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Evaluating Three
Explanations for the design
of Bilateral Investment
Treaties
By TODD ALLEE and CLINT PEINHARDT*
Introduction
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A second major contribution, which produces several important insights, is our articulation and testing of three rationalist theoretical explanations for this treaty variation. We draw upon literatures that are
widely embraced but theoretically muddled (credible commitment),
as well as upon those that are established but largely untested (the
rational design project) to devise three plausible, generalizable explanations for why bits vary in important ways. Despite the increasing
appreciation that preferential economic agreements vary, we still lack
a clear theoretical understanding as to why this variation exists, despite the presence of potentially promising arguments about credible
commitment, state power, and rational design. As we argue shortly,
bits represent a particularly good laboratory in which to apply these
theoretical concepts and advance our understanding of the design of all
types of international agreements.
Ultimately, empirical tests using our original data reveal strong support for the theoretical perspective that emphasizes the bargaining
power of capital-exporting statesin ways that recast credible commitment arguments in the direction of power politics. The emerging
account is that capital-exporting states desire stronger treaties, often
because of the preferences of domestic actors, leading them to push for
these more enforceable treaties with all treaty partners. The resulting
treaty often includes strong arbitration provisions due to the formers
considerable bargaining power, thereby cementing a so-called credible commitment to respect fdi. Interestingly, we find no evidence that
investment-seeking treaty partners with the greatest need to include
stronger investor protections, due to poor reputations or weak domestic institutions, end up signing stronger treaties. Thus we reject the
common hands tying micrologic, which predicts that states with the
most severe credibility problems will bind themselves to treaties with
stronger investor protections. Instead, the explanation for treaty design
resides squarely within the preferences and power of home states and
not the varying conditions in the heterogeneous host states, almost
all of whom end up having their hands tied for them. This central role
for the preferences and power of capital-rich states also casts serious
doubt on the largely unsupported rational design perspective, which
discounts the identities and preferences of the states that sign the treaties and instead emphasizes structural conditions and abstract cooperation problems they jointly face.
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in ptas and other types of agreements. International treaties generally share a common contracting problem: how can states ensure that
the pledges enshrined in the agreement will be upheld by the parties?
Treaties that allow third parties to resolve disputes can raise the ex post
costs of noncompliance, with the World Trade Organizations disputesettlement mechanism serving as the most prominent example from
a multilateral regime.18 Even with the shift toward more bilateral and
regional agreement making, treaty clauses on dispute settlement remain important. In fact, the earliest forays into exploring variation in
ptas focused on dispute-settlement provisions, a trend that continues
in more recent scholarship.19 Given historical antagonism over fdi, it
is not surprising that treaty clauses governing the settlement of investment disputes have been identified as a central component of bits.20
For the first time in history, bits allow foreign investors, to varying degrees, to utilize international legal institutions to directly challenge the
legality of host state actions.
Identifying Important Variation across BITs
Legal scholars increasingly acknowledge that dispute-settlement
clauses within bits have multiple subcomponents and can vary considerably.21 Therefore, a major contribution of this study is to investigate
and code multiple aspects of treaty variation in this important area.
In particular, we consider the number of dispute-settlement options
that exist, what types of arbitration venues are available, and whether
signatories consent in advance to have disputes taken to international
arbitration.
The first variable we code captures whether the two states agree in
advance to settle disputes through international arbitration. Having
both state parties preconsent to international arbitration whenever a
dispute arises speeds up the dispute-resolution process and limits the
accused states ability to stall. The contrasting situation is when the
parties (a foreign investor and the host state) must agree on the course
of action for settling any disputes that arise and must submit to the
authority and jurisdiction of a particular dispute-settlement body. The
need to obtain such ex post consent and determine jurisdiction on a
dispute-by-dispute basis, with the default being that a dispute will be
Bagwell and Staiger 2009.
See Smith 2000; Jo and Namgung 2012.
20
Dolzer and Stevens 1985; Franck 2007a; Franck 2007b; Sauvant and Sachs 2009; Sornarajah
2000; Vandevelde 1992.
21
See Franck 2007a; Franck 2007b.
18
19
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addressed by legal institutions in the host state, creates the potential for
delay and battles over jurisdiction.
