the effect of treaties on foreign direct investment: bilateral investment treaties, double taxation treaties, and investment flows doc

Do Bilateral Investment Treaties Increase Foreign Direct Investment to Developing Countries?. Do Double Taxation Treaties Increase Foreign Direct Investment to Developing Countries?. Mor

direct investment: bilateral

investment treaties, double

taxation treaties, and

investment flows

direct investment: bilateral

investment treaties, double

taxation treaties, and

investment flows

edited by

karl p sauvant and lisa e sachs

1

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Library of Congress Cataloging-in-Publication Data

The effect of treaties on foreign direct investment: bilateral investment treaties, double

taxation treaties, and investment fl ows / edited by Karl P Sauvant and Lisa E Sachs.

p cm.

Includes bibliographical references and index.

ISBN 978-0-19-538853-4 ((hardback): alk paper)

1 Investments, Foreign—Taxation—Law and legislation 2 Double taxation.

3 Treaties I Sauvant, Karl P II Sachs, Lisa E

(Based on the Declaration of Principles jointly adopted by a Committee of the

American Bar Association and a Committee of Publishers and Associations.)

You may order this or any other Oxford University Press publication by

visiting the Oxford University Press website at www.oup.com

whom I wish every success in their lives

Karl

To my parents Jeffrey and Sonia—my best teachers and

my greatest inspiration

Lisa

Contributors xiForeword xxi

part ii: exploring the impact of bilateral investment

treaties on foreign direct investment flows

5 Do BITs Really Work?: An Evaluation of Bilateral Investment

Treaties and Their Grand Bargain 109

j e s w a l d w s a l a c u s e a n d n i c h o l a s p s u l l i v a n

6 Bilateral Investment Treaties and Foreign Direct

Investment: A Political Analysis 171

t i m b ü t h e a n d h e l e n v m i l n e r

7 Do Bilateral Investment Treaties Increase Foreign Direct

Investment to Developing Countries? 225

e r i c n e u m a y e r a n d l a u r a s p e s s

8 The Impact of Bilateral Investment Treaties on

Foreign Direct Investment 253

p e t e r e g g e r a n d m i c h a e l p f a f f e r m a y r

9 New Institutional Economics and FDI Location in

Central and Eastern Europe 273

r o b e r t g r o s s e a n d l e n j t r e v i n o

10 Do Investment Agreements Attract Investment?

Evidence from Latin America 295

13 Do Bilateral Investment Treaties Attract FDI?

Only a Bit And They Could Bite 349

m a r y h a l l w a r d - d r i e m e i e r

14 Do BITs Really Work?: Revisiting the Empirical Link between

Investment Treaties and Foreign Direct Investment 379

j a s o n y a c k e e

15 Bilateral Investment Treaties and Foreign Direct

Investment: Correlation versus Causation 395

19 The Impact of Endogenous Tax Treaties on Foreign Direct

Investment: Theory and Empirical Evidence 513

21 Tax Treaties for Investment and Aid to Sub-Saharan

Africa: A Case Study 563

a l l i s o n c h r i s t i a n s

22 It’s All in the Timing: Assessing the Impact of Bilateral

Tax Treaties on U.S FDI Activity 635

d a n i e l l m i l l i m e t a n d a b d u l l a h k u m a s

23 Do Double Taxation Treaties Increase Foreign Direct

Investment to Developing Countries? 659

e r i c n e u m a y e r

part iv: exploring the impact of tax and foreign investment treaties on foreign direct investment flows

24 The Effect of Tax and Investment Treaties on Bilateral

FDI Flows to Transition Economies 687

t o m c o u p é , i r i n a o r l o v a a n d a l e x a n d r e s k i b a

Selected Bibliography on Bilateral Investment Treaties

and Double Taxation Treaties 715

l i s a e s a c h s

Index 725

emma aisbett

Emma Aisbett is a lecturer at the Crawford School of Economics and Government and Research Fellow at the Economics Program of the Research School of Social Sciences at The Australian National University Recently graduated from the University of California at Berkeley, her research interests center on the ques-tion of how globalization can be harnessed to promote sustainable development Aside from her contribution to this volume, recent work has analyzed the sources

of debate concerning the impact of globalization on poverty and considered the effi ciency of the regulatory takings doctrine that is implied by the language of most bilateral investment treaties (BITs)

reuven s avi-yonah

Reuven S Avi-Yonah is the Irwin I Cohn Professor of Law and Director of the International Tax LL.M Program at the University of Michigan Law School He teaches courses on taxation, international taxation, corporate taxation, tax trea-ties and transnational law He has published numerous articles on domestic and

international tax issues, and is the author of International Tax as International

Law: U.S Tax Law and the International Tax Regime (2007) and U.S International Taxation: Cases and Materials (with Brauner and Ring, 2005) He holds a Ph.D

in History and a J.D from Harvard University He has served as consultant to the U.S Treasury and the Organisation for Economic Co-operation and Development (OECD) on tax competition issues and has been a member of the executive committee of the New York State Bar Association Tax Section and of the Advisory Board of Tax Management, Inc He is currently a member of the Steering Group of the OECD International Network for Tax Research and Chair

of the ABA Tax Section VAT Committee and an International Research Fellow

of the Oxford University Centre for Business Taxation

melissa b.l birch

Melissa B.L Birch is at the Fletcher School and the Global Development and Environment Institute at Tufts University Her expertise lies in the areas of eco-nomic and social development, environmental sustainability, and democracy, particularly in Latin America and the Caribbean In addition to research relating

to sustainable development, she has worked in education in Monterrey, Mexico, and in natural resource management and education in the United States She holds an M.A in International Relations and Environmental Policy from Boston University and is currently a doctoral candidate at the Fletcher School

bruce a blonigen

Bruce Blonigen is the Knight Professor of Social Science in the Economics Department at the University of Oregon and a Research Associate with the National Bureau of Economic Research He has research interests in empirically examining international trade issues from a microeconomic and political econ-omy perspective, especially with respect to multinational corporations and anti-dumping policies His research has been funded by the National Science

Foundation and published in such journals as the American Economic Review, the European Economic Review, the Review of Economics and Statistics, the Journal

of International Economics, and the Canadian Journal of Economics He also

currently serves as coeditor of the Journal of International Economics.

per-of noncountry actors in world politics He has also written about methodological issues, the politics of business confi dence, and European integration His work

has been published in the American Political Science Review, World Politics, Law &

