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Evaluating Three Explanations for the Design of

Bilateral Investment Treaties
Todd Allee and Clint Peinhardt
World Politics / Volume 66 / Issue 01 / January 2014, pp 47 - 87
DOI: 10.1017/S0043887113000324, Published online: 29 December 2013

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How to cite this article:
Todd Allee and Clint Peinhardt (2014). Evaluating Three Explanations for the Design
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Evaluating Three
Explanations for the design
of Bilateral Investment


HE rise of preferential economic agreements is one of the major

developments in international relations in the late twentieth and
early twenty-first centuries, and one that shows few signs of slowing
down. Economic giants such as the United States and the European
Union continue to negotiate preferential trade agreements (ptas) with
countries across Africa, Asia, and Latin America. Likewise, bilateral
investment treaties (bits) have become hugely popular, with states
worldwide signing between fifty and one hundred such agreements
annually. Although ptas typically attract the most attention from the
media and politicians, bits are far more commonplace and their myriad
potential effects are significant.1 Although bits have existed for more
than half a century, only recently have they attracted their fair share
of scholarly attention. Despite a recent wave of bit scholarship, these
treaties are oversimplified in the extant literature and their motivations
remain poorly understood.
Empirical research typically treats ptas and bits as undifferentiated
and employs simple, dichotomous variables to capture such treaties.2
Common research questions emphasize either the causes of these
*For helpful comments on various versions of this article we thank Christina Davis, Kris Miler,
Thomas Prusa, Todd Sandler, Beth Simmons, the World Politics editors and reviewers, and participants
at the first annual conference on the Political Economy of International Organizations and the Niehaus Center for Globalization and Governance Workshop on the Politics of Preferential Trade Agreements. We also thank Richard Laird, Masaki Nakamoto, Kacem Ayachi, Alex Fit-Florea, and Anca
Turcu for their excellent research assistance.
See Simmons 2014 for a more complete discussion and assessment of the treaties intended and
unintended consequences.
See Dr, Baccini, and Elsig forthcoming for a useful discussion in the context of the pta literature.
World Politics 66, no. 1 ( January 2014), 4787
Copyright 2014 Trustees of Princeton University
doi: 10.1017/S0043887113000324


w o r l d p o li t i c s

black boxed agreements (who signs them?) or the consequences of

having one (do they affect future economic flows between signatories?).
Recently, a variety of trade scholars, including Bthe and Milner in
this symposium, have begun to acknowledge that ptas vary in important ways, culminating in ongoing efforts to identify and explain the
institutional diversity in ptas.3 Yet the existing empirical literature on
bits continues to treat these investment agreements as homogenous,
despite strong reason to believe otherwise. In fact, scholars who study
bits frequently acknowledge that the treaties probably vary in ways
that have not been identified. As Hallward-Driemeier notes, (t)oo
much attention has been placed on whether or not a bit exists than on
the strength of property rights actually being enshrined in these agreements.4 Thus, bit scholars should accelerate efforts to follow their pta
brethren and pinpoint important areas of variation across investment
treaties and probe the causes and consequences of this variation.5
Upon closer inspection, we find that bits vary in several ways, particularly with regard to their important dispute-settlement provisions.
Therefore, a first major contribution of this article is to identify and
systematically code important areas of variation across the treaties. We
emphasize differences in provisions for settling disputes between investors and governments; put differently, we examine the procedures
in each bit for enforcing the obligations enshrined in the treaties. bits
specify varying options for dispute settlement, including international
arbitration, which may or may not be automatically evoked or tied to
permanent international institutions. These dispute-settlement procedures are commonly identified by legal scholars as among the most important aspects of the treaties, particularly given historical antagonism
between the North and South over fdi, as well as the size and notoriety
of recent arbitration awards. Indeed, the strongest of these provisions
leads directly to the contentiousness and pushback described by Simmons in her contribution to this symposium. And for their part, Bthe
and Milner show that ptas that include such provisions can generate
greater fdi inflows for signatories.6 All in all, many vibrant contemporary debates over bits as well as over ptas stem from the presence or
absence of certain dispute-settlement provisions in the agreements.
For example, Bthe and Milner 2014; Dr, Baccini, and Elsig forthcoming; Hicks and Kim 2012;
Jo and Namgung 2012; see also Smith 2000.
Hallward-Driemeier 2003, 3. See also Neumayer and Spess 2005.
On the former, see Allee and Peinhardt 2010; on the latter, see Allee and Peinhardt 2012; Peinhardt and Allee 2011; and Simmons 2014.
Simmons 2014; Bthe and Milner 2014.