A second variable captures the number of venues specified in the
treaty for the handling of future investment disputes. In addition to
domestic courts in the host state, which is an ever present option, more
than a dozen international arbitration venues can be specified as disputesettlement options. These options range from ad hoc arbitration using
rules devised by the United Nations Commission on International
Trade Law (uncitral) to arbitration through standing bodies such as
the International Centre for the Settlement of Investment Disputes
(icsid), the Permanent Court of Arbitration, or one of several regional
arbitration centers in places such as Cairo, Stockholm, and Singapore.
Different bits specify different options from among this list. All else
equal, the more venues that are specified, the more options are available
to investors for effectively addressing their claims.
A third and final variable captures the fact that some arbitration
venues are more institutionalized than others. icsid, for instance, is
a permanent arbitration institution that has state delegates, a permanent staff, and a strong enforcement system. Regional arbitration centers possess most of these same features of institutionalization, all of
which should make enforcement more efficient and awards easier to
obtain. By contrast, other arbitration options are far less institutionalized and instead rely heavily on the states to formulate rules and to collect awards. Most notably, a substantial number of treaties allow for ad
hoc arbitration, in which case the states must often decide on rules for
selecting arbitrators, objection, compensation, and award procurement
only after the dispute arises.22
Drawing on the preceding discussion, we produce an original data
set that codes nearly fifteen hundred bits based on these three important components. The first step is to assemble all available treaty texts
for bilateral investment treaties signed between 1959 and 2006.23 Our
collection of bit treaty texts includes all treaties available for download
via the unctad Investment Instruments Online archive, the primary
entity for systematically collecting and publishing the texts of bits; we
supplement those with other treaties assembled from country-specific
On the distinction between institutionalized and ad hoc arbitration, see Slate 1996.
Although bits have been signed with regularity since 1959, with five to fifteen new treaties
signed each year from the early 1960s until the late 1970s, the majority of bits in our sample come
from the late 1980s through the early 2000s. There is a slight uptick in bit signing throughout the
1980s and a more notable uptick in 1991. The number peaks in the mid-to-late 1990s, with approximately one hundred new treaties entering our data set annually from 1994 to 1998, followed by a
modest drop in the subsequent decade.
22
23
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sources.24 A second important step is to translate and code all of the treaties that are available only in non-English languages (Arabic, French,
German, Italian, Spanish, Portuguese, and Russian). The resulting data
set contains 1,473 translated (as needed) and coded treaties, from nearly
all of the countries in existence during the past half-century.25 Although
there are treaties for which we could not obtain the treaty texts, the countries and treaties in our data set are quite heterogeneous, as discussed in
the following paragraph, and the collections of identified and missing
treaties mirror one another with only one exception.26
The data set includes a total of 170 countries and thus produces a
diverse collection of treaty pairings. In terms of the capital-exporting
countries in the data set, various European countries are preeminent, although non-European countries such as the United States and South
Korea maintain a strong presence (see Table 1a). Other, often regional,
players also are notably present, with countries such as Kuwait, Singapore, and Thailand represented a dozen or more times.27 The capitalimporting countries in the data set are a particularly diverse group,
crossing various geographic regions and income classifications. Among
the most common treaty signatories on this side are China, Egypt, Bulgaria, Vietnam, Pakistan, and Lithuania (see Table 1b). Putting these
two together, we see treaties that cover a wide spectrum of dyads. Approximately one-quarter of treaties are between roughly balanced equals,
one-quarter are highly asymmetric, and about half reflect varying, more
moderate differences between the two signatories (see Table 1c).
Using this data set we produce operational variables for the three bit
design elements discussed earlier, which later serve as the three primary
dependent variables in our empirical tests. The first variable, Preconsent
to International Arbitration, captures whether the two signatory states
agree to automatically submit future investor-state disputes to international arbitration. Just over two-fifths of bits contain such language
24
The unctad database on international investment agreements contains by far the most comprehensive collection of treaty texts. We also utilized state-level archives from governments such as the
United States (http://tcc.export.gov/) to supplement the unctad collection.
25
In total, we were able to identify and code the text of nearly 60 percent (1,473) of the 2,599 bits
in existence at the end of 2006.
26
We compare our independent variables across two sets of bits: those for which we have the text
of the treaty and those that we know exist but for which we do not have the text. For nearly all control
variables used in our analyses, the differences across samples are neither statistically nor substantively
significant. Only one variable, the percentage of worldwide multinationals located in the home country, differs notably across the coded and uncoded samples. In this case, the value of the variable is
greater for the coded treaties; this likely reflects that fact that treaty texts from oecd members such
as the United States and prominent European countries (see Table 1a) are typically never missing.