Contemporary Problems, Governance, and other journals He is online at http://

www.buthe.info

allison christians

Allison Christians is an assistant professor of law at the University of Wisconsin Law School She received her J.D from Columbia University School of Law and her LL.M in Taxation from New York University School of Law Prior to joining the faculty of the University of Wisconsin Law School, she taught J.D and LL.M courses in federal and international income taxation at Northwestern University School of Law, and before that practiced tax law at the law fi rms of Wachtell, Lipton, Rosen & Katz and Debevoise & Plimpton in New York, where she focused

on the taxation of domestic and cross-border mergers and acquisitions; offs; restructurings and associated issues; and transactions involving private and public companies Her scholarly interests include foreign policy, globalization, competition, and development aspects of taxation

spin-tom coupé

Tom Coupé obtained his Ph.D from the Free University of Brussels in 2002 and has since been working in Ukraine, initially as assistant professor and currently as

director of the Kyiv School of Economics His research interests are labor economics, transition economics, economics of education, and political economy.

ronald b davies

Ronald B Davies received his Ph.D from the Pennsylvania State University in

1999 After spending nine years at the University of Oregon, he accepted a fessor position at University College, Dublin, in Ireland His research focuses on foreign direct investment, with a particular focus on the use of tax policy to manipulate the behavior of multinationals His work has been published in jour-

pro-nals such as American Economic Review, European Economic Review, Journal of

Public Economics, and Journal of International Economics.

john h dunning

John Dunning is an emeritus professor of international business at the University

of Reading, UK, and at Rutgers University He has been researching into the economics of international direct investment and the multinational enterprise since the 1950s He has authored, coauthored or edited forty-two books on this subject, and on industrial and regional economics His latest publications are a

book of essays, Globalisation at Bay, a two- volume compendium of his more

infl uential contributions to international business during the past 30 years

(Edward Elgar, 2002), and a newly edited volume on Making Globalization Good (Oxford University Press, 2003) The revised edition of his textbook Multinational

Enterprises and the Global Economy (with Sarianna Lundan), fi rst published in

1993, was published in July 2008 by Edward Elgar

peter egger

Peter Egger is a professor of economics at the University of Munich and head of the department at the Ifo Institute of Economic Research in Munich He is inter-ested in applied theoretical and empirical work in international trade and foreign direct investment More specifi cally, his research interests include the determi-nants of bilateral trade and foreign direct investment, the determinants of economic policy choice with regard to taxation, tariffs, and investment costs, the endogenous choice of fi rm organization, and the role of imperfect labor mar-kets for international trade and foreign investment He has published in

journals such as the Journal of Econometrics, Journal of International Economics,

European Economic Review, Journal of Applied Econometrics, and Journal of Urban Economics.

kevin p gallagher

Kevin P Gallagher is an assistant professor of international relations at Boston University, where he also serves as a Research Fellow at the Frederick S Pardee

Center for the Study of the Longer-Range Future He is the author of The Enclave

Economy: Foreign Investment and Sustainable Development in Mexico’s Silicon

Valley (with Lyuba Zarsky), and Free Trade and the Environment: Mexico, NAFTA, and Beyond, in addition to numerous reports, articles, and opinion pieces on trade

policy, development, and the environment He has been the editor or coeditor

for a number of books, including Putting Development First: the Importance of

Policy Space in the WTO and IFIs, International Trade and Sustainable Development,

and others He is also a research associate at the Global Development and Environment Institute of the Fletcher School of Law and Diplomacy and Tufts University, an adjunct fellow at Research and Information System for Developing Countries in Delhi, India, and a member of the U.S.-Mexico Futures Forum

as in many universities in Latin America He is a leading author on international

business in Latin America His latest book is Can Latin American Firms Compete?

(Oxford, 2007) He holds a B.A degree from Princeton University and a ate from the University of North Carolina, both in international economics He is

doctor-a Fellow of the Acdoctor-ademy of Interndoctor-ationdoctor-al Business

andrew t guzman

Andrew T Guzman is a professor of law and director of the International Legal Studies Program at Boalt Hall School of Law, at the University of California, Berkeley He holds a J.D and a Ph.D in economics from Harvard University He has written extensively on international trade, international regulatory matters, foreign direct investment and public international law, and served as editor on

the recently published Handbook of International Economic Law and authored

How International Law Works He is a member of the Institute for Transnational

Arbitration’s Academic Council and is on the board of several academic nals He has taught as a visiting professor at Harvard Law School, the University

jour-of Chicago Law School, the University jour-of Virginia Law School, Vanderbilt Law School, the University of Hamburg, and the National University Law School in Bangalore, India

mary hallward-driemeier

Mary Hallward-Driemeier is a senior economist in the Development Research Group of the World Bank She has published articles on fi rm productivity, the impact of the investment climate on fi rm performance and determinants of foreign direct investment She was the deputy director for the World Development Report 2005: A Better Investment Climate for Everyone She helped establish the World Bank’s Enterprise Surveys Program, now covering more than 70,000 enterprises in 100 countries She is also a founding member of the Microeconomics

of Growth Network She received her M.Sc in development economics from Oxford University as a Rhodes Scholar and received her Ph.D in economics from M.I.T.

abdullah kumas

Abdullah Kumas received his B.S in mathematics education from Bogazici University, Turkey, in 2000, his M.S in applied mathematics from Oklahoma State University in 2004, and his M.A in economics from Southern Methodist University (SMU) in 2006 He is now a fourth-year Ph.D student at SMU His research focuses mainly on international trade, applied econometrics, and labor economics

henry j louie

Henry Louie is an international economist in the U.S Treasury Department’s Offi ce of Tax Policy He joined the Treasury Department in 1996 His principle work areas encompass economic research, analysis of current law and legislative proposals relating to international taxation, and the negotiation of bilateral income tax treaties on behalf of the United States He represents the United States at the OECD’s working party that examines issues regarding the OECD Model Tax Convention He received his M.A in economics from Duke University

in 1995 and his B.A in 1990 from Georgetown University

andreas f lowenfeld

Andreas F Lowenfeld is Rubin Professor of International Law at New York University Law School, where he has been on the faculty since 1967 He has taught, practiced, and written in nearly all aspects of international law for more than fi ve decades and is frequently an arbitrator in international controversies, public and private He is the author of a major treatise on International Economic Law, as well as casebooks and textbooks on confl ict of laws and aviation law and

a series of teaching books on international economic law He was associate reporter of the American Law Institute’s Restatement (Third) of Foreign Relations Law, and coreporter of the Institute’s Project on International Jurisdiction and Judgments He is an elected member of the Institut de Droit International and

of the International Academy of Comparative Law He is a graduate of Harvard College and Harvard Law School

mario larch

Mario Larch is a researcher in the International Trade and Foreign Direct Investment Department at the Ifo Institute for Economic Research He has research interests in the theory of multinational fi rms and trade, international economics, economic geography, and spatial econometrics He has published

in such journals as the European Economic Review, the Canadian Journal of

Economics and the Journal of Comparative Economics.