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A second major contribution, which produces several important insights, is our articulation and testing of three rationalist theoretical explanations for this treaty variation. We draw upon literatures that are
widely embraced but theoretically muddled (credible commitment),
as well as upon those that are established but largely untested (the
rational design project) to devise three plausible, generalizable explanations for why bits vary in important ways. Despite the increasing
appreciation that preferential economic agreements vary, we still lack
a clear theoretical understanding as to why this variation exists, despite the presence of potentially promising arguments about credible
commitment, state power, and rational design. As we argue shortly,
bits represent a particularly good laboratory in which to apply these
theoretical concepts and advance our understanding of the design of all
types of international agreements.
Ultimately, empirical tests using our original data reveal strong support for the theoretical perspective that emphasizes the bargaining
power of capital-exporting statesin ways that recast credible commitment arguments in the direction of power politics. The emerging
account is that capital-exporting states desire stronger treaties, often
because of the preferences of domestic actors, leading them to push for
these more enforceable treaties with all treaty partners. The resulting
treaty often includes strong arbitration provisions due to the formers
considerable bargaining power, thereby cementing a so-called credible commitment to respect fdi. Interestingly, we find no evidence that
investment-seeking treaty partners with the greatest need to include
stronger investor protections, due to poor reputations or weak domestic institutions, end up signing stronger treaties. Thus we reject the
common hands tying micrologic, which predicts that states with the
most severe credibility problems will bind themselves to treaties with
stronger investor protections. Instead, the explanation for treaty design
resides squarely within the preferences and power of home states and
not the varying conditions in the heterogeneous host states, almost
all of whom end up having their hands tied for them. This central role
for the preferences and power of capital-rich states also casts serious
doubt on the largely unsupported rational design perspective, which
discounts the identities and preferences of the states that sign the treaties and instead emphasizes structural conditions and abstract cooperation problems they jointly face.


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The Emergence and Importance of BITs

After decades of antagonism between wealthy states that invest abroad
and developing countries that receive fdiand in the face of failed,
multilateral attempts to regulate fdibits have arisen as the dominant
way in which states regulate cross-border investment. Dating back to
the early twentieth century, a major global cleavage has existed between
capital-exporting states such as the United States and much of the developing world.7 Developing countries evoked the Calvo Doctrine,
which purportedly legitimized their right to seize foreign assets as
needs dictated and to address investors alleged grievances in domestic
courts. In contrast, capital-exporting states pointed to customary international law and evoked the Hull Rulein reference to comments
by US Secretary of State Cordell Hull in 1932which demanded
prompt, adequate, and effective payment in the event of a taking. A
broader consensus on the mutual benefits of fdi began to take hold in
the last quarter of the twentieth century, yet no overarching mechanism arose to govern fdi multilaterally. The wto engaged with investment during the Uruguay Round, yet none of the four resulting subagreements that touched on fdi broke any new ground.8 More notable
was the ambitious Multilateral Agreement on Investment (mai), devised by members of the Organization for Economic Cooperation and
Development (oecd), which unraveled in the mid-1990s.9
Without clear multilateral agreement, bits became the predominant method of regulating fdi. The first bit was signed in 1959, and
in the following decades a few dozen bits were concluded each year.
By the 1990s, however, bits had escalated in popularity. Since 1990,
between fifty and one hundred new bits have been signed annually.
A recent estimate from the United Nations Conference on Trade and
Development (unctad) now puts the total number of bits worldwide
at 2,833.10 Approximately 180 countries have signed at least one bit,
with countries as diverse as China, Egypt, Germany, and South Korea
being among the most prolific signers.
As noted earlier, bits have attracted a swell of research interest. The
dominant question is whether bits are economically beneficial, that is,
whether they generate greater fdi for signatories, which is the treaties explicit goal. Research to date on this important question returns
See Guzman 1998; Lowenfeld 2008, 46994.
For example, Low and Subramanian 1996; Sauv 1994.
Graham 2000; Henderson 1999.
unctad 2012, xx.

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decidedly mixed findings.11 Some empirical studies identify significant

positive effects for bits on fdi, although these effects often apply only
in certain environments.12 Other studies find no or only weak effects
of bits on fdi and instead conclude that other macrolevel determinants
are stronger predictors of foreign investment.13 We are agnostic on
this question of the ultimate economic effects of the treaties and suspect that divergent findings can be traced in part to differences across
studies in terms of research design, model specification, and timing.14
A second, less investigated question is why governments sign bits.
Elkins, Guzman, and Simmons emphasize various diffusion mechanisms that result from competition for capital among developing countries.15 Jandhyala, Henisz, and Mansfield emphasize similar dynamics,
but identify various waves of treaty signing.16 Our study shares more in
common with this latter groups emphasis on the treaties origins and motivations, yet we examine variation across important components of the
treaties, whereas all of the aforementioned studies treat bits as uniform.
Bilateral investment treaties contain a number of important elements that have been singled out by scholars of investment law. bits
establish the terms under which investment takes place and provide
important substantive and procedural guarantees to investors. The substantive guarantees in the treaties, such as fair and equitable treatment,
national treatment, and most-favored-nation status (mfn), all address
important issues. But these elements are fairly standard across treaties.17 By contrast, the procedural guarantees, which spell out how the
substantive guarantees will be enforced, differ considerably from treaty
to treaty. They specify the various permissible courses of action for resolving any disputes that might arise between investors from one signatory and the government of the other.
Indeed, how future disputes between investors and hosts will be resolved has emerged as perhaps the central issue in bits, as it often is
For an excellent survey of the literature to date, see Sauvant and Sachs 2009.
See Allee and Peinhardt 2012; Egger and Pfaffermayr 2004; Neumayer and Spess 2005; Salacuse
and Sullivan 2005.
See Hallward-Driemeier 2003; Tobin and Rose-Ackerman 2011; unctad 1998.
Some studies examine dyadic effects of bits while other studies focus on broader, country-level
effects (see Bthe and Milner 2009 for a discussion). Another distinction is whether studies examine
the effects of US bits only (Salacuse and Sullivan 2005), a broader cross-national sample (Egger and
Pfaffermayer 2004; Hallward-Driemeier 2003; Neumayer and Spess 2005), or perhaps both (Tobin
and Rose-Ackerman 2011). Furthermore, some studies focus on signed bits, others focus on ratified
bits, and still others compare both signing and ratification (Egger and Pfaffermayr 2004; Haftel 2010).
Elkins, Guzman, and Simmons 2006.
Jandhyala, Henisz, and Mansfield 2011.
Lowenfeld 2009; Muchlinski 2009. Muchlinski 2009, 47, for instance, argues that most bits
include fair and equitable treatment clauses, with rare exceptions among African and Asian treaties,
and that national treatment is likewise included in the vast majority of investment treaties.


