Bilateral Investment Treaties and Domestic Institutional Reform

The bilateral investment treaties (“BITs”) signed between developed and developing countries are supposed to increase the flow of investment from the former to the latter. But the evidence indicates that the existing approach of guaranteeing special protections for foreign investors has only a modest impact on luring their dollars. At the same time they are failing to produce meaningful benefits, these treaty commitments create substantial costs for the host States that make them, exposing them to liability and constraining their regulatory authority. Given this state of imbalance, the time seems ripe for a new approach, but existing proposals for revising BITs are either insufficient or unrealistic, or in some instances even counterproductive.

This Article calls for a fundamental redesign of BITs based on empirically validated premises about how host States actually attract foreign investment. Political science and economic studies show that foreign investors place substantial weight on the quality of domestic institutions. Existing BITs fail to promote investment because they are not an adequate substitute for these institutions, nor are they effective in generating reform. The proposed model would make domestic institutional reform the organizing principle of BIT design, and the Article offers several specific provisions that would help achieve that goal. Such an approach would produce immediate benefits for host States and so should be particularly attractive to developing countries. But the institutional reform model also retains the end goal shared by both sides of increasing foreign investment and so should be more realistically attainable than proposals pitched as benefiting developing States alone.

55 Colum. J. Transnat'l L. 547