the Editorial Council for the Journal of Environmental Economics and Management

His research focuses mainly on the empirical analysis of issues related to national trade, environmental quality, and schooling

inter-helen v milner

Helen V Milner is the B.C Forbes Professor of Politics and International Affairs

at Princeton University, the chair of the Department of Politics, and the director

of the Center for Globalization and Governance at Princeton’s Woodrow Wilson School She has written extensively on issues related to international trade, the connections between domestic politics and foreign policy, globalization and regionalism, and the relationship between democracy and trade policy Some of

her writings include The Political Economy of Economic Regionalism (coedited with Edward Mansfi eld, 1997), Internationalization and Domestic Politics (coed-

ited with Robert Keohane, 1996), “Why the Move to Free Trade? Democracy and

Trade Policy in the Developing Countries” (International Organization, 2005),

“Why Democracies Cooperate More: Electoral Control and International Trade Agreements” (coauthored with Edward Mansfi eld and B Peter Rosendorff,

International Organization, 2002), and “The Optimal Design of International

Institutions: Why Escape Clauses are Essential.” (coauthored with B Peter

Rosendorff, International Organization, 2001).

peter muchlinski

Peter Muchlinski is a professor in international commercial law at the School of

Oriental and African Studies, University of London He is the author of Multinational

Enterprises and the Law (Second edition, Oxford University Press, 2007) and is

coeditor (with Dr Federico Ortino and Professor Christoph Schreuer) of the Oxford

Handbook of International Investment Law (Oxford University Press, 2008) He acts

as an adviser to the United Nations Conference on Trade and Development (UNCTAD) on investment law issues He is corapporteur to the International Law Association Committee on the International Law on Foreign Investment and occa-sionally advises in international investment arbitrations

eric neumayer

Eric Neumayer is a professor in the department of geography and environment

at the London School of Economics and Political Science since 1998 Before, he was an academic assistant at the Centre for Law and Economics at the University

of Saarbrücken, Germany An economist by training, he is the coeditor of the

Handbook of Sustainable Development (with Giles Atkinson and Simon Dietz), the

author of Weak versus Strong Sustainability: Exploring the Limits of Two Opposing

Paradigms, Greening Trade and Investment: Environmental Protection Without Protectionism and The Pattern of Aid Giving: The Impact of Good Governance on Development Assistance, as well as numerous journal articles He has broad

research interests that all relate to evidence-based public policy

irina orlova

Irina Orlova is a 2005 graduate of Economics Education and Research Consortium M.A Program in Economics She is currently working with CASE Ukraine Her research interests lie in the areas of international trade, capital fl ows, and transi-tion economies

michael pfaffermayr

Michael Pfaffermayr is a professor of international economics in the Department

of Economic Policy, Economic Theory and Economic History at the University of Innsbruck, Austria He is managing editor of EMPIRCA, a CESifo Research Fellow and an International Research Fellow at the Oxford University Centre for Business Taxation His research interests include international and industrial economics, applied econometrics, and especially foreign direct investment as it relates to multinational fi rms and trade Currently, a major focus of his research

is international tax competition He has authored a number of publications

susan rose-ackerman

Susan Rose-Ackerman is the Henry R Luce Professor of Jurisprudence (Law and Political Science) and codirector of the Yale Law School’s Center for Law, Economics, and Public Policy She has held fellowships from the Guggenheim Foundation and the Fulbright Commission and was a Visiting Research Fellow

at the World Bank and a fellow at the Center for Advanced Study in the Behavioral

Sciences, Stanford, California She is the author of Corruption and Government:

Causes, Consequences and Reform, 1999 (translated into thirteen languages); From Elections to Democracy: Building Accountable Government in Hungary and Poland

(2005); Controlling Environmental Policy: The Limits of Public Law in Germany and

the United States (1995); Rethinking the Progressive Agenda: The Reform of the American Regulatory State (1992); and Corruption: A Study in Political Economy

(1978) She holds a B.A from Wellesley College and a Ph.D in economics from Yale University

taught part-time at George Mason University, George Washington University and the University of Hawaii at Manoa His main interests are applied microeco-nomics, international fi nance, and public fi nance

lisa e sachs

Lisa Sachs is the program coordinator at the Vale Columbia Center on Sustainable International Investment at Columbia University She received a J.D and a Master of International Affairs from Columbia in May 2008 Her academic research has focused on foreign investment, corporate responsibility, human rights, and economic development

jeswald w salacuse

Jeswald W Salacuse is Henry J Braker Professor of Law at the Fletcher School

of Law and Diplomacy at Tufts University He is the author of several books,

including most recently The Global Negotiator (2003), Leading Leaders (2006) and Seven Secrets for Negotiating with Government (2008) He is a member of the

Council on Foreign Relations and the American Law Institute and serves as president of an ICSID international investment arbitration tribunal

karl p sauvant

Karl P Sauvant is the founding executive director of the Vale Columbia Center

on Sustainable International Investment, Research Scholar and Lecturer in Law

at Columbia Law School, codirector of the Millennium Cities Initiative, and guest professor at Nankai University, China Before that, he was director of UNCTAD’s Investment Division He is the author of, or responsible for, a sub-stantial number of publications In 2006, he was elected an Honorary Fellow of the European International Business Academy He received his Ph.D from the University of Pennsylvania in 1975

alexandre skiba

Alexandre Skiba received his Ph.D from Purdue University in 2003 Since then,

he has taught at Purdue University, the University of Kansas, and the University of Wyoming His research focuses on empirical investigations of international trade

laura spess

Laura Spess is a Ph.D candidate in the Department of Geography at Pennsylvania State University Her current research focuses on intranational migration in the developing country context She has coauthored papers on poverty and fertility in developing countries and urban-rural differences in mortality among older adults in China

nicholas p sullivan

Nicholas P Sullivan is the author of You Can Hear Me Now: How Microloans and Cell Phones Are Connecting the World’s Poor to the Global Economy, and

the publisher of Innovations: Technology/Governance/Globalization He was a United Nations-accredited business interlocutor to the International Financing for Development conference He is a partner in the Global Frontier Fund, a private-equity fund of local funds in emerging markets, for which he compiles the annual Wealth of Nations Index, a ranking of 70 developing countries

A graduate of Harvard University and the Fletcher School of Law and Diplomacy,

he is currently a visiting fellow at the Feinstein International Center at Tufts and a visiting scholar at the Legatum Center for Development & Entrepreneurship

at Massachusetts Institute of Technology

deborah l swenson

Deborah L Swenson is a professor of economics at the University of California, Davis, and a research associate with the National Bureau of Economic Research Her research, which focuses on issues relating to the international location deci-

sions of global fi rms, has appeared in academic journals, including the American