w o r l d p o li t i c s

in ptas and other types of agreements. International treaties generally share a common contracting problem: how can states ensure that
the pledges enshrined in the agreement will be upheld by the parties?
Treaties that allow third parties to resolve disputes can raise the ex post
costs of noncompliance, with the World Trade Organizations disputesettlement mechanism serving as the most prominent example from
a multilateral regime.18 Even with the shift toward more bilateral and
regional agreement making, treaty clauses on dispute settlement remain important. In fact, the earliest forays into exploring variation in
ptas focused on dispute-settlement provisions, a trend that continues
in more recent scholarship.19 Given historical antagonism over fdi, it
is not surprising that treaty clauses governing the settlement of investment disputes have been identified as a central component of bits.20
For the first time in history, bits allow foreign investors, to varying degrees, to utilize international legal institutions to directly challenge the
legality of host state actions.
Identifying Important Variation across BITs
Legal scholars increasingly acknowledge that dispute-settlement
clauses within bits have multiple subcomponents and can vary considerably.21 Therefore, a major contribution of this study is to investigate
and code multiple aspects of treaty variation in this important area.
In particular, we consider the number of dispute-settlement options
that exist, what types of arbitration venues are available, and whether
signatories consent in advance to have disputes taken to international
The first variable we code captures whether the two states agree in
advance to settle disputes through international arbitration. Having
both state parties preconsent to international arbitration whenever a
dispute arises speeds up the dispute-resolution process and limits the
accused states ability to stall. The contrasting situation is when the
parties (a foreign investor and the host state) must agree on the course
of action for settling any disputes that arise and must submit to the
authority and jurisdiction of a particular dispute-settlement body. The
need to obtain such ex post consent and determine jurisdiction on a
dispute-by-dispute basis, with the default being that a dispute will be
Bagwell and Staiger 2009.
See Smith 2000; Jo and Namgung 2012.
Dolzer and Stevens 1985; Franck 2007a; Franck 2007b; Sauvant and Sachs 2009; Sornarajah
2000; Vandevelde 1992.
See Franck 2007a; Franck 2007b.

d es i g n o f b i l at er a l i n v es t m en t t r e at i es


addressed by legal institutions in the host state, creates the potential for
delay and battles over jurisdiction.
A second variable captures the number of venues specified in the
treaty for the handling of future investment disputes. In addition to
domestic courts in the host state, which is an ever present option, more
than a dozen international arbitration venues can be specified as disputesettlement options. These options range from ad hoc arbitration using
rules devised by the United Nations Commission on International
Trade Law (uncitral) to arbitration through standing bodies such as
the International Centre for the Settlement of Investment Disputes
(icsid), the Permanent Court of Arbitration, or one of several regional
arbitration centers in places such as Cairo, Stockholm, and Singapore.
Different bits specify different options from among this list. All else
equal, the more venues that are specified, the more options are available
to investors for effectively addressing their claims.
A third and final variable captures the fact that some arbitration
venues are more institutionalized than others. icsid, for instance, is
a permanent arbitration institution that has state delegates, a permanent staff, and a strong enforcement system. Regional arbitration centers possess most of these same features of institutionalization, all of
which should make enforcement more efficient and awards easier to
obtain. By contrast, other arbitration options are far less institutionalized and instead rely heavily on the states to formulate rules and to collect awards. Most notably, a substantial number of treaties allow for ad
hoc arbitration, in which case the states must often decide on rules for
selecting arbitrators, objection, compensation, and award procurement
only after the dispute arises.22
Drawing on the preceding discussion, we produce an original data
set that codes nearly fifteen hundred bits based on these three important components. The first step is to assemble all available treaty texts
for bilateral investment treaties signed between 1959 and 2006.23 Our
collection of bit treaty texts includes all treaties available for download
via the unctad Investment Instruments Online archive, the primary
entity for systematically collecting and publishing the texts of bits; we
supplement those with other treaties assembled from country-specific
On the distinction between institutionalized and ad hoc arbitration, see Slate 1996.
Although bits have been signed with regularity since 1959, with five to fifteen new treaties
signed each year from the early 1960s until the late 1970s, the majority of bits in our sample come
from the late 1980s through the early 2000s. There is a slight uptick in bit signing throughout the
1980s and a more notable uptick in 1991. The number peaks in the mid-to-late 1990s, with approximately one hundred new treaties entering our data set annually from 1994 to 1998, followed by a
modest drop in the subsequent decade.