27
Note that some countries, such as Thailand, China, and Turkey, enter into our data set as home
countries in some treaties but host countries in others due to the relational nature of our data.
Table 1
Countries in Our BIT Design Data Set
(a)
Home Countries (Capital Exporters)
# of Treaties
# of Treaties
China 55
Egypt 37
Romania 31
Pakistan 29
Bulgaria 28
Hungary 28
Vietnam 27
Russia 23
Turkey 22
Lithuania 22
India 22
Morocco 21
(c)
Ratio between Home Country
and Host Country in Terms of
25th
Percentile
50th
Percentile
75th
Percentile
95th
Percentile
1.78 to 1
8.89 to 1
47.8 to 1
525.3 to 1
1 to 1.81
2.68 to 1
12.6 to 1
137.9 to 1
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Table 2
Variation across BIT Provisions
Preconsent
to Arbitration
Number of Treaties
0
1
Total
875
586
1,461
Number of
Dispute-Settlement Options
0
1
2
3
4
Total
95
636
563
150
30
1,474
Institutionalization of Arbitration
0
1
2
Total
Number of Treaties
Number of Treaties
95
159
1,221
1,475
Overall Enforceability
Number of Treaties
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investment treaties. Each is considered separately as a possible explanation for bit design.31 The first two approaches stem from credible
commitment explanations for fdi, but they prioritize different sides
of the treaty pairing and rely upon distinct logics. The first of these
relies most directly on arguments about the need for host states to use
bitsand accordingly, the contents of bitsto establish credibility
about respect for inward investment. The second approach incorporates general, realist-oriented arguments to emphasize the bargaining
power and preferences of influential, capital-exporting states as determinants of bit design. The final theoretical framework draws on the
well established, but rarely tested, literature on the rational design of
international institutions to emphasize the nature of the cooperation
problems facing the signatories as predictors of treaty design.
Credibility-Based Explanations
The first two theoretical explanations share a common starting point,
which is the endemic credible commitment problem that historically
has plagued fdi. Before any investment is made, potential investors
from the home country have considerable bargaining leverage over
those host states that seek to attract investment. But once the investment is made and costs are sunk, leverage shifts to the host government, which then may face domestic incentives to renege on promises
or change the terms of investment. This creates a commitment problem that plagues both sides: a host government cannot credibly commit
ex ante to respecting investment over the long term, and investors may
be hesitant to invest in the first place because they cannot determine
ex ante the host governments true commitment to respect investment
into the future. Signing investment treaties, particularly if they contain
many of the design elements that are the focus of this article, is a way to
address this credible commitment problem. In fact, nearly all existing
research on the possible effects of bits portrays the treaties, regardless
of their contents, as some type of credible commitment device.32 Yet
one crucial point is that bits vary, and thus some treaties generate more
credibility than others, as Bthe and Milner similarly point out in their
study of pta credibility.33 As a concept, credibility is also notoriously
vague, something that Bthe and Milner also acknowledge.34 Thus, in
31
We realize that some overlap among the theories is unavoidable, yet each of these theories reflects broader scholarship in the field and deserves individual consideration.
32
For example, Bubb and Rose-Ackerman 2007; Bthe and Milner 2009; Egger and Pfaffermayr
2004; Haftel 2010; Hallward-Driemeier 2003; Kerner 2009.
33
Bthe and Milner 2014.
34
Bthe and Milner 2014n10.
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trying to explain bit design from the popular credibility perch, an important requirement is to define it and to determine who pushes for it
and who benefits from it.
Both the tying hands and power and preferences approaches build on
the inherent asymmetry within bits. The overwhelming majority of
bits are signed by a clearly identifiable host country that seeks to attract
fdi and a home country that will be the source of that investment.35
As noted above, establishing credible commitments to respect investment is in the interest of both parties. The tying hands explanation for
bit design puts the focus squarely on host countries and posits that
those host countries with the greatest credibility problems will tie their
hands the tightest by including the strongest enforcement provisions
in bits. By contrast, the power and preferences approach emphasizes
the varying degrees to which some home governments will insist on
stronger investment protections in bits, regardless of the host-country
treaty partner, as well as on their greater relative ability to achieve these
outcomes.
