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The Effect of Treaties on Foreign Direct InvestmentBilateral Investment Treaties, Double Taxation Treaties, and Investment Flows$

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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(p.725) Index

(p.725) Index

Source:
The Effect of Treaties on Foreign Direct Investment
Publisher:
Oxford University Press
A
Agreement on Trade Related Investment Measures, 20–21, 231
Andean Free Trade Agreement, 297
Arbitration
ad hoc, 66, 131–132
binding, provisions, 74, 91, 183, 185–187, 212, 353, 380
and BIT clauses and provisions, 18, 28, 172, 210, 312, 381
BIT critics and, 155
BITs as customary law and, 157
choice between ICSID and, 67
compulsory, 131, 188
consent to international, 56
costly, 29, 313
direct investor-state dispute mechanisms and, 395
extra national, 398–399
in Latin American countries, 6
non-binding, 104
OECD model of, 104
panels, 183–184, 188, 205, 210
securing international, 58, 112
under investor-state treaty, 30, 32, 398, 423
under NAFTA, 48
under UNCITRAL rules, 48–49, 66, 132, 398
unfair and inequitable treatment in, 48–49
Asian-African Legal Consultative Committee, 47
model “A” BIT, 60–62
model “B” BIT, 62
model treaties, 47
B
Bilateral investment treaties, 3
alternatives to, 382–383
arbitration under, 381
associated with large increases in foreign investment, 440
basic structure of, 123
binding investor-to-state dispute settlement provisions under, 230
commitment to investment protection of, 15
compensation for expropriation under, 61–64
compensation for losses due to armed conflict or internal disorder under, 61
compliments to good institutional quality, 226
conditions to stimulate foreign direct investment and, 311–312
content of, 37–71
core elements, 296
cross sectional analysis of FDI inflows under, 233
customary international law and, 156–158
design of, 253
in developed countries, 13
discriminatory treatment against foreign investors in, 230
disputes between the contracting parties under, 66–67
dispute settlement clauses and procedures contained in, 65, 439
dominant vehicle through which investment is regulated, 73–75
early, 67
econometric research study of, 140–143
effective resolution of credible commitment problems and, 382
effect of, on FDI location, 225–227
effect of, on foreign direct investment, 188–190
efficiency implications of, 91–93
evaluation of, 109–110
ex ante information and, 184
(p.726)
ex post enforcement and, 186–188
ex post information and, 185–186
failure to negotiate a multilateral agreement on investment and, 317–320
FDI related issues regulated by, 253
first, 253
and foreign direct investment increases to developing countries, 225–252
free trade agreements, 297
free transfer of payments under, 59–61
general principles of law of, 158–159
government policies and, 231
history of, 317–320
impact of, on customary international law, 75, 93–96
impact of, on general nondiatic FDI inflows, 232–233
impact on foreign direct investment flows, 109–394
importance of institutions and property rights and, 356–359
important instrument of protection to foreign investors, 231
incorporation of international dispute resolution mechanisms for, 395–596
increased global efficiency, 75
international arbitration and, 230–231
international arbitration under, 19
international investment insurance and, 382–383
international legal instrument, 109
investment contracts and, 382
investment promotion under, 138–140
inward flow of FDI and, 225–227
lack of investor awareness of, 381–383
large FDI inflows and, 225–227
marginal impact of, 311–312
method of governing relationship between investors and governments, 74–75
model, 30
modern, 115
as most common type of international investment agreement, 37
most economically important aspect of, 395
most favored nation treatment under, 17
movement, 110–113
national treatment under, 17
network of, 15–16
objectives of, 109
observance of obligations under, 54–59
popularity of, 73–97, 228
potential endogeneity of, 396–397
as a potent tool for attracting FDI, 311–312
primary purpose of, 114–115
prior United Nations studies of, 143–147
programs, 14
property rights and, 352–355
protected tariffs of tax incentives for foreign investors and, 231
for protecting and influencing foreign investment, 109
protections provided by, 16
provisions on common set of investment issues of, 438–443
purpose of, 225–227
rise to prominence of the, 74–75
risk of investment and, 313–314
role of, in promoting FDI, 227
signaling effect of, 312–313
signing, 439–457
specific standards of treatment under, 59–75
studies of, location of FDI, 232–234
trends in, 355–356
uniformity across countries, 296
welfare implication of, 93
