Do Bilateral Investment Treaties Actually Promote Foreign Direct Investment?

For as long as I can remember, arbitration lawyers have repeated – like a mantra – the proposition that bilateral investment treaties are a positive influence on foreign direct investment.??I wondered, however, whether there was any evidence to back that up?

For at least the first two decades of my career, if I ever brought up the topic of bilateral investment treaties with my clients, it was invariably met with a blank, quizzical expression.??Yet these people I was talking to were typically senior executives whose roles included actually making foreign direct investments.??So if BITs actually promoted FDI, you would expect them to have at least heard about them.??Yet almost none of them had.??As a matter of fact, in the three large international firms where I practiced law, most of my corporate partners at the time knew virtually nothing about these treaties either.??To say they were considered esoteric at that time would be an understatement.

I contrast this to double taxation treaties.??Virtually all of my clients had heard of those, and many of them structured their entire portfolio to take advantage of them.??In a marked contrast to BITs, you would hear clients, particularly in the finance departments, talk at length about taxation treaties and how they could be utilised.??(That was my turn to have a blank, quizzical expression on my face.) My corporate colleagues in my law firms were also very familiar with them.

All of this is anecdotal, I admit.??And I will also admit that in the third decade of my career, I did near the occasional reference to BITs or ISDS when speaking with clients.??Some awareness of BITs does appear to have seeped into the global consciousness.??But I thought that I would do a little more digging.??I looked at some academic literature, and – how to put this – the results are mixed.??The table below is reproduced from an excellent 2016 article by N. Bhasin & R. Manocha,?Do Bilateral Investment Treaties Promote FDI Inflows, Evidence from India.??Of the eight academic studies referenced, some conclude that BITs do attract FDI, some conclude that they do not, some offer no categoric conclusion, one way or the other.

I then came upon this graph in a 2003 article by M. Hallward Driemeier of the World Bank, which seemed to support some sort of correlation between BITs and FDI.

However, Ms. Hallward Driemeier concluded that this was not sufficient evidence of a correlation and concluded in fact the BITs do not necessarily attract additional FDI.

So then I decided to do a little research on Ireland, where I am from.??Why???Because since the 1980s, Ireland has attracted a great amount of FDI.??For the bulk of that period, however, it had no BITs at all.??In 1996, it signed its only BIT with the Czech Republic, which was never an important source of inward FDI to Ireland.?That single BIT has been terminated.??And yet look at the graph below. It is strikingly similar to the chart for the OECD contained in the Hallward Driemeier article.

Ireland FDI Growth

So, if Ireland, with its educated workforce and investor-friendly legal and tax environment can attract FDI without any BITs (or with one relatively unimportant one), does that mean that we need to look behind the chart for the OECD above; or at least conclude that FDI growth might not be wholly due to BITs??

All of this matters because as public opinion about ISDS turns negative, our arguments about the benefits of BITs need to get better; more precise.??Those arguments need to be evidence based if they are to persuade an increasingly sceptical, and sometimes even hostile audience. I would love to hear from any of you that have some better data or evidence that you would like to share on this issue.?????????