tying hands
According to the tying hands approach, the inclusion of certain enforcement provisions in bits is driven by host states that want to tie
their own hands in order to more firmly establish a credible commitment to respect foreign investment. For our purposes, this may entail either granting advanced consent to international arbitration in
the event a dispute arises or specifying that investors from the home
country will have access to various institutionalized arbitration options. The inclusion of these investor-friendly elements is a deliberate,
self-interested maneuver that is intended to mollify investor concerns
about states with particularly severe credibility problems. As such, according to this hands-tying explanation, variation in bit design stems
from differences from one host state to another. Those with the largest
credibility problems, perhaps stemming from weak domestic political
institutions, weak rule of law, or a governments poor reputation, are
most likely to include stronger provisions in their bits. By contrast,
host states without such credibility problems have far less need to tie
their hands, since their higher quality institutions or solid reputations
alleviate any worries investors might have.
35
See also Elkins, Guzman, and Simmons 2006. Even in bits between developing countries, which
represent less than one-quarter of all bits in existence (unctad 2009), one country is often the clear
source of investment, as China is in its bits with various less developed countries.
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Put simply, if the host has a particularly strong need to convey its intent to respect fdi, it is more likely to sign treaties that contain elements
to strengthen enforceability, including preconsent clauses and multiple,
institutionalized enforcement options. Such hand tying will correspond
to the severity of the credibility problem in the host-state bit signatory.
Therefore, the overarching tying hands proposition is as follows:
TH proposition. Bilateral investment treaties are more likely to include
provisions that enhance enforceability, such as preconsent clauses, institutionalized arbitration, and multiple dispute-settlement options, when the
credible commitment problem in the host state is most severe.
More specifically, we expect such hand tying if the host has poor-quality
legal institutions, few constraints on the ability of leaders to break contracts, and a past history of expropriation. It is the presence of these
types of features, then, that should predict bit design.
We thus generate and include in empirical tests three tying-hands
variables that should explain important variation across the treaties as
a function of the severity of the hosts credible commitment problem.36
The first measure is whether political executives in the host country are
relatively free to pursue any course of action they choose, such as expropriating, or whether their power is checked by other domestic political
institutions. The presence of legislative or other actors who constrain
political executives can increase the credibility of a states commitment
to respect fdi by reducing fears that an executive will change course
and engage in some type of expropriation. Absent such internal checks,
those countrys bits should include the stronger design features. As a
result, Heniszs political constraints indicator (Political Constraints on
Executive) is included as a first variable.37
Similarly, poor domestic legal institutions can exacerbate the commitment problems inherent to a bit and lead to greater hand tying.
Host states with powerful legal institutions can more credibly convey
to investors that the rule of law will be respected and that recourse to
international arbitration will not be needed. In sharp contrast, weak
legal institutions in host states exacerbate the commitment problem.
Such situations are more likely to lead the host to tie its hands via
international arbitration, since pursing claims through domestic legal institutions in the host is not a viable option for foreign investors.
Therefore, a second tying-hands variable, the International Country
36
All three explanatory variables are included in the tests, since they are conceptually distinct and
are not highly correlated (the greatest bivariate correlation among these variables is .19).
37
Henisz 2006.
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Risk Groups (icrg) measure of law and order in the host, is employed
to capture the quality of legal institutions in the host state.38
A third and final variable reflects that in the fdi context, the commitment problem is exacerbated when the host bit signatory has expropriated assets in the past or violated the terms of similar investment
treaties. This type of negative past reputation for engaging in takings
should also lead to greater hand tying by those states via stronger enforcement provisions in their treaties. The host states recent history of
expropriation, measured over the past five years, serves as the operational indicator of this logic.39
Given the strong conceptual focus on the host state, clear coding
rules are devised to identify the host state among each pair of bit signatories, in accordance with the theoretical logic. The primary rule is
to select the country with the smallest gdp per capita as the host.40
Because this coding rule produces a few peculiarities, we use a series of
theoretically informed secondary coding rules to refine the classification of gdp per capita; this, then, results in a reversal of the ordering in
fewer than 1 percent of treaties.41 None of our estimated findings are
sensitive to this reclassification.
power and preferences
Like the tying hands explanation, the power and preferences approach
emphasizes the inherent asymmetry in bits and builds, albeit less directly, on the credible commitment logic. In this case the emphasis is
firmly on the home state of the bit pairing: its desire to include stronger enforcement provisions in bits and its ability to incorporate them
successfully. The capital-exporting member of the bit pairing typically
will prefer to include in its bits stronger enforcement provisions to
protect the interests of its investors. This is particularly true when there
38
prs Group 2007. The prs/icrg measure of law and order only covers the period from 1982 to
2006. Although only 10 percent of bits in our sample are signed before 1982, the exclusion of these
cases would cause us to lose data on all bits from earlier time periods. Therefore, for all prs/icrg variables we extend values from 1982 to any earlier missing years, although this decision does not affect
the significance of any of our primary findings.