Bilateral investment treaties, core elements of, 296
Bilateral investment treaties and foreign direct investment
alternative estimation techniques for statistical analysis of, 200–202
causation between, 395–398
correlation between, 395–398
empirical findings from monadic analysis concerning, 179–180
empirical models of, 176–178
political analysis of, 171–224
political theory of, 180–184
statistical analysis of, 190–196
statistical findings of, 196–199
(p.727)
studies on the effect of, on foreign direct investment, 173–176
Bilateral investment treaties as means of attracting foreign investment
as a commitment device, 350–352
studies on growth and investment relating to, 351–352
Bilateral investment treaty movement
development of the, 114
evolution of the, 113–118
goals of the, 118–122
history of the, 110–113
impetus for the, 110
in the late 1980s. 117
new face in the history of the, 117–118
Bilateral investment treaty regime, 60, 88–89, 91–93, 120, 210, 311–321
global, 27, 311–321
rise of the, 312, 317–320
Bilateral investment, treaty signing and
analysis exploring the economic effects of, 440–443
countries, 443–448
developing countries and, 440–443
economic determinants including FDI stocks and flows of, 449–450
economic determinants of, 444–448
economic evidence on value of, 452–453
the effect of country identity and, 451
effect on FDI flows, 453–455
effects of, 440–443
empirical results of, 444–448
identifying economic effects of, 450
interpretation of further issues on, 455–457
investment liberalization and, 441–442
leads and lags in investment reactions and, 451
values of, 452–455
Bilateral investment treaty structure
compensation for losses from armed conflict or internal disorder, 129–130
conditions for the entry of foreign investments, 126
general standards of treatment of foreign investment, 126–128
investment dispute settlement 130–133
monetary transfers, 128–129
operational conditions, 129
protection of dispossession, 130
scope of application, 123–125
Bilateral tax treaties, 461–466
Bilateral treaties, 4
availability of, as commitment mechanism, 318
bilateral flows based on signed, 359
Bilateral Treaties of Friendship, Commerce and Navigation, 4, 7
colonial era, 8
investment protection for, 10
modern, 17
most favored nation treatment and, 17
national treatment and, 17
postwar, 8–10
submission of disputes to an ad hoc arbitral tribunal under, 17
Bilateral treaty making, 115–117
C
Calvo Doctrine
defined, 5
end of, 22
Latin America and, 5
Central American Free Trade Agreements (CAFTA), 297
Charter of Economic Rights and Duties of States (CERDS), 12
adoption of, 14
creation, 12
expropriation issues and, 14
regime, 87–88, 92–93
Credible commitments
ability of political institutions to make, 236, 670–671
to attract more foreign direct investment, 85, 215, 229, 289
bilateral investment agreements as, 206–207, 211–213, 318, 380–382, 389
contractual, 90
cost of, 91
customary law and, 91
dynamic inconsistency problem and, 91
lack of, 92
liberal economic policies defined as, 182
logic of, 176
mechanism, 82, 92, 206
(p.728)
problems with, 217, 382
to property rights, 314
risk premium of, 382
Customary international law, 5, 30–31
Calvo clause in, 5
deficiencies of, 13
under the Hull Rule, 75
lack of consensus on, 118–119
as a means of protecting international investment, 13–14
D
Developing countries
aggregate FDI flows to, 160–161
arbitration in, 155–156
BITs as investment vehicles that promote FDI in, 225–250
BITs concluded by, 356–357
capital importing, 26–27, 689–690
competing for FDI, 350–352, 437–443
credible commitment by, 312
DTTs and, 659–679
decolonized, 111
economic determinants of BIT signing by, 445–449
effect of BITs on inward FDI flows to, 197
expropriation, privatization and harassing of FDI issues in, 130, 134, 312, 318
FDI as a percentage of gross capital formation in, 441
FDI flows towards, 21, 73–74, 147–148, 165, 169, 175–176, 313, 359, 440, 687–692
FDI in and among, 357, 362, 441
FDI inward flows to. See Developing countries, FDI flows towards
FDI regime and, 320–321
growth of BITs and FDI in, 118, 439
increased use of BITs between, 71
integration agreements between, 52
liberalization of, 119, 133, 136
literature and studies on, 356–358
national or most favored nation treatment in, 128
OECD countries and, 177, 317, 355, 359 368, 374, 376, 692
popularity of BITs in, 313
private market for credit and, 21–22
property rights in, 175, 362
protection of FDI in, 176
rule of law in, 172, 177
share of FDI to, 359–360
socialist countries and, 12
sovereignty issues and investment in, 29–30, 112–113
statistical analysis of FDI flows to, 190–217
tax treaties with the U.S. signed by, 616
trade between developed countries and, 36
U.S. FDI flows to, 141, 177–178, 204, 692