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sources.24 A second important step is to translate and code all of the treaties that are available only in non-English languages (Arabic, French,
German, Italian, Spanish, Portuguese, and Russian). The resulting data
set contains 1,473 translated (as needed) and coded treaties, from nearly
all of the countries in existence during the past half-century.25 Although
there are treaties for which we could not obtain the treaty texts, the countries and treaties in our data set are quite heterogeneous, as discussed in
the following paragraph, and the collections of identified and missing
treaties mirror one another with only one exception.26
The data set includes a total of 170 countries and thus produces a
diverse collection of treaty pairings. In terms of the capital-exporting
countries in the data set, various European countries are preeminent, although non-European countries such as the United States and South
Korea maintain a strong presence (see Table 1a). Other, often regional,
players also are notably present, with countries such as Kuwait, Singapore, and Thailand represented a dozen or more times.27 The capitalimporting countries in the data set are a particularly diverse group,
crossing various geographic regions and income classifications. Among
the most common treaty signatories on this side are China, Egypt, Bulgaria, Vietnam, Pakistan, and Lithuania (see Table 1b). Putting these
two together, we see treaties that cover a wide spectrum of dyads. Approximately one-quarter of treaties are between roughly balanced equals,
one-quarter are highly asymmetric, and about half reflect varying, more
moderate differences between the two signatories (see Table 1c).
Using this data set we produce operational variables for the three bit
design elements discussed earlier, which later serve as the three primary
dependent variables in our empirical tests. The first variable, Preconsent
to International Arbitration, captures whether the two signatory states
agree to automatically submit future investor-state disputes to international arbitration. Just over two-fifths of bits contain such language
The unctad database on international investment agreements contains by far the most comprehensive collection of treaty texts. We also utilized state-level archives from governments such as the
United States ( to supplement the unctad collection.
In total, we were able to identify and code the text of nearly 60 percent (1,473) of the 2,599 bits
in existence at the end of 2006.
We compare our independent variables across two sets of bits: those for which we have the text
of the treaty and those that we know exist but for which we do not have the text. For nearly all control
variables used in our analyses, the differences across samples are neither statistically nor substantively
significant. Only one variable, the percentage of worldwide multinationals located in the home country, differs notably across the coded and uncoded samples. In this case, the value of the variable is
greater for the coded treaties; this likely reflects that fact that treaty texts from oecd members such
as the United States and prominent European countries (see Table 1a) are typically never missing.
Note that some countries, such as Thailand, China, and Turkey, enter into our data set as home
countries in some treaties but host countries in others due to the relational nature of our data.

Table 1
Countries in Our BIT Design Data Set
Home Countries (Capital Exporters)

# of Treaties

Germany (inc. West Germany)

Netherlands 88
France 85
Switzerland 83
United Kingdom
South Korea
Belgium 54
Finland 45
Sweden 45
Austria 44
United States
Italy 41
Host Countries (Capital Importers)

# of Treaties

China 55
Egypt 37
Romania 31
Pakistan 29
Bulgaria 28
Hungary 28
Vietnam 27
Russia 23
Turkey 22
Lithuania 22
India 22
Morocco 21
Ratio between Home Country
and Host Country in Terms of





Gross Domestic Product

Correlates of War Composite
Index of Capabilities
(CINC score)