39
Data on expropriations come from Kobrin 1987; Minor 1994; and personal correspondence.
40
This ordering is justified on empirical grounds, since the median gdp per capita for the host state
among the bits in our data set is $1,286, while the comparable number for home states is more than
twelve times higher at $16,285. All gdp data are expressed in constant US dollars (in this case constant
2000 US dollars) and are taken from World Development Indicators (wdi).
41
The following rules are used to determine reordering: (1) a non-oecd state is considered the
host in a bit with an oecd state, (2) smaller economies (defined as a state with less than one-fifth the
aggregate gdp of the other) are treated as host states, provided that their gdp per capita is no more
than three times that of the other state, and (3) in cases where the two gdp per capita values differ by
less than one-third, the state with the smaller aggregate gdp is treated as the host state, provided that
its aggregate gdp is less than one-half that of the other state.
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They will want to ensure that their investors have recourse in the event
that conditions change or that disputes arise. The best way to do so is
to include in the treaty elements such as preconsent clauses, multiple
options for enforcement, and the ability to utilize institutionalized arbitration venues. As real-world evidence of these preferences, consider
that most oecd countries have model bits that reveal their preferences and serve as a template for treaty bargaining. These model treaties typically include advanced consent to arbitration and provide for
arbitration through permanent arbitration institutions.49 Even though
these governments devise new model bits every few years, their preferences for these enforcement provisions are quite stable.50
Home governments have strong, logical reasons to prefer the inclusion of each of these clauses. These preferences stem from the fact that
investors from home states are almost always the claimants in disputes.
As Simmons notes, this private right of standing is a unique, investorfriendly arrangement. It is aided significantly when the treaty includes
preconsent to international arbitration, which removes a key obstacle to
jurisdiction and lowers hurdles to obtaining third-party disputes settlement. Home governments also will view the inclusion of institutionalized arbitration as being in their interest. Under ad hoc arbitration the
parties still must navigate most aspects of the case, such as choice of
law, rules for selecting arbitrators, objection, compensation, and award
procurementall of which lead to a decrease in procedural efficiency
and security.51 In contrast, when centralized options are available, litigating investors benefit from established rules, quality control, basic
administrative support, management of the proceedings, selection of
arbitrators, facilities, award enforcement, and legal support.52 Notably,
a more centralized venue like icsid greatly enhances enforcement once
awards are rendered, since it has a built-in enforcement mechanism:
awards have the force of a domestic court judgment, there is no domestic review, and annulment is highly unlikely.53 Finally, the specification
of multiple possible venues for arbitration is highly desirable for home
governments, since it allows their aggrieved firms to forum shop for
the venue that best serves their interests.54 Forum shopping is an integral part of firms legal strategy in investment disputes, since different venues present advantages and disadvantages for investors due to
For example, Dolzer and Stevens 1995; unctad 1998; Vandevelde 1992; Vandevelde 2000.
For a useful recent illustration, see Johnson 2012.
51
Diel-Grigor 2011, 689; also Slate 1996.
52
Slate 1996, 5260.
53
Diel-Grigor 2011.
54
On forum shopping before international tribunals, see Pauwelyn and Salles 2009.
49
50
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a wider variety of venues, each with its own strengths and weakness.67
Likewise, arbitration institutions that are more institutionalized can
be thought of as heavily centralized, since dispute-settlement authority is located in a central, permanent actor that can provide important
information-provision and interpretive functions. For example, icsid
is part of the World Bank group and contains an administrative council, a secretary-general, and a professional staff that provide numerous types of institutional support.68 Furthermore, icsid awards help to
clarify the application of investment law. Thus, a recent study finds that
icsid awards in 2006 included an average reference to 9.3 previous icsid rulings, and icsid now requires publication of the legal reasoning in
all cases.69 Moreover, other studies in the rational design tradition have
conceptualized flexibility and centralization of arbitration institutions
in similar ways, and that further increases our confidence in the conceptual match.70 Three rational design conjectures, which were among
the most supported by case studies in the original 2001 volume, are
directly relevant.