Developed countries, 13
capital exporting, 120, 232, 679–680
DDTs and, 572, 662–666, 669, 679, 615, 626
development aid from, 227, 661
as dominant source and major recipient of FDI, 227, 661
dyadic sample of, 667
FDI and, 194
investment treaties signed between, 118, 120
liberal market model in, 119
OECD model treaty and, 602
tax issues in, 580, 582, 604, 606, 609, 616, 632–633
total number of BITs in force in, 313
Dispute resolution
fora (forum), 172
international, 395
investor-state, 23, 29, 395–396
mechanisms, 315, 350, 353, 395–398
procedures, 353
provisions in FCNs, 9–10
WTO system of, 64–65
Doha Round of Multilateral Trade Negotiations, 34
declaration, 442
investment agreements and the, 34, 442
negotiation of a MIA during the, 34, 155–156, 442
statement, 20, 442
Double taxation treaties
defined, 690
(p.729)
developing countries and, 659, 679–680
exploring the impact or effect of, on FDI flows, 461–538, 659–660, 665–667
and FDI, 660–665
growth of, 660
introduction, 99–106
models, 99–101
network, 99, 101, 104, 660
number of, concluded 1990–2004, 711
number of, with OECD countries, 681, 710
OECD model of, 99–101
statistical analysis of, 667–679, 690
timing of, effect of FDI flows, 708
United Nations model, 99–101
web, 99, 101, 104, 660
Dynamic inconsistency problem
defined, 78
developing nations attempting to attract FDI and, 230
efficiency and, 82–83
and foreign direct investment, 78–79
global perspective of, 82
host country and, 82
impact of, 82
reputational effect of, 82
E
Espousal, 19
as a customary law mechanism, 5
defined, 5
as a diplomatic process, 6
as a dispute resolution mechanism, 112
procedure, 5–6
satisfactory resolution of, 5–6
Economic integration, 35
agreements, 25
in the past, 26
regional and interregional, 26
Effect of bilateral investment treaties on foreign direct investment. see impact of bilateral investment treaties on foreign direct investment
Empirical methodology and data to estimate the effect of BITs, 491–496
Empirical link between investment treaties and foreign direct investment
econometric analysis of the, 379–383
revisiting the 379–392
Endogenous tax treaties, 513–516
F
Foreign direct investment (FDI)
balancing financial accounts and, 295
bilateral outward stocks, 258
Central and Eastern Europe, 273–391
dynamic inconsistency and, 78–79
economic benefits, 437
effect of taxation on, 461–466
empirical studies of the effects of taxation on, 485
flows, 73–74
global flows of, 73–74
growth and growth rates, 395
how treaties affect, 467–469
impact of BITs on, 312–314
impact of endogenous tax treaties on, 513–516
key determinants of, 298–302
location, 273–291
negotiating BITs as a strategy to attract, 287
nominal outward stocks, 258
outward stocks, 255, 258
protection of, 4–7
regulations on, 287
response to tax incentives of, 461–466
studies concerning extent of FDI response to tax incentives, 461–466
vertical, 254–256
Foreign direct investment flows
global, 273
Foreign investment
alternatives to, 21
developing countries, 11–12
form of neocolonialism, 11
Germany and, 13
liberalization of, 3
political risks of, 14
protection of, 3
socialist block and the Soviet Union, 11
(p.730) Fourth Ministerial Meeting, Doha, 2001. see Doha Round
Free Trade Agreements, 32
G
General Agreement on Tariffs and Trade 6, 10
framework, 6
as a trade negotiations forum, 6
trade relations and, 6
General Agreement on Trade in Services 20
Good neighbor policy, 6. see also Roosevelt Administration
H
Havana Charter, 114. see also International Trade Organization
Hull Rule
customary international law and, 75
fall of, 76–78
international community and, 79
international law and, 79
opposition to, 74–75
protection for foreign investors and, 228
I
International investment agreement, 3, 37
changes in, 19
colonial era, 3–6
content of, 34
covered persons and entities under, 42–45
definition of investments covered by, 39–40
divorced from the concept of liberalization, 35
fair and equitable treatment under, 46–52
first historical era of, 3–6
framework of, 28
general standards of treatment in, 46
global era, 19–28
history of, 3–35
increasingly universal, 35
major and most common provisions in, 37–38
postcolonial era, 3, 7–19
preambles to, 38
principle provisions of, 37–38
as a protection against political risk, 35
provisions defining the scope of application of the treaty, 39–46
standards of treatment to be applied to, 46
subject matter covered in, 39–42
temporal application, 45–46
territorial scope of, 45
Impact of bilateral investment treaties on FDI, 485–487
analysis of time series data to determine the, 326–331
caveats concerning the, 323–324
change in the exchange rate as a variable in determining the, 333
country risk as a variable in determining the, 334
