Transnational corporations and the proliferation of bilateral investment treaties: more than a bit influential

Abstract

To date, over 2500 bilateral investment treaties (BITs) have been signed. The popularity of these treaties raises the question, what has driven the proliferation of BITs? Previous research argues that the proliferation of BITs is the product of competition for capital among developing states. This study hypothesises that the developed state transnational corporations (TNCs) are driving the spread of BITs. The results from a time series logistic regression support the TNC hypothesis, adding support to the argument that transnationals should be recognised as major actors in the international political economy.

Keywords:

• BITs
• FDI
• TNCs

View correction statement:

Correction to: Michael Jacobs, Transnational corporations and the proliferation of bilateral investment treaties: more than a bit influential

Disclosure statement

The authors report no conflicts of interest. The authors alone are responsible for the content and writing of this article.

Notes

Notes

1 Vernon 1971 and Vernon 1977 use the phrase ‘obsolescing bargain,’ while Guzman (1998) and Elkins et al. (2006) use the phrase ‘dynamic inconsistency problem;’ however, both phrases refer to the same phenomena.

2 The production structure is ‘the sum of all arrangements determining what is produced, by whom, by what method and on what terms’ (Strange 1988a, p. 62). Technological advances in transportation and information have further globalised the capitalist production structure. Containerisation and supertankers allow most products to be efficiently shipped around the world. Corporations can effectively manage complex global supply chains as a result of advances in computers and communication capabilities. Consequently, goods destined for one market can be produced and assembled across the globe.

3 The security structure is ‘the framework of power created by the provision of security by some human beings for others’; consequently, the providers of security have power over those to whom they provide security (Strange 1994, p. 45). Strange (1994) uses a broad definition of security that includes not only traditional notions of security (such as protection from war and violence), but also protection from other unpleasant circumstances (such as bankruptcy, unemployment, and starvation, all factors that contribute to a country’s political stability). The globalisation of the capitalist production structure has emphasised the importance of the latter and deemphasised the importance of the former by enhancing ‘the benefits of peaceful competition for world market shares while raising the costs of competition for command over territory’ (Strange 1994, p. 62). Thus, in the post-WWII globalised world, economic relationships influence the ability of states to provide security to their citizens.

4 The financial structure is ‘the sum of all the arrangements governing the availability of credit plus all the factors determining the terms on which currencies are exchanged for one another’ (Strange 1994, p. 90). The United States dominates both aspects of the financial structure (Strange 1994). The United States used its powerful position post-WWII to create an open financial system with, eventually, the dollar as the reserve currency. Financial institutions of the United States possess significant sway over which states are granted credit and to which states credit is denied. This is a significant source of power, since credit is necessary for investment and economic development.

5 The knowledge structure refers to ‘what is believed (and the moral conclusions and principles derived from those beliefs); what is known and perceived as understood; and the channels by which beliefs, ideas and knowledge are communicated – including some people and excluding others’ (Strange 1994, p. 119). Strange (1994) notes that the four structures overlap. This is the case with the knowledge structure, in particular. Knowledge disparities in the area of production create power asymmetries. Firms with technological advantages will have more success in the global marketplace than firms without such technologies. The home states of firms with knowledge advantages seek to entrench those advantages through global institutions, such as the rules established through the World Trade Organisation for governing intellectual property rights, which are skewed in favor of developed states that already possess advanced technologies.

6 For example, the determinants of a state’s monetary and exchange-rate policy have been argued to stem from domestic political pressures (Clark, 2002), domestic veto players (Keefer and Stasavage, 2002), federalism (Hallerberg, 2002), coalition governments (Bernhard and Leblang, 2002), and domestic policy transparency (Broz, 2002).

7 The process of policy diffusion is assumed to be an uncoordinated process; consequently, it is not amenable to game theory analysis, particularly game theory assumptions that actors have complete information and are rational (Elkins and Simmons, 2005).

8 For instance, states may use or threaten to use physical force.

9 For example, strong, developed states implemented the Basel Accord in capital market regulation, and weaker, developing states were expected to follow suit (Simmons, 2001).

10 An example of very soft power is the US’s ideational dominance in multilateral organisations such as the IMF and the World Bank. These organisations trumpeted the ‘Washington Consensus’ as an ideal policy framework for development, possibly influencing the policy preferences of developing states.

11 Coercion theory makes three assumptions (Simmons et al., 2006): that strong states have an intentional motive to influence the policies of weak states, that weaker states would prefer not to change their policy, and that vertical power relationships are primary to horizontal relationships for the proliferation of liberal policies.

12 According to Frieden (1991), ‘the interests of two groups – the owners and managers of financial assets and the multinational corporations – are opposed to those of the specific factors, so that financial and multinational interests in the developed countries are expected to diverge from the interests of specific nationally based industrial sectors’ (440).

13 The top capital exporting countries used here are Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Italy, Japan, the Netherlands, Norway, Spain, Sweden, Switzerland, the United Kingdom, and the United States. These countries have been the source of most FDI during the period covered, 1985–2000 (Yackee, 2008). Singapore is omitted because the OECD, the data source used here for bilateral FDI flows, does not list bilateral FDI data on Singapore. See http://www.oecd-ilibrary.org/finance-and-investment/data/oecd-international-direct-investment-statistics_idi-data-en.

14 Elkins et al. (2006) also test two other economic competition variables: BITs among export product competitors and BITs among infrastructure competitors. BITs among export product competitors, competitionBIT, ‘records the degree to which nations export the same basket of goods’ (Elkins et al., 2006, p. 830). A BIT among infrastructure competitors, jedinbit, ‘captures the degree to which countries have similar educational and infrastructural resources’ (Elkins et al. 2006, p. 830). The three economic competition variables are strongly correlated (Elkins et al., 2006).

15 Elkins et al. (2006) establish the competitionBIT in the following way: they ‘compute a spatial lag by anchoring the distances (measured as correlations) at zero by adding 1 to each score and then using these distances to calculate a weighted sum of BITs in force in all other host countries in the previous year’ (p. 831).

16 An xtprobit model with fixed effects was not used due to a lack of variation in the dependent variable.

17 A quadratic for of gdp cap was also tested. The quadratic of gdp cap was employed to see if, initially, an increase in a country’s economic development increased the chances of a BIT being signed in a dyad but the odds of a dyad signing a BIT decreased after a certain level of economic development is reached. However, the results were not significant. Therefore, the quadratic form of gdp cap is not included in the model.