Do Enforcement Provisions Promote Investment? New Evidence from a Natural Experiment in the Investment Treaty Network

Abstract

Many developing countries are considering curtailing enforcement provisions available to investors in bilateral investment treaties (BITs). This change will likely benefit developing countries by restoring a portion of their sovereign autonomy, but perhaps at the cost of a decline in foreign investment. To evaluate whether and how the strength of the enforcement provisions in a BIT affect foreign investment I introduce a new comprehensive database that contains provision level information for over 2,500 BITs. I also identify a natural experiment that endowed some investors with new and stronger enforcement provisions through an unanticipated application of the “most favored nation” principle. I present robust evidence that stronger enforcement provisions do not lead to more investment. I also present suggestive evidence that imposing these provisions on a host economy may lead to a decline in investment as it reacts to its increased exposure to arbitration and tightened constraints on its regulation of foreign capital.