Economic Review, Review of Economics and Statistics, Journal of International Economics, and Canadian Journal of Economics Much of her work involves empir-

ical analysis of foreign investment and outsourcing decisions that examine how the international differences in costs and policy environment affect the operat-ing choices of multinational fi rms She also investigates how multinational fi rms affect the global environment, by studying the impact of multinational fi rms on local economic performance and by studying the implications of multinational

fi rm behavior for international tax systems

len j trevino

Len J Trevino, Ph.D., holds the Gerald N Gaston Eminent Scholar Chair in International Business in The Joseph A Butt, S.J College of Business at Loyola University New Orleans His expertise lies in strategic management/policy, management of the multinational enterprise, global business strategy, foreign direct investment, and strategic management in emerging markets His research centers on the theory of the multinational enterprise, foreign direct investment, and the intersection of strategic management and international business He

has published in many top academic journals, including Journal of International

Business Studies, Management International Review, Journal of World Business, International Business Review, Journal of Labor Research, Business Horizons, and Transnational Corporations, among others He has consulted with such organiza-

tions as Dow Brands, Eli Lilly, Monsanto, and the United Nations Conference on Trade and Development

kenneth j vandevelde

After graduating from Harvard Law School in 1979, Kenneth J Vandevelde entered private practice in Washington, D.C In 1982, he joined the Offi ce of the Legal Adviser at the U.S Department of State, where his responsibilities included arbitration of investment claims before the Iran-United States Claims Tribunal

and the negotiation of bilateral investment treaties In 1988, he left the State

Department to teach and to write his book, United States Investment Treaties:

Policy and Practice Since then, he has published numerous articles on bilateral

investment treaties; has spoken about these agreements in Europe, Asia, Africa, and North and South America; and has served as a consultant on bilateral invest-ment treaties to the U.S Senate Foreign Relations Committee to foreign govern-ments and to counsel for private investors He currently is Professor of Law at Thomas Jefferson School of Law in San Diego, California, where he served as Dean from 1994 to 2005

hannes winner

Hannes Winner is professor of economics and public fi nance at the University

of Innsbruck He is also adjunct professor at the Free University of Bozen (Italy) In 2003, he was visiting professor at the European University Institute in Florence His fi elds of interest include public economics and economics of taxation, health economics, and econometrics He has published

Bolzano-in academic journals Bolzano-includBolzano-ing International Tax and Public FBolzano-inance, Regional

Science and Urban Economics and the Canadian Journal of Economics His current

research is on the empirical impact of taxation on international production and location decisions of multinational fi rms

jason yackee

Jason Yackee is an assistant professor of law at the University of Wisconsin He holds a Ph.D in political science from the University of North Carolina, Chapel Hill, and a J.D from Duke University School of Law His research centers on international investment law, international economic relations, foreign arbitra-tion, and administrative law His research on BITs and other topics has been published in a number of peer-reviewed journals and law reviews, including the

Journal of Politics, International Politics and the Duke Law Journal.

It would be tactless in a foreword to propose answers to the puzzle of bilateral investment treaties (BITs) and double taxation treaties (DTTs) Perhaps, though,

it is not inappropriate to pose some questions that may whet the appetite of the reader Although many questions about the diffusion and implications of these bilateral treaties are relevant to both BITs and DTTs, I focus on BITs, a topic on which many academic and policy discussions have centered

BITs (and investment dispute provisions in trade agreements, such as NAFTA) keep sprouting up—more than 2,500 as of the publication of this book Nevertheless, all efforts to reach agreement on a multilateral investment treaty (in the United Nations, in the Organisation for Economic Co-operation and Development, in the World Trade Organization, and elsewhere) have failed, even though the substantive provisions in the proposals read just like BITs How can this be explained?

A number of observers, including this writer, have reached for the conclusion that the common provisions of BITs—non-discrimination, open access for inves-tors, fair and equitable treatment, expropriation only for a public purpose and subject to full compensation, arbitration of investor-state disputes—now com-prise or refl ect the customary international law of foreign investment Is this persuasive? Or is there no such law, as shown by the failure to achieve a multi-lateral agreement? Note that the answer to this question is not just for the scholar, but becomes critical in dispute settlement A customary law of foreign invest-ment, or even of interpretation of similar BITs, would mean that arbitrators hearing a dispute between a Xandian investor and the state of Patria could (and should?) rely on (or at least be guided by) decisions involving treaties of Tertia, Quarta, Quinta, etc An opposite answer would make resolution of each dispute into a journey from square one

Why do developing countries in huge numbers enter into BITs and DTTs anyway? In some instances, the answer is clear When, in the early 1990s, President Carlos Menem saw the way out of Argentina’s doldrums to be privati-zation of state-run utilities and other monopolies, he needed foreign capital Foreign private capital, however, would come in only on the basis of a stable cur-rency linked to the dollar and a bilateral investment treaty with each potential investor’s home state When Mexico wanted to take part in the free trade arrange-ments between the United States and Canada, the anticipation of increased investment in Mexico to produce goods for the United States market depended

on a secure investment protection regime as a necessary component of the North American Free Trade Agreement But in other cases the answer is not so clear

Do BITs and DTTs actually attract foreign investment? Or is it true that absence

of an applicable BIT or DTT discourages potential investors? And how can one really tell? More broadly, is the presence or absence of a BIT really an indicator

of a good or bad investment climate, as stated, for instance, in the Convention Establishing MIGA, the Multilateral Investment Guarantee Agency sponsored

by the World Bank?

Many critics (not only in Latin America, but also in the United States and Canada) have pointed out that under a BIT and its analogues in free trade agree-ments, a foreign investor may enjoy greater legal protection than a domestic investor would U.S jurisprudence under the “just compensation” clause of the Fifth Amendment has a long and sometimes confusing tradition distinguishing between a “taking” (entitled to compensation) and an exercise of regulatory powers (generally not entitled to compensation) The Canadian constitution does not contain a property clause at all Most Latin American constitutions contain variations on the concept of the “social function of property.” Typically BITs contain a stricter form of protection for investors in case of expropriation or deprivation of operating rights than is available under the law or in the courts of the host state The answer of the proponents of BITs is that the criticism may be true, but the object of the exercise is precisely to give additional protection in order to encourage cross-border investment If, then, BITs are not supposed to

be neutral (as between domestic and foreign investment) can they nevertheless

be fair?