cross sectional analysis to determine the, 331–337
evidence regarding the, 396–398
inflation as a variable in determining the, 333
literature on, 253–355
market size and growth as a variable in determining the, 332–333
other variable in determining the, 334–335
rate of capital formation as variable in determining the, 333–334
statistical analysis of the, 323, 326–348
theoretical considerations surrounding the, 324–326
Intellectual property rights, 21
International Centre for Settlement of Investment Disputes, 19
International Country Risk Guide (as an index of political risk), 315
(p.731) International Court of Justice
Barcelona traction case and the, 110–113
submission of disputes to, 17
International investment
colonial era, 4
protection of, 4
regime, 6
International investment law
bilateral investment treaties and, 109–110
historical development of, 115
modern, 115
transformation of, 109–110
International investment regime, 35
colonial era, 6
features of, 6
postcolonial era, 10
trade and property, 6
treaty-based, 32–33
virtually universal, 35
International law, 91–96
International legal framework, 115
International Monetary Fund, 60
International Trade Organization, 114
International trade relations, 6
Investment protection, 19, 37–71
Investor-host conflicts, 75
Investor protection regime. see Regime, Investor protection
K
Key determinants of foreign direct investment
analysis of, 323–326
in developing countries, 297–303
difference between sub-regions, 308
econometric model to identify, 303–305
factor endowments as one of, 298
factors relating to geography as one of, 299–300
factors relating to infrastructure as one of, 299–300
importance of, 323
in Latin America and the Caribbean, 305–308
literature on, 297–302
macroeconomic stability of one of, 298–299
market size as one of, 298
policy environment as one of, 299
political stability as one of, 299
privatization as one of, 302
substantial differences in, 308
value of BITs and, 314
L
Least Developed Countries (LDC), 76–91
behavior of the, 83–85
collective interests of the, 86–88
conduct of the, 88–90
in early 1960s, 77
economic interpretation concerning, 90–91
interests of individual, 85–86
paradoxical behavior of the, 83–91
strategic analysis of, 85–88
Liberalization. see Market liberalization
M
Market liberalization
an absolutist evaluation of, 134–136
investment and, 133–134
a relativist evaluation of, 136–138
trend toward, 23
Military Action. see Military force
Military force, 19
to collect debts, 13
as a legitimate means of protecting country’s interests, 35
to protect investment, 13, 19
use of, 13
Monroe Doctrine, 6
Most favored nation, 4
obligations, 30
treatment, 4, 16
Multilateral Agreement on Investment, 33
Multilateral agreements, 6
Multilateral investment agreement, 312, 317–320
Multinational enterprises, 70
horizontal, 254
institutional environment and, 275
investment strategy and, 275
vertical, 254
N
National treatment, 16
New institutional economics and foreign direct investment
bilateral investment treatments concerning, 278–279
corruption and, 277–278
currency evaluation and, 281–282
FDI control variables and, 280–287
literature on the, 276–277
market size and the, 282–283
political risks inherent to the, 280
privatization and the, 279–280
regulations on the, 279
rule of law and the, 283
statistical results concerning, 285–287
theory on, 276–280
New International Economic Order, 12
adoption of, 14
declaration of, 12
discussions of a, 22
North American Free Trade Agreement, 25–28
arbitral decisions under the, 47
chapter eleven, 26, 231
interpretive notice under, 31
investment protection provisions under, 231
investment related provisions of, 26
section on investment, 117
O
Office of Investment Affairs, Bureau of Economic Business Affairs, 253–254
Organisation for Economic Co-operation and Development (OECD), 114
P
Promotion of foreign direct investment
effect of bilateral tax treaties on the, 469–474
empirical framework for statistical analysis of the, 467–469
statistical analysis and results of the, 474–481
Property protection provisions 6, 8
Protectionist policies, 6
R
Regional trade agreements, 23
S
Socialist countries, 12
Standard of expropriation, 15–16
T
Tax treaties
bilateral, 487–491
functions of, 487–491
history of, 487–491
list of United States, 489
primary functions of, 488–490
primary goal of, 485–486
process of creating, 487–491
Theoretical trade literature 254
Trade liberalization 6
Trade protection provisions 6, 8
Trade-Related Investment Measure (TRIM), 137–138
Transition countries, 266–267
U
United Nations Conference on Trade and Development (UNCTAD), 254
U.S. bilateral investment treaty program
basic aims, 253–254
fact sheet, 253
W
World Trade Organization (WTO), 20