1.78 to 1

8.89 to 1

47.8 to 1

525.3 to 1

1 to 1.81

2.68 to 1

12.6 to 1

137.9 to 1


w o r l d p o li t i c s

providing advanced consent (see Table 2).28 A second variable, Number

of Dispute-Settlement Options, measures how many venues for international arbitration are provided for in the treaty. Across all coded treaties this variable ranges from 0 to 4. The most common outcome is for
treaties to specify one or two options for international arbitration, with
both categories occurring roughly 40 percent of the time (see Table 2).
A third variable, Institutionalization of Arbitration, captures the degree
to which arbitration may occur through an institutionalized arbitration venue, which should lead to swifter and more effective arbitration,
ceteris paribus. We generate a three-category variable that takes a value
of 2 if the treaties allow for some type of institutionalized arbitration,
1 if the treaty allows for ad hoc arbitration only, and 0 if it allows for
neither.29 Most treaties provide an institutionalized arbitration option,
although a notable number of treaties allow for only ad hoc arbitration
or neither form. Descriptive statistics for all three variables are presented in Table 2.
Although these three variables are important on their own and distinct from one another, one could think of them collectively as reflecting the overall degree to which the treaty can be effectively enforced.30
Therefore, in our empirical tests we also explore them collectively by
creating a composite variable that captures the Overall Enforceability of
each bit. To do so, we utilize a straightforward method of combining
the three variables into a single indicator, which ranges from 0 to 3 and
in which each component is given equal weight. The Institutionalization of Arbitration and Number of Dispute-Settlement Options variables
are divided by two and four respectively, to convert them into a 0 to 1
scale, and then added to the Preconsent to International Arbitration variable, which takes its original 0 or 1 form. The resulting Overall Enforceability variable has a median of 1.5 and a mean of 1.69 (see Table 2).
Theoretical Explanations for BIT Design
With important features of the treaties identified and coded, we turn
to the question of what might explain this variation. A second major
There is a slight temporal pattern, in that in the period before 1990 only 29 percent of treaties
included preconsent (as compared with 40 percent across all years), yet the pre-1990 treaties account for
less than one-fifth of total observations.
Logically, both the number of arbitration options and thus the likelihood of institutionalized
arbitration go up slightly over time as new arbitration venues emerge. To address this we include
controls for time in our empirical tests.
Indeed, the variables are positively correlated, although only one pairwise correlation is above
.25. Number of dispute-settlement options and institutionalization of arbitration are correlated at .54.

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Table 2
Variation across BIT Provisions
to Arbitration

Number of Treaties




Number of
Dispute-Settlement Options







Institutionalization of Arbitration



Number of Treaties

Number of Treaties

Overall Enforceability

0 .75 1 1.25 1.5 1.75 2 2.25 2.5 2.75 3

Number of Treaties

73 134 13 200 348 117 16 285 209 48 16

goal of this study is to formulate and test theory-driven predictions for

variation in international economic agreements in ways that are applicable not only to bits but also to ptas and other agreements. We believe it is important to test coherent theoretical explanations for treaty
design, and not just introduce large numbers of potentially relevant
variables to improve model fit. Indeed, international agreement making, particularly on foreign investment, is a topic on which established
theoretical ideas should be highly useful. There exist well formulated
theories, in both the realist and rational design research programs,
that should apply. Moreover, existing scholarship on fdi typically portrays bits and ptas as credible commitment devices, so the need to
establish added credibility in the treaties might also be a prime motivation in how they are designed.
Three different theoretical perspectives, all of which utilize a rationalist logic, are identified as promising explanations for variation across


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investment treaties. Each is considered separately as a possible explanation for bit design.31 The first two approaches stem from credible
commitment explanations for fdi, but they prioritize different sides
of the treaty pairing and rely upon distinct logics. The first of these
relies most directly on arguments about the need for host states to use
bitsand accordingly, the contents of bitsto establish credibility
about respect for inward investment. The second approach incorporates general, realist-oriented arguments to emphasize the bargaining
power and preferences of influential, capital-exporting states as determinants of bit design. The final theoretical framework draws on the
well established, but rarely tested, literature on the rational design of
international institutions to emphasize the nature of the cooperation
problems facing the signatories as predictors of treaty design.
Credibility-Based Explanations
The first two theoretical explanations share a common starting point,
which is the endemic credible commitment problem that historically
has plagued fdi. Before any investment is made, potential investors
from the home country have considerable bargaining leverage over
those host states that seek to attract investment. But once the investment is made and costs are sunk, leverage shifts to the host government, which then may face domestic incentives to renege on promises
or change the terms of investment. This creates a commitment problem that plagues both sides: a host government cannot credibly commit
ex ante to respecting investment over the long term, and investors may
be hesitant to invest in the first place because they cannot determine
ex ante the host governments true commitment to respect investment
into the future. Signing investment treaties, particularly if they contain
many of the design elements that are the focus of this article, is a way to
address this credible commitment problem. In fact, nearly all existing
research on the possible effects of bits portrays the treaties, regardless
of their contents, as some type of credible commitment device.32 Yet
one crucial point is that bits vary, and thus some treaties generate more
credibility than others, as Bthe and Milner similarly point out in their
study of pta credibility.33 As a concept, credibility is also notoriously
vague, something that Bthe and Milner also acknowledge.34 Thus, in
We realize that some overlap among the theories is unavoidable, yet each of these theories reflects broader scholarship in the field and deserves individual consideration.
For example, Bubb and Rose-Ackerman 2007; Bthe and Milner 2009; Egger and Pfaffermayr
2004; Haftel 2010; Hallward-Driemeier 2003; Kerner 2009.
Bthe and Milner 2014.
Bthe and Milner 2014n10.