Finally, for this menu of appetizers, why do the industrial countries advocate for these treaties? To illustrate this trend, consider the fact that there are cur-rently 103 treaties for France, 83 for Italy, 147 for the Germany, 102 for the United Kingdom, and 48 for the United States.1

Policies are rarely one-dimensional, and my impression is that BITs have rarely been subject to serious debate in the developed countries Foreign invest-ment was accepted as a natural feature of major corporations, nearly all of which became multinational well before globalization swept across the planet If the business community wanted BITs and they did not cost much, why not employ them? But does not foreign direct investment encourage outsourcing, loss of domestic jobs, and a drain on the balance of payments? Can one justify BITs and DTTs on the basis that public sector foreign assistance (whether bilateral

or through the World Bank and regional development banks) does not work? Private investment, by contrast, is designed to bring what the public sector cannot bring: technology, management skills, and access to global markets Maybe foreign direct investment can act as a catalyst, contributing to a culture

of incentives and innovation that will lift a country out of poverty If so, by

1 Figures from ICSID The U.S total does not include NAFTA and Free Trade Agreements with Australia, Chile, Singapore, and others that contain chapters substan-tially replicating BITs

encouraging their corporations to invest in developing countries, can the trial countries justify their minimal commitment—0.47% of GDP for France and the United Kingdom, 0.36% for Germany, 0.28% for Japan, 0.22% for the United States—to public sector aid?2

indus-My task was to raise a few preliminary questions For answers—though not

necessarily the answers—I invite the reader to proceed to the main text.

Andreas F Lowenfeld

2 Figures from The Economist, Pocket World in Figures, 2008 Edition.

The critical role of foreign direct investment (FDI) in global economic growth and development is by now widely recognized In addition, the activities of mul-tinational enterprises (MNEs) are acknowledged as some of the most dynamic components of the international division of labor Over the past two decades, policy makers have increasingly come to appreciate that FDI is crucial to a coun-try’s economic success Past institutions and government strategies restrictive to FDI infl ows have generally given way to those geared toward attracting and retaining such resource transfers These have included several waves of invest-ment liberalization, an increasing variety of investment incentives, and addi-tional protections for foreign investors This volume focuses on these institutions and, more specifi cally, on the extensive network of bilateral investment and tax

treaties that have emerged over the past two decades Inter alia, and in the light

of global economic events, such measures have both upgraded the standards of treatment toward foreign investors and created new legal processes to protect their rights

The burgeoning number of bilateral investment treaties (BITs) and double taxation treaties (DTTs) also refl ects the changing nature of inbound foreign investment fl ows, and the locational decisions of MNEs Whereas, in the past, sitings of foreign direct investments were primarily determined by resource endowments and the size and structure of local and adjacent markets, today’s locational decisions are far more complex Government policies and institutions have become increasingly important relative to the traditional economic funda-mentals, especially for FDI from and to the advanced industrialized countries For this reason, host economies seeking to attract inbound MNE activity are increasingly focusing their attention on improving the investment environment

by adopting domestic institutions and policies that favor FDI, concluding national investment agreements, guaranteeing certain standards of protection, and providing favorable tax treatment for foreign investors With the growing signifi cance of these investment agreements—some 5,000 BITs and DTTs have been signed so far—it is time to evaluate whether, and in what ways, these treaties have had a positive impact on attracting the kind of FDI infl ows sought

inter-by host countries

The present volume sets out a comprehensive and impressive collection of studies from the past decade on the impact of BITs and DTTs on FDI fl ows As the editors note in the Introduction, the debate has been lively and varied, but is,

as yet, inconclusive The contributions in this volume illustrate some of the

dif-fi culties in identifying and evaluating the numerous factors that infl uence FDI

fl ows, including the specifi c impact of bilateral treaties Nevertheless, the debate

about the effect that BITs and DTTs have on FDI remains relevant and tant, especially as host countries incur sovereignty costs and risk costly arbitra-tion in their attempts to attract and retain foreign direct investment While this volume will not provide the reader with defi nitive answers on the roles of BITs and DTTs, it does bring together the most important studies on this issue It is therefore an essential resource for those who wish to understand this particular debate.

impor-By placing their signifi cance and contents in historical and economic tive, the editors’ Introduction gives a helpful and concise introduction to BITs and DTTs Rather than attempting to extract a simplifi ed conclusion from the varied studies, they provide a useful overview of the key issues related to invest-ment agreements and FDI fl ows Importantly, the studies that follow include contributions from leading economists, legal scholars, and political scientists, who frame the debate from multiple angles and highlight its contextual complex-ity In my opinion, this volume will be extremely useful for policy makers, practi-tioners, the investment community, political scientists, economists, international investment lawyers, and, indeed, all those interested in the fi eld of foreign direct investment and the role of MNEs in international relations

perspec-John H Dunning

l i s a e s a c h s a n d k a r l p s a u v a n t

In the past two decades, foreign direct investment (FDI) has been spurred by the widespread liberalization of the FDI regulatory framework, combined with advances in information and communication technologies and competition among firms Most countries have opened themselves to foreign investment, improved the operational conditions for foreign affiliates and strengthened stan-dards of treatment and protection In fact, virtually all countries now actively encourage FDI, as it can bring capital, technology, skills, employment, and market access Investment promotion strategies include the establishment of Investment Promotion Agencies (IPAs), the offering of incentives, the preparation and dis-semination of investment guides, and, notably, the conclusion of international investment agreements, especially bilateral investment treaties (BITs) and double taxation treaties (DTTs) For countries, the basic purposes of concluding BITs and DTTs are, respectively, to assure investors that investments will be legally protected under international law and to mitigate the possibility of double taxation

of foreign entities and, in this manner, to help increase FDI inflows

Whether BITs and DTTs do indeed affect the flow of FDI has been studied and debated for the past decade This volume brings together published studies, updated articles and original pieces from that period dealing with that subject matter Its focus is on BITs and DTTs because these (and especially the former) are the principal international investment agreements (IIAs), that is, instruments that, in a significant manner, address investment issues.1 While the focus of this

∗ The authors wish to thank José Alvarez, Reuven Avi-Yonah, Andrea Bjorklund, Dali Bouzoraa, Olivier De Schutter, Lorraine Eden, Susan Franck, Mark Kantor, Luke Peterson, Lauge N Poulsen, Jeswald W Salacuse, Jan Peter Sasse, Christoph Schreuer, Kenneth Vandevelde, and Christopher Wilkie for their very helpful comments and clarifications Thanks are also due to Hamed El-Kady and Masataka Fujita for providing extensive data,

to Matthew Beck for creating the graphs and tables, and to Matthew Quint, Chryse Bautista and especially Michael O’Sullivan and Kimmie Lathana for their instrumental assistance

in preparing this volume Finally, we wish to thank the publishers of the reprinted papers included in this volume for their permission and assistance Any errors or omissions are

of course those of the authors

1 IIAs also include a number of bilateral free trade agreements with substantial ment chapters and regional and multilateral instruments on investment; studies of the effect

invest-of these agreements on FDI flows are not covered in this volume, although the number invest-of

compendium is on the impact of BITs and DTTs on FDI flows, the chapters in the first section of this volume discuss the general nature of these agreements to facilitate the understanding of the subject matter; additional materials are listed

in the bibliography The present overview looks briefly at current FDI trends and their salient features, provides a general introduction to BITs and DTTs, and summarizes the findings of the studies contained in this compendium as to the impact of these agreements on FDI flows