The first two conjectures identify centralization and flexibility, respectively, as rational responses to high levels of uncertainty about the
state of the world, which is defined within rational design as states
knowledge about the consequence of their own actions, the actions
of other states, or the actions of international institutions.71 Governments that sign investment treaties may do so in an environment where
there is either little or conflicting information about the myriad consequences of the agreement they are about to sign. This uncertainty may
increase or decrease over the life of a treaty depending on the amount
of available information, as well as the nature of any unexpected developments or shocks within the relevant issue-area.72
Thus, the first rational design conjecture predicts that uncertainty
about the state of the world should lead to greater centralization within
bits.73 When uncertainty is high, states may desire to have one or more
centralized international institutions provide additional information
about the state of the world and to clarify ambiguities in the treaties they
have signed. Delegating dispute-settlement authority to centralized
Diel-Grigor 2011; Kreindler 2005.
Diel-Grigor 2011; Schreuer 2001; Shihata 1992; Sornarajah 2000.
69
Commission 2007.
70
Koremenos 2007; Mattli 2001.
71
Koremenos, Lipson, and Snidal 2001, 778.
72
See Koremenos 2005; Mattli 2001; Oatley 2001. Unforeseen developments in the world of fdi
could include dramatic fluctuations in investment patterns or currency crises, for instance.
73
This is conjecture C1 in the original edited volume (Koremenos, Lipson, and Snidal 2001).
67
68
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sizes the power and preferences of the home state. In contrast, the sister
argument about hand-tying behavior, which emphasizes the credibility
problem in host countries, is not supported. Furthermore, the rational
design projects conjectures receive only middling, ephemeral support.
In the subsections below we discuss in detail the individual findings for
each of the three explanations, beginning with the supportive findings
for the power and preferences approach and then proceeding to the
comparatively weak findings for the other two approaches.
Power and Preferences
Among the three approaches, the one that emphasizes the power and
preferences of the home country produces by far the greatest number
of statistically significant findings. Table 3 reveals the many supported
relationships between the three power and preferences variables and the
four bit-design-feature dependent variables. Several coefficient estimates for each of the three relevant explanatory variables, home-state
presence of MNCs, right-wing government, and relative bargaining power,
are statistically significant in the hypothesized direction as predictors
of bit variation. In fact, three-quarters of the relationships of interest
in Table 3 turn out as predicted, at high levels of confidence.
A first conclusion to be drawn from the results in Table 3 is that the
preferences of important domestic actors within the country become
integrated into the treaties. Home countries in general should prefer
bits to include investor protections that facilitate enforcement, and we
postulated that countries with many large multinationals and rightwing governments should have particularly strong preferences in this
regard. Indeed, Table 3 indicates that the inclusion of investor-friendly
bit provisions is more likely when such actors are present on the more
powerful side of the bit pairing. Right-wing governments in home
countries are more likely to conclude bits with preconsent clauses, several enforcement options, and greater overall enforceabilitywith all
of these findings significant at the 95 percent level of confidence or
greater. Similarly, when there are numerous large, and likely outwardly
investing, mncs in the home country, bits are more likely to include
preconsent to international arbitration and greater institutionalization
of enforcement.
A second conclusion that emerges from Table 3 is the importance of
home-country bargaining power as a predictor of bit variation. States
that have significant leverage over the treaty partner are more likely to
get all of the features they and their investors desire included in the
treaty: preconsent to international arbitration, a greater number of ven-
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Table 3
Power and Preferences as an Explanation for BIT Variation
Dependent Variable
Preconsent
to Intl
Power and Preferences Variables
Arbitration
Presence of MNCs (+)
Right-Wing Government in
Home (+)
Relative Bargaining Power (+)
DV Average among Regional
Peers
Constant
Number
of Disp.
Institu-
Settlement tionalized
Overall
Options
Arbitration Enforceability
.968 *
.373
1.22 *
.244
(.648) (.230) (.930) (.332)
.186 ***
.060 **
.122
.105 ***
(.075)
(.027)
(.095)
(.035)
.481 ***
.068 *
.667 ***
.268 ***
(.137) (.048) (.160) (.062)
3.61 ***
.124
.533
.320 ***
(.566)
(.091)
(.295)
(.095)
1.23 +++
.752 +++
1.34 +++
(.162) (.093) (.104)
ues through which investors can pursue grievances, and at least one institutionalized arbitration optionall of which enhance overall treaty
enforceability. In fact, all four estimated relationships between bargaining power and desired treaty features are supported in Table 3, three
of them at the 99 percent level of confidence. Thus power politics is a
strong determinant of bit design.