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trying to explain bit design from the popular credibility perch, an important requirement is to define it and to determine who pushes for it
and who benefits from it.
Both the tying hands and power and preferences approaches build on
the inherent asymmetry within bits. The overwhelming majority of
bits are signed by a clearly identifiable host country that seeks to attract
fdi and a home country that will be the source of that investment.35
As noted above, establishing credible commitments to respect investment is in the interest of both parties. The tying hands explanation for
bit design puts the focus squarely on host countries and posits that
those host countries with the greatest credibility problems will tie their
hands the tightest by including the strongest enforcement provisions
in bits. By contrast, the power and preferences approach emphasizes
the varying degrees to which some home governments will insist on
stronger investment protections in bits, regardless of the host-country
treaty partner, as well as on their greater relative ability to achieve these
tying hands

According to the tying hands approach, the inclusion of certain enforcement provisions in bits is driven by host states that want to tie
their own hands in order to more firmly establish a credible commitment to respect foreign investment. For our purposes, this may entail either granting advanced consent to international arbitration in
the event a dispute arises or specifying that investors from the home
country will have access to various institutionalized arbitration options. The inclusion of these investor-friendly elements is a deliberate,
self-interested maneuver that is intended to mollify investor concerns
about states with particularly severe credibility problems. As such, according to this hands-tying explanation, variation in bit design stems
from differences from one host state to another. Those with the largest
credibility problems, perhaps stemming from weak domestic political
institutions, weak rule of law, or a governments poor reputation, are
most likely to include stronger provisions in their bits. By contrast,
host states without such credibility problems have far less need to tie
their hands, since their higher quality institutions or solid reputations
alleviate any worries investors might have.
See also Elkins, Guzman, and Simmons 2006. Even in bits between developing countries, which
represent less than one-quarter of all bits in existence (unctad 2009), one country is often the clear
source of investment, as China is in its bits with various less developed countries.


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Put simply, if the host has a particularly strong need to convey its intent to respect fdi, it is more likely to sign treaties that contain elements
to strengthen enforceability, including preconsent clauses and multiple,
institutionalized enforcement options. Such hand tying will correspond
to the severity of the credibility problem in the host-state bit signatory.
Therefore, the overarching tying hands proposition is as follows:
TH proposition. Bilateral investment treaties are more likely to include
provisions that enhance enforceability, such as preconsent clauses, institutionalized arbitration, and multiple dispute-settlement options, when the
credible commitment problem in the host state is most severe.

More specifically, we expect such hand tying if the host has poor-quality
legal institutions, few constraints on the ability of leaders to break contracts, and a past history of expropriation. It is the presence of these
types of features, then, that should predict bit design.
We thus generate and include in empirical tests three tying-hands
variables that should explain important variation across the treaties as
a function of the severity of the hosts credible commitment problem.36
The first measure is whether political executives in the host country are
relatively free to pursue any course of action they choose, such as expropriating, or whether their power is checked by other domestic political
institutions. The presence of legislative or other actors who constrain
political executives can increase the credibility of a states commitment
to respect fdi by reducing fears that an executive will change course
and engage in some type of expropriation. Absent such internal checks,
those countrys bits should include the stronger design features. As a
result, Heniszs political constraints indicator (Political Constraints on
Executive) is included as a first variable.37
Similarly, poor domestic legal institutions can exacerbate the commitment problems inherent to a bit and lead to greater hand tying.
Host states with powerful legal institutions can more credibly convey
to investors that the rule of law will be respected and that recourse to
international arbitration will not be needed. In sharp contrast, weak
legal institutions in host states exacerbate the commitment problem.
Such situations are more likely to lead the host to tie its hands via
international arbitration, since pursing claims through domestic legal institutions in the host is not a viable option for foreign investors.
Therefore, a second tying-hands variable, the International Country
All three explanatory variables are included in the tests, since they are conceptually distinct and
are not highly correlated (the greatest bivariate correlation among these variables is .19).
Henisz 2006.

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Risk Groups (icrg) measure of law and order in the host, is employed
to capture the quality of legal institutions in the host state.38
A third and final variable reflects that in the fdi context, the commitment problem is exacerbated when the host bit signatory has expropriated assets in the past or violated the terms of similar investment
treaties. This type of negative past reputation for engaging in takings
should also lead to greater hand tying by those states via stronger enforcement provisions in their treaties. The host states recent history of
expropriation, measured over the past five years, serves as the operational indicator of this logic.39
Given the strong conceptual focus on the host state, clear coding
rules are devised to identify the host state among each pair of bit signatories, in accordance with the theoretical logic. The primary rule is
to select the country with the smallest gdp per capita as the host.40
Because this coding rule produces a few peculiarities, we use a series of
theoretically informed secondary coding rules to refine the classification of gdp per capita; this, then, results in a reversal of the ordering in
fewer than 1 percent of treaties.41 None of our estimated findings are
sensitive to this reclassification.
power and preferences