A FDI Trends and Characteristics

The IMF and OECD define direct “foreign investment” as cross-border ment made by a resident entity in one economy (the “direct investor” or “multi-national enterprise”) with the objective of establishing a lasting interest in an enterprise resident in an economy other than that of the direct investor (the “for-eign affiliate”).2“Lasting interest” implies the existence of a long-term relation-ship between a direct investor and a foreign affiliate, and a significant degree of influence on the management of the latter A minimum stake of 10% of the ordinary shares of an enterprise is generally regarded as being the minimum threshold for a foreign investment to be classified as a direct investment for sta-tistical purposes.3 FDI is typically measured in either inflows or stocks “FDI

invest-inflows” refer to the capital provided by a foreign investor to a foreign affiliate (equity, loans, reinvestment earnings), while “FDI stocks” are the total value of foreign-owned assets at a given time

Over the past twenty years, FDI inflows have expanded substantially, from approximately $40 billion at the beginning of the 1980s, to $200 billion in 1990,

to some $1.5 trillion in 2007 (Figure 1) Cross border mergers and acquisitions (M&As) are the principal drivers of this growth, as they are the main form of FDI

in the developed world and an increasingly important one in emerging markets.4

countries covered by them rivals that of countries covered by BITs and DTTs For a survey

of studies of the impact of the NAFTA investment chapter, see José Alvarez, “The NAFTA’s

Investment Chapter and Mexico,” in Rudolf Dolzer, Matthias Herdegen and Bernhard

Vogel, eds Foreign Investment: Its Significance in Relation to the Fight Against Poverty, Economic Growth and Legal Culture (Berlin: Konrad Adenauer Stiftung Foundation, 2006),

p 253

2 OECD, Detailed Benchmark Definition of Foreign Direct Investment (Paris: OECD, 1996), third edition, and International Monetary Fund, Balance of Payments Manual

(Washington: IMF, 1993), fifth edition

3 It should be noted that the definition of “investment” in BITs is typically much broader and includes “everything of economic value, virtually without limitation,” in order

to ensure flexibility in the BIT’s application Calvin Hamilton and Paula Rochwerger,

“Trade and investment: foreign direct investment through bilateral and multilateral ties,” 18 N.Y Int’l L Rev 1 (2005), p 12

trea-4 In this overview, developed countries are members of the OECD, excluding the Republic of Korea and Mexico Economies in transition are the former Socialist countries,

The value of the global inward FDI stock is expected to climb to about $14 trillion

by the end of 2007 (Figure 2) There are more than 80,000 multinational enterprises (MNEs) globally, with more than 800,000 foreign affiliates.5 The developed countries attract the lion’s share of world FDI flows (nearly two-thirds

in 20076), with Asia being the most attractive region among emerging markets (Figure 3) Some two-thirds of world FDI inflows, and half of FDI inflows in developing countries, are in services.7

except if otherwise noted, and developing countries are all remaining countries Emerging markets are economies in transition and developing countries combined These categories

vary slightly among different sources, so the data may reflect slight variations in country classifications Similarly, the studies of the impact of BITs and DTTs included in this volume may employ slightly varied categorizations

5 UNCTAD, World Investment Report 2007: Transnational Corporations, Extractive Industries and Development (New York and Geneva: United Nations, 2007), p 218.

6 Laza Kekic and Karl P Sauvant, eds., World Investment Prospects to 2011: Foreign Direct Investment and the Challenge of Political Risk (London: The Economist Intelligence

Unit, 2007), p 6 (table 1)

7 As of 2005 UNCTAD, World Investment Report 2007: Transnational Corporations, Extractive Industries and Development (New York and Geneva: United Nations, 2007), p xvi.

Source: UNCTAD, World Investment Report 2007: Transnational Corporations,

Extractive Industries and Development (New York and Geneva: United Nations, 2007),

p 3, and Laza Kekic and Karl P Sauvant, eds., World Investment Prospects to 2011: Foreign Direct Investment and the Challenge of Political Risk (London: The Economist

Intelligence Unit, 2007)

∗ FDI inflow projections for 2007–2011 are derived from data in World Investment

Prospects, whose regional definitions vary slightly from World Investment Report data.

(trillion us dollars)

Developed economies Emerging markets

Global FDI flows over the next few years will depend on the principal FDI determinants The regulatory framework, on balance, will most likely remain favorable, with a further liberalization of FDI laws and regulations and the strengthening of the international investment law system; however, there are signs of a backlash against FDI that make the regulatory framework less wel-coming in a number of countries.8 Investment promotion, too, will continue, although countries may shift toward a more targeted approach Finally, in light

of the turmoil in financial markets and the effect this may have on the real omy, economic growth—the principal FDI determinant—may decrease sub-stantially or even turn negative in key economies, negatively affecting FDI flows Current estimates are that this combination of factors will mean that such flows will remain at a plateau of about $1.4–$1.6 trillion in the next few years, with the caveat that the current economic turmoil does not turn into a widespread recession.9

econ-Twelve of the top 20 FDI recipients are developed countries, with the top 20 accounting for three-quarters of world FDI inflows The United States is the lead-ing recipient and will likely retain its dominant position in 2007–2011 (Table 1) However, FDI into the EU as a whole is significantly higher than inflows into the United States, and the EU will continue to outstrip the United States as a host region for such investment.10 Among emerging markets, concentration also

8 Karl P Sauvant, “Regulatory risk and the growth of FDI,” in Kekic and Sauvant,

op cit., p 71.

9 Kekic and Sauvant, op cit., p 6.

10 These data include intra-EU flows—that is, FDI flows from one EU country to another If intra-EU flows were excluded from the calculation, FDI inflows to the United States would exceed inflows to the EU

Source: UNCTAD (http://stats.unctad.org/fdi/), and Kekic and Sauvant, op cit.

∗Inward FDI stock projections for 2007–2011 are derived from data in World

Investment Prospects which varies slightly from World Investment Report data.