We also emphasize that these strong results for the power and preferences variables hold even after controlling for time-period effects and
the behavior of regional peers, both of which have considerable explanatory power in our models. Taken together, the results in Table 3 suggest that powerful states with actors who prefer strong enforceability
are able to achieve what they want in bits.
Tying Hands
In sharp contrast, there is no support in Table 4 for the overarching
claim that the need for host states to establish credible commitment
and to tie their own hands affects the design of bits. This theoretical perspective maintains that the ubiquitous hand-tying argument in
74
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d es i g n o f b i l at er a l i n v es t m en t t r e at i es
75
Table 4
Tying Hands as an Explanation for BIT Variation
Dependent Variable
Preconsent
to Intl
Tying Hands Variables
Arbitration
Political Constraints on
Executive ()
Quality of Legal Institutions ()
Recent History of
Expropriation (+)
DV Average among Regional
Peers
Constant
Number
of Disp.
Institu-
Settlement tionalized
Overall
Options
Arbitration Enforceability
.235
.095
1.46 +++
.354 +++
(.184)
(.067)
(.252)
(.094)
.026
.010
.023
.006
(.036) (.013) (.041) (.013)
.171
.026
.005
.032
(.150)
(.037)
(.004)
(.029)
1.90 ***
.341 ***
.593
.352 ***
(.392)
(.087)
(.232)
(.109)
.796 +++
.275 +++
1.36 +++
(.186) (.089) (.136)
76
w o r l d p o li t i c s
Table 5
Rational Design as an Explanation for BIT Variation
Dependent Variable
Preconsent
to Intl
Arbitration
Number
of Disp.
Institu-
Settlement tionalized
Overall
Options
Arbitration Enforceability
to lower gdp growth in one of the signatories, the treaty is more likely
to include powerful, institutionalized enforcement options. Yet these
two supportive findings are isolated, and alternative ways of measuring
these concepts and testing the conjectured relationships fail to uncover
any consistent pattern of support.
One challenge inherent to testing the rational design theoretical approach is the difficulty of devising appropriate operational measures.
Therefore, we consider several additional ways of operationalizing
important concepts like uncertainty about the state of the world and
enforcement problems, yet in the end we still fail to find any real support. As alternative ways to think about the incentives to cheat logic
of enforcement problems, we substitute the countries inflation and unemployment rates during the past year for their gdp growth rate. After
reestimating all relevant models from Table 5, neither alternative in-
d es i g n o f b i l at er a l i n v es t m en t t r e at i es
77
Duffield 2003.
See Copelovitch and Putnam 2010.
78
w o r l d p o li t i c s
explanations for variation across bits, we also consider all three explanations jointly in the same empirical test. Thus in Table 6 we estimate
and report a series of supermodels that include the relevant variables
from all three models; this guards against any omitted variables bias
that might be present in the restricted, nonnested models in Tables
35.99 The findings presented in Table 6 are strikingly similar to those
reported in the previous tables and further elevate the power and preferences explanation over the other two. In Table 6 nearly all of the power
and preferences variables exhibit the same, statistically significant relationships found in Table 3. Eight of the twelve variables are statistically significant predictors of bit design, even with the inclusion in the
estimations of the many variables from the other two theoretical perspectives. In fact, several of the predicted relationships exhibit a higher
degree of confidence than previously in Table 3. In contrast, the middling support for the rational design explanation evaporates in Table 6.
Neither of the two statistically significant relationships from Table 5
survives once the variables from the power and preferences approach are
added. The previous unsupported findings for the tying hands explanation also are robust; none of the tying hands variables exhibits the expected relationship with bit provisions in Table 6. All in all, the power
and preferences explanation holds, and looks even stronger in comparison with the two alternatives, when the variables from the three approaches are folded into a single, unified empirical model.
