The Economics of BITs

Abstract

Bilateral Investment Treaties are the cornerstone of international investment law. While empirical research indicates that BITs can increase foreign investment to the signatory state, the economic analysis of law has so far only barely been applied to BITs. The decisive question in this context is why BITs function given that international law is weak and lacks a supranational authority with coercive power. Further, how do litigation costs, damages, reputational concerns etc. impact the economic functioning of BITs? Which countries can actually utilise BITs to attract investment? This chapter will attempt to answer these and similar questions and proceeds as follows: after discussing the perceived weakness of international law (section 4.1), the empirical literature on the impact of BITs on FDI will be reviewed (section 4.2). The burgeoning research approach of international law and economics will be introduced (section 4.3) and the main findings of this method will be applied to international investment law (section 4.4). Special focus will be given to the commitment and signalling properties of BITs. These properties will be checked against the existing empirical research on the topic (section 4.5). Section 4.6 discusses the main results and concludes.