Source: Kekic and Sauvant, op cit.

remains relatively high, with the top ten recipients accounting for 55% of all inflows to emerging markets in 2006 China was by far the main FDI host among emerging markets in 2006 (Figure 4), with almost 6% of the global total, and is expected to rank behind only the United States and the United Kingdom

in 2007–2011

While the vast majority of FDI flows emanate from developed countries, panies from emerging markets (mostly in Asia) are increasingly becoming important players in the world FDI market An estimated 20,000 MNEs are now headquartered in emerging markets (Figure 5), and outward FDI flows from these economies rose to approximately $210 billion in 2006, or 17% of the global total (Table 2) The stock of this investment amounts to an estimated $1.8 tril-lion.11Until relatively recently, most FDI flows from emerging markets took the form of South-South investment But MNEs from these economies have also in more recent years undertaken some large, high-profile acquisitions in developed countries that have attracted considerable attention The rise of multinationals from the South—especially those of state-controlled entities (including sover-eign wealth funds)—is feeding rising protectionist and nationalist sentiment in parts of the developed world, which makes it all the more important to keep the development of emerging-market outward FDI in perspective Despite the increase in these FDI flows in recent years (likely to be boosted further by

com-11 UNCTAD, World Investment Report 2007, op cit., p 255 Note that this value is based

on a different dataset from the values for FDI flows, and the classification of “emerging economies” may vary slightly

Source: Laza Kekic, “Global foreign direct investment to 2011,” in Kekic and Sauvant,

investments by sovereign wealth funds), they are still dwarfed by investment originating in the developed world.

B International investment agreements

As countries increasingly opened their doors to FDI in the 1980s and 1990s, they simultaneously entered into numerous international investment agree-ments, leading especially to an explosion in the number of bilateral investment treaties (BITs) and bilateral double taxation treaties (DTTs) (Figure 6)

1 Bilateral investment treaties The FDI surge during the past few decades

has been accompanied by a similar growth of international investment ments Pride of place among these agreements belongs to BITs—treaties that seek to protect and promote foreign investment To put the evolution of BITs

agree-Source: UNCTAD, World Investment Reports 1993, 2003, and 2007 Annex tables.

into a historic context, Kenneth Vandevelde (Chapter 1) traces the history of such agreements He distinguishes three eras of BIT development (Colonial Era, Post-Colonial Era, Global Era), and describes how investment agreements have been shaped by the political, economic and legal contexts of each period He also discusses broadly the evolution of the content of BITs as well as the legal enforce-ability of their substantive provisions, and articulates several current develop-ments that may herald a fourth era in their development.

By the end of 2006, 2,573 BITs had been signed,12 most of them since 1990

In fact, from 1959 (when the first BIT was concluded between Germany and Pakistan) until the end of 1989, only 386 BITs had been signed; more than 2,000 BITs were entered into in the following 15 years By the end of 2006, 177 countries had entered into one or more bilateral investment treaties (UNCTAD has the best database of BITs, available on its website at http://www.unctad.org/iia.) While BITs were originally signed overwhelmingly between developed and developing countries, developing countries now routinely sign investment trea-ties with other developing countries (and economies in transition) Indeed, 680 BITs had been signed between developing countries by the end of 2006, consti-tuting 27% of the stock of BITs (Figure 7) The economies with the most BITs are led by Germany, China, and Switzerland (Figure 8)

12 J Zhan, J Karl and J Weber, “International investment rule-making at the ning of the 21st century: stocktaking and options for the way forward,” in José Alvarez and

begin-Karl P Sauvant, with Kamil Gérard Ahmed, eds., The Future of International Investment Law and Policy (forthcoming).

Source: UNCTAD, World Investment Report 2007, op cit., p 17.

27

40 10

7

13

3

Between developing countries

Between developed and developing countries

Between developing countries and South-East Europe & Commonwealth of Independent States Between developed countries

Between developed countries and South-East Europe & Commonwealth of Independent States Between countries of South-East Europe and Commonwealth of Independent States

Source: www.unctad.org/iia.

135 119 114 103 100 100 98 91 86 84

0 20 40 60 80 100 120 140 160 Belgium and Luxembourg*

Republic of Korea

Netherlands

France Italy Egypt United Kingdom

Switzerland

China Germany

In addition to the conclusion of new BITs, countries are increasingly tiating existing treaties; there have been 121 renegotiated treaties by June 2008.13Some countries are renegotiating treaties due to changed circumstances, such as

renego-to bring existing BITs in line with commitments under other investment ments (for instance when the Central European countries acceded to the EU in 2004), or to add or update certain provisions, such as dispute settlement clauses Although most BITs provide for tacit renewal upon their expiration, some coun-tries are renegotiating expired BITs to amend host-country commitments or to clarify existing provisions While many renegotiations are intended to strengthen investor protections, some renegotiated BITs narrow investor protections—at least in some respects.14 An increasing number of BIT renegotiations is expected

agree-in the comagree-ing years, as many BITs with a duration of ten to thirty years were signed in the 1990s

BITs only become legally binding instruments when they enter into force Although the signing of a BIT may have some legal consequences for host coun-tries under international law, this act does not “establish legally binding obliga-tions of the latter vis-à-vis the foreign investors.”15 Some BITs stipulate that the agreement enters into force upon the signature of both parties Most BITs, how-ever, require each party to complete the domestic requirements necessary for the BITs’ entry into force, for instance the ratification by a national parliament and the notification of ratification to the treaty partner By the end of 2005, 76% of all BITs signed until that point had entered into force; this share partly reflects the time lag due to relatively complicated domestic ratification processes The share

of BITs in force increases with respect to earlier BITs; for instance, more than 90% of the BITs signed in the first half of the 1990s have entered into force.16BITs are agreements between two sovereign states From the point of view

of the capital-importing country, their basic purpose is to help to attract FDI

13 UNCTAD Research Note, “Recent developments in international investment ments,” UNCTAD/WEB/ITE/IIT/2005/1, available at: http://www.unctad.org/sections/dite_dir/docs//webiteiit20051_en.pdf

agree-14 Examples of the former are the extension of the prohibition of performance ments and the strengthening of transparency provisions; examples of the latter are clari-fication concerning regulatory takings and fair and equitable treatment

require-15 “The entry into force of bilateral investment treaties,” IIA Monitor, No 3 (2006),

UNCTAD/WEB/ITE/IIA/2006/9, p 4 (“Before a treaty enters into force, contracting parties have a general obligation to refrain from acts that would defeat the object and

purpose of the agreement See Article 18 of the Vienna Convention on the Law of Treaties.”)

