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The Effect of Treaties on Foreign Direct InvestmentBilateral Investment Treaties, Double Taxation Treaties, and Investment Flows$
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Karl P. Sauvant and Lisa E. Sachs

Print publication date: 2009

Print ISBN-13: 9780195388534

Published to Oxford Scholarship Online: May 2009

DOI: 10.1093/acprof:oso/9780195388534.001.0001

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Explaining the Popularity of Bilateral Investment Treaties *

Explaining the Popularity of Bilateral Investment Treaties *

Chapter:
(p.73) 3. EXPLAINING THE POPULARITY OF BILATERAL INVESTMENT TREATIES *
Source:
The Effect of Treaties on Foreign Direct Investment
Author(s):

Andrew T. Guzman (Contributor Webpage)

Publisher:
Oxford University Press
DOI:10.1093/acprof:oso/9780195388534.003.0003

This chapter looks at why BITs have become the preferred method for governing the relationship between foreign investors and host governments in developing countries. It offers a novel explanation of why developing states fought aggressively against the former rule of “prompt, adequate, and effective” compensation for expropriation and in favor of a more lenient standard, and yet contemporaneously flocked to sign treaties that offer investors much greater protection than did the old rule of customary international law. It shows that although an individual country has a strong incentive to negotiate with and offer concessions to potential investors—thereby making itself a more attractive location relative to other potential hosts—developing countries as a group are likely to benefit from forcing investors to enter contracts with host countries that cannot be enforced in an international forum, thereby giving the host a much greater ability to extract value from the investment. The chapter offers a comprehensive explanation for the behavior of developing countries and assesses the desirability of BITs. It discusses the welfare implications of BITs as compared to the “appropriate compensation” standard that developing countries have advocated at the UN. It demonstrates that although BITs increase global efficiency, they likely reduce the overall welfare of developing countries. Finally, the chapter discusses the impact of BITs on customary international law.

Keywords:   bilateral investment treaties, Hull Rule, international law, appropriate compensation, developing countries

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