Like the tying hands explanation, the power and preferences approach
emphasizes the inherent asymmetry in bits and builds, albeit less directly, on the credible commitment logic. In this case the emphasis is
firmly on the home state of the bit pairing: its desire to include stronger enforcement provisions in bits and its ability to incorporate them
successfully. The capital-exporting member of the bit pairing typically
will prefer to include in its bits stronger enforcement provisions to
protect the interests of its investors. This is particularly true when there
prs Group 2007. The prs/icrg measure of law and order only covers the period from 1982 to
2006. Although only 10 percent of bits in our sample are signed before 1982, the exclusion of these
cases would cause us to lose data on all bits from earlier time periods. Therefore, for all prs/icrg variables we extend values from 1982 to any earlier missing years, although this decision does not affect
the significance of any of our primary findings.
Data on expropriations come from Kobrin 1987; Minor 1994; and personal correspondence.
This ordering is justified on empirical grounds, since the median gdp per capita for the host state
among the bits in our data set is $1,286, while the comparable number for home states is more than
twelve times higher at $16,285. All gdp data are expressed in constant US dollars (in this case constant
2000 US dollars) and are taken from World Development Indicators (wdi).
The following rules are used to determine reordering: (1) a non-oecd state is considered the
host in a bit with an oecd state, (2) smaller economies (defined as a state with less than one-fifth the
aggregate gdp of the other) are treated as host states, provided that their gdp per capita is no more
than three times that of the other state, and (3) in cases where the two gdp per capita values differ by
less than one-third, the state with the smaller aggregate gdp is treated as the host state, provided that
its aggregate gdp is less than one-half that of the other state.


w o r l d p o li t i c s

are domestic economic actors that strongly prefer such provisions, as

well as a government that is also oriented toward these interests. A
primary distinguishing feature of the power and preferences approach
is the irrelevance of the credibility problem within the host state. The
home states preferences are not contingent on the characteristics of
the host state; the home government consistently pursues its universal
design preferences, and the resulting treaty typically conforms to its
wishes, provided that its relative bargaining power is sufficient.
The starting point for this perspective is the long-standing emphasis
on power politics within international relations. Recent literatures have
emphasized that powerful states exert a major influence on the composition and functioning of international organizations. One sees this
in international regulatory regimes,42 supranational institutions that
govern money and trade,43 the workings of the United Nations Security Council,44 and lending decisions of the International Monetary
Fund.45 One would therefore also expect to see the preferences and
power of major states reflected in the bits they sign.
bits, and the terms within them, are particularly susceptible to global
power dynamics. For one, most treaties are signed by pairs of states in
which one state is to some degree more powerful than the other (see
Table 1c). Like ptas, they are driven by capital-rich states that choose
with whom they want to sign the agreements. Because they may be
competing for capital, potential host states are eager partners, despite
the fact that the treaties could be detrimental.46 All of this means that
bit negotiations are likely to occur on terms set by the home state. Its
ability to obtain favored objectives should increase when it is clearly
more powerful than the treaty partner. Only in selected cases when the
power dynamics are not so pronounced should we see treaties that do not
reflect the wishes of the capital-exporting state within the pairing.47
In terms of preferences, all else equal, home-state governments will
prefer bits to include multiple, strong options for enforcing the treaties.48
Drezner 2007.
Gruber 2000.
Thompson 2010a.
For example, Copelovitch 2010; Stone 2004.
Elkins, Guzman, and Simmons 2006; Guzman 1998; Simmons 2014; Swenson 2005.
In the 1980s, for instance, the US bit with strategic ally Turkey contained weaker enforcement
provisions than a dozen other bits it signed with other partners at that time (see Vandevelde 1992,
Simmons notes that industrialized countries have begun to rethink this preference, yet we believe this assertion holds in our study for two reasons: (1) our temporal coverage ends in 2006, before
this recent rethinking, and (2) industrialized countries in our data set are always capital exporters that
are signing treaties with capital-importing states, since we eliminate the small number of treaties between pairs of advanced industrial countries.

d es i g n o f b i l at er a l i n v es t m en t t r e at i es


They will want to ensure that their investors have recourse in the event
that conditions change or that disputes arise. The best way to do so is
to include in the treaty elements such as preconsent clauses, multiple
options for enforcement, and the ability to utilize institutionalized arbitration venues. As real-world evidence of these preferences, consider
that most oecd countries have model bits that reveal their preferences and serve as a template for treaty bargaining. These model treaties typically include advanced consent to arbitration and provide for
arbitration through permanent arbitration institutions.49 Even though
these governments devise new model bits every few years, their preferences for these enforcement provisions are quite stable.50
Home governments have strong, logical reasons to prefer the inclusion of each of these clauses. These preferences stem from the fact that
investors from home states are almost always the claimants in disputes.
As Simmons notes, this private right of standing is a unique, investorfriendly arrangement. It is aided significantly when the treaty includes
preconsent to international arbitration, which removes a key obstacle to
jurisdiction and lowers hurdles to obtaining third-party disputes settlement. Home governments also will view the inclusion of institutionalized arbitration as being in their interest. Under ad hoc arbitration the
parties still must navigate most aspects of the case, such as choice of
law, rules for selecting arbitrators, objection, compensation, and award
procurementall of which lead to a decrease in procedural efficiency
and security.51 In contrast, when centralized options are available, litigating investors benefit from established rules, quality control, basic
administrative support, management of the proceedings, selection of
arbitrators, facilities, award enforcement, and legal support.52 Notably,
a more centralized venue like icsid greatly enhances enforcement once
awards are rendered, since it has a built-in enforcement mechanism:
awards have the force of a domestic court judgment, there is no domestic review, and annulment is highly unlikely.53 Finally, the specification
of multiple possible venues for arbitration is highly desirable for home
governments, since it allows their aggrieved firms to forum shop for
the venue that best serves their interests.54 Forum shopping is an integral part of firms legal strategy in investment disputes, since different venues present advantages and disadvantages for investors due to
For example, Dolzer and Stevens 1995; unctad 1998; Vandevelde 1992; Vandevelde 2000.
For a useful recent illustration, see Johnson 2012.
Diel-Grigor 2011, 689; also Slate 1996.
Slate 1996, 5260.
Diel-Grigor 2011.
On forum shopping before international tribunals, see Pauwelyn and Salles 2009.