In addition to the international law obligation not to defeat the object and purpose of a treaty that a country has signed but not yet ratified, a country’s domestic law (or policy) may well be to give that obligation effect by providing an investor a right to challenge a law that an investor argues violates the “object and purpose” of a signed but unratified BIT

16 “The entry into force of bilateral investment treaties,” IIA Monitor, No 3 (2006),

UNCTAD/WEB/ITE/IIA/2006/9

From the point of view of the capital-exporting country, the basic purpose of BITs is to protect investors from political risks and instability and, more gener-ally, safeguard the investments made by its nationals in the territory of the other state.17 This is why, originally, they were concluded primarily between developed and developing countries, as the former were virtually the only sources of FDI, and the latter were seen as often having risky and volatile business environ-ments Some of the more recent BITs, especially those with the United States and Canada, go further than protecting investors’ rights and require the liberal-ization of certain aspects of the FDI regime of a host country, for example by including provisions of national and most-favored-nation treatment at the estab-lishment phase of an investment18 or by prohibiting host country governments from imposing certain performance requirements on foreign investments.19Peter Muchlinski (Chapter 2) provides an overview of the principal substan-tive and procedural provisions of BITs The substantive rights typically include a guarantee of prompt, adequate, and effective compensation for expropriation, freedom from unreasonable or discriminatory measures, a promise of “fair and equitable treatment” for foreign investments, guaranteed national and most-fa-vored-nation treatment for investments, and assured full protection and security

of investments Together, these provisions are meant to boost investor dence and the transparency of the policy environment As mentioned, a number

confi-of more recently concluded BITs have expanded these rights somewhat to cover

a wider range of host country activities in detailed and complex ways A number

of these provisions limit the regulatory flexibility of host countries to pursue not only economic development policies but other public policies as well However, recent BITs also place somewhat greater emphasis on certain public concerns, including health, the environment, national security, labor rights, and transpar-ency in information exchange and rulemaking

While BITs are largely similar in their substantive content and structure, recent innovations in their provisions have led to greater variation In particular, three broad approaches seem to be emerging: the liberalization approach, used mostly by the United States, Canada, Japan and the Republic of Korea (and some other Western Hemisphere countries); the protection approach, mostly followed

by European countries; and the more qualified protection approach, used mostly between developing countries One notable difference is that the liberalization approach extends national treatment and most-favored-nation obligations to the

17 It should be noted that investments can also be protected through specific ments between host country governments and foreign investors, or state contracts These can be found especially in the natural resource sector

agree-18 Most of these treaties have, however, reservations that restrict the applicability of such clauses

19 Tom Ginsburg, “International substitutes for domestic institutions: bilateral investment treaties and governance,” 25 Int’l Rev of L & Econ 107, at 108 (2005)

pre-establishment phrase of investment, while the two other approaches tionally cover only the post-establishment phase Additionally, the recent U.S and Canadian model BITs clarify the meaning of, inter alia, the provisions on the minimum standard of treatment and regulatory takings, following lessons learned in recent NAFTA litigation, whereas the European BITs have not yet adopted these clarifications BITs between developing countries are quite similar

tradi-to the European BITs, but they often put more emphasis on exceptions and include clauses requiring the contracting parties to choose between litigation in the host country or in an international tribunal in case of a dispute.20

The procedural rights, one of the novel and noteworthy features of modern BITs, afford investors an adjudicatory mechanism to enforce substantive rights.21Typically, investors can choose between arbitral panels at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID), arbitration

at another designated forum22 or ad hoc arbitration proceedings (especially UNCITRAL) This dispute settlement provision provides investors a remedy for unlawful or uncompensated actions by host states that affect their investments, usually without having to exhaust local remedies first before resorting to interna-tional arbitration The designation of a third-party arbitration process frees inves-tors from reliance on the political and judicial processes of host countries (which they often consider—rightly or wrongly—as being insufficient), and gives them direct access to protection under international law If the proceeding is con-ducted under the ICSID Convention, the arbitration process is beneficial for the respondent state because it eliminates the possibility of diplomatic protection by the investor’s home country While the ICSID Convention (Article 36.1) provides that both host country governments of contracting states and investors of con-tracting states can initiate investment-dispute settlement proceedings, BITs limit such initiation to investors.23

There were only a handful of internationally arbitrated investor-state putes in the 1980s and early 1990s; however, by the end of 2007, 290 known international treaty-based arbitration cases had been initiated, involving at least

dis-20 UNCTAD, “South-south cooperation in international investment arrangements,” UNCTAD/ITE/IIT/2005/3 (New York and Geneva: United Nations, 2005) Available at: http://www.unctad.org/en/docs/iteiit20053ch2_en.pdf

21 Most BITs have arbitration provisions, particularly the most recent ones; however, some do not, and some allow for very limited investor-state arbitration

22 Other institutions available for arbitration include the ICC Court of Arbitration in Paris, the Stockholm Chamber of Commerce Arbitration, the London Court of International Arbitration, and various regional arbitration centers

23 All treaty-based investment arbitration requires the consent of both parties Host countries consent to treaty-based investment disputes in the dispute settlement clause of the BIT; since investors are not parties to BITs, BITs cannot constitute the investors’ con-sent An investor’s consent is embodied in its claim, so no consent exists until the investor has filed a claim, at which point most BITs allow the host-country to file a counter-claim

seventy-three countries—fifteen developed countries, forty-four developing countries, and fourteen economies in transition.24 Over three-quarters of these cases had arisen since the beginning of 2002, and close to two-thirds of them were filed with ICSID (or the ICSID Additional Facility) (Figure 9).25 Argentina has by far faced the highest share of claims filed at ICSID, most of which stem from its government’s emergency measures during the 2001 financial crisis At least forty-six cases had been brought against Argentina for violating investment treaty protections, with twenty arbitrations brought in 2003 alone Almost all treaty-based investment disputes are disputes brought by investors against host countries; the only known exception is a 2003 dispute between Chile and Peru, brought by Peru against Chile after a Chilean firm filed an investor-state claim against Peru.26 These proceedings have alleged treaty violations in response to a

24 UNCTAD, IIA Monitor, No 1 (2008) There are also higher estimates See the

“Investment Treaty News: Year in Review 2006,” http://www.iisd.org/pdf/2007/itn_year_review_2006.pdf For a discussion of the reasons for this rise in investment disputes,

see Jeswald W Salacuse, “Explanations for the increased recourse to treaty-based

invest-ment dispute settleinvest-ment: resolving the struggle of life against form?”, in Karl P Sauvant

with Michael Chiswick-Patterson (eds.), Appeals Mechanism in International Investment Disputes (New York: Oxford University Press, 2008).

25 The total number of investor-state arbitration proceedings is not known because ICSID is the only institution that publicly provides a list of cases UNCTAD, “Investor-state disputes and policy implications,” TD/B/COM.2/62 (Jan 17, 2005), available at http://www.unctad.org/en/docs/c2d62_en.pdf It appears that, in 2006, there were more non-ICSID cases than ICSID cases See the “Investment Treaty News: Year in Review 2006,” http://www.iisd.org/pdf/2007/itn_year_review_2006.pdf

26 Lucchetti S.A and Lucchetti Peru S.A v Republic of Peru, ICSID Case No ARB/03/4 There were a few other ICSID cases brought by states against investors; how-ever in those cases, the basis of jurisdiction was not a treaty but a contract between the

Source: UNCTAD, IIA Monitor, No 1 (2008).

ICSID Non-ICSID All cases cumulative