The examination of individual variable relationships in Tables 36 is
useful and highly suggestive, yet more systematic comparison of the three
theories is needed. The final step is thus to compare the overall fit of each
of the three models vis--vis one another. Comparisons of nonnested
models can be complex, particularly when using maximum-likelihood
estimation and discrete outcomes.100 Thankfully, two information-based
measures of model fit, Akaikes information criterion (aic) and the
Bayesian information criterion (bic), provide useful ways to compare the
relative fit of competing models.101 Therefore, we calculate both aic and
bic measures for all of the models presented in Tables 35 and compare
the overall fit of each theory as a predictor of investment treaty variation.
The measures and comparisons are presented in Table 7.
99
The only minor difference between the estimations in Table 35 and those in Table 6 is that we
omit the Quality of Legal Institutions variable from the group of Tying Hands variables in Table 6. This
variable is never a statistically significant predictor of bit design in Table 4, nor in any other regressions we run, and its inclusion in Table 6 results in the deletion of more than one hundred treaties
from the analyses.
100
Clarke 2001.
101
Akaike 1973; and Raftery 1996, respectively. See also Long and Freese 2006 for a discussion.
Table 6
Variables from All Theories as Explanations for BIT Variation
Dependent Variable
Preconsent
to Intl
Arbitration
Number
of Disp.
Settlement
Options
Institutionalized
Overall
Arbitration Enforceability
80
w o r l d p o li t i c s
Table 7
Comparison of Model Fit for Each Theory and BIT Design Featurea
(Using Akaikes Information Criterion, AIC,
and Bayesian Information Criterion, BIC )
DV
Theory
Preconsent to
International
Arbitration
Number of
Enforcement
Options
AIC
AIC
BIC
BIC
BIC
AIC
BIC
1.31
.83
1.32
1.32
.99
.86
Smaller aic values indicate better model fit; more negative bic values indicate better model fit.
d es i g n o f b i l at er a l i n v es t m en t t r e at i es
81
Ours is the most comprehensive effort to date to code multiple components of a large, diverse slate of investment treaties. The fact that we
have made these data publicly available is another important contribution, which allows other scholars (such as Simmons in this volume) to
investigate this newfound variation across these important treaties.102
A second major contribution is our careful articulation and then
testing of three theoretical explanations for this treaty variation. Our
goal has been to advance the theoretical frontier and to produce more
logically grounded hypotheses about international treaty variation. Applying important theoretical ideas to our new data-collection efforts
is a mutually beneficial way to underpin empirical tests with a stronger theoretical foundation and to test important theories. We produce
compelling findings that call attention to powerful states preferences
and bargaining power to explain diversity across bilateral investment
treaties, a topic that thus far has been understudied. Our conclusions
speak directly to both established and emerging trends in international
relations that emphasize links between international institutions and
state power as well as domestic politics.
The lack of support for the rational design projects predictions is
surprising but also meaningful. We realize that others may take issue with our operational measures, coding decisions, and the degree
to which bits are a relevant fit. That said, we executed our tests of rational design as faithfully and comprehensively as possibleand came
away skeptical. We see several major problems with rational design, including the lack of conceptual clarity, the challenge of coming up with
appropriate empirical measures, and the overall inapplicability of the
propositions to real-world international institutions. As crafted to date,
the utility of the rational design of international institutions project
seems limited. We leave to others the decision regarding whether to
abandon rational design fully or whether to take it in new directions.103
For those in the latter camp, one important contribution from this research is our identification of several plausible measures for the abstract
concepts, or cooperation problems, common to rationalist studies of
international relations. Although the strategic context will differ from
issue to issue, we have done much of the conceptual heavy lifting to
produce an extensive list of indicators that can serve as a starting point
for other researchers who want to measure concepts such uncertainty
or enforcement problems.
102
103
Simmons 2014.
Thompson 2010b; Copelovitch and Putnam 2010.
82
w o r l d p o li t i c s
d es i g n o f b i l at er a l i n v es t m en t t r e at i es
83
not clear that denouncing bits or letting the treaties expire will improve global or state welfare. Recent moves by states like Ecuador and
Bolivia to withdraw from the icsid Convention strike us as ineffective, but, along with moves by states like Argentina to annul arbitration awards, they challenge the emerging global rule of law. Perhaps
a previously elusive multilateral effort will emerge, yet this seems unlikely. Instead, the implications of the regime are likely to continue to
be bargained bilaterally in new and renegotiated bits. Even changing
preferences on the part of host states would still have to overcome the
bargaining asymmetry that has characterized bit design to date.
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