w o r l d p o li t i c s

varying applications of law.55 More generally, in certain types of cases

some international arbitral venues may be preferred to othersand all
of the above clauses can advantage firms from home countries when
they have discretion over how and where a dispute will be heard. 56
This discussion leads to the first of two propositions regarding the
power and preferences of the home state:
PP proposition 1. Bilateral investment treaties are more likely to include provisions that facilitate enforceability, such as preconsent clauses,
institutionalized arbitration, and multiple dispute-settlement options,
when domestic actors in the home state strongly prefer such clauses.

Multinational corporations are the most relevant domestic actors and,

for all of the reasons detailed in the previous paragraph, have a strong
preference for bits that include the most effective procedures for challenging foreign government actions. They want their governments to include in the treaties advanced consent to arbitration and institutionalized
arbitration options, both of which are more likely to return swifter, fairer,
and more easily collected awards from foreign violators. All else equal,
they would also prefer to have multiple options for dispute settlement,
as that would give them greater choice regarding arbitration venue. A
second relevant domestic actor is the home government. Governments
with a right-wing orientation may have particularly strong desires to
include extensive enforcement provisions in their bits. For one, these
provisions are more consistent with their free-market orientation and
their explicit preferences for economic openness.57 Right-wing governments are also more likely to advance the interests of capital, the abundant factor domestically that benefits from new market opportunities.
Accordingly, we employ two variables to capture the presence of
these domestic actors in home states that sign bits. For the presence of
multinational corporations, we include an original indicator that captures the percentage of the worlds largest multinational corporations
that are headquartered in the home country.58 Likewise, we also in55
For excellent comparisons of the advantages and disadvantages of various arbitral venues, see
Diel-Grigor 2011; and Kreindler 2005.
For instance, well-known arbitrator Charles Brouwer recently commented that disputes over insurances cases are almost always arbitrated in London or Bermuda. At http://www.metrocorpcounsel
.com/articles/11566/aworld-class-international-arbitrator-speaks, accessed December 7, 2011.
For data that illustrate this overall pattern for right-wing parties, see Klingemann et al. 2007,
as well as raw data from the Comparative Manifestos Project Web site. At https://manifestoproject
Data for this measure are taken from Forbes magazines annual list of the worlds largest mncs.
To standardize the Forbes lists across years (19802002), we count all mncs that have revenues above
a constant threshold (approximately $5 billion in 1980 US dollars). We then identify the percentage

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clude a measure of whether right-wing governments are in power in the

home country. Data on the left-right orientation of governments are
taken from the World Banks Database of Political Institutions.59
The second proposition emphasizes the bargaining power of the
home government and its ability to inject its preferences into the treaties.
PP proposition 2. Bilateral investment treaties are more likely to include provisions that facilitate enforceability, such as preconsent clauses,
institutionalized arbitration, and multiple dispute-settlement options,
when the home state is considerably more powerful than the host state.

As noted above, capital-exporting states typically prefer bits to include

provisions that enhance enforceability, although their preferences will
vary in intensity based on domestic factors. A crucial determinant of
whether these provisions are incorporated into a bit is relative bargaining power. Ceteris paribus, these preferences of home countries are
more likely to be inserted into a bit as its bargaining power vis--vis
the other signatory increases. When the gap between the two countries
is greater, the home country gains more leverage in negotiations, while
the host country is resigned to accepting them. Our primary measure
of this relative bargaining power argument examines the relative economic power of the home country and is created by subtracting the
gdp of the host country from that of the home country.
Rational Design
For the final theoretical explanation we turn to the project on the Rational Design of International Institutions, which is laid out in a landmark 2001 International Organization special issue in which the volumes editors set out to offer a systematic account of the wide range
of design features that characterize international institutions.60 This
rational design approach is anchored by a highly developed analytical framework in which six cooperation problems are put forward as
explanations for five design features, or common dimensions of variation in international institutions. The resulting sixteen cause-and-effect
conjectures are evaluated in the original volume using case studies,
which have been criticized for their inconsistency and narrowness.61
of those mncs in each year that are from each country in our data set. For 2003 we use the Forbes
Global 100 and for 20046 we use the Forbes Global 200 list. For years before 1980, we use the values
from 1980, although the inclusion or exclusion of the pre-1980 cases does not affect our substantive
Beck et al. 2001.
Koremenos, Lipson, and Snidal 2001, 762.