.

⁵ http://www.kluwerarbitration.com/BITs-countries.aspx. (Accessed July 14, 2012); http://www.unctadxi.org/templates/DocSearch____779.aspx. (Accessed October 30, 2012).

⁶ Missing data on other variables unfortunately limit our statistical analysis to just under 800 cases.

⁷ Australia–Indonesia (1992), UK–Belize (1982), Japan–Sri Lanka (1982), USA–Cameroon (1986), Israel–Thailand (2000), and Germany–Ethiopia (2000).

⁸ We used the Python package fuzzywuzzy to implement a fuzzy match, calibrated by using hand-scored treaty texts.

⁹ We provide further details of our methodology in an online appendix that is included with the replication package for this article, available at [insert article DOI here].

¹⁰ West Germany until 1990. Like the majority of socialist countries, the German Democratic Republic did not negotiate any bilateral investment treaties.

¹¹ Regardless of whether one agrees with the theoretical reasoning in Poulsen and Aisbett (2013), their empirical evidence demonstrates that developing countries do not sign BITs for many years after being hit by the first claim.

¹² The PRS data only start in 1984 so that we extrapolate it backward.

¹³ This means that the results from a Tobit model with censoring values set to 0 and 1 would by definition be identical with the OLS estimates.

¹⁴ In future research, we hope to broaden our sample to include a sufficient number of renegotiated BITs as well as trade agreement investment chapters. Haftel and Thompson (2013) provide evidence that treaty renegotiations often occur in reaction to investment disputes, an argument that matches our findings nicely.

¹⁵ See Greene (2003:158).

¹⁶ Peinhardt and Wellhausen (2016) document exactly such a trend—a growing number of treaty defections by developing countries.

Additional information

Funding

This research was partially funded by European Commission FP-7 Grant PIRG05-GA-2009-247836 and by British Academy Small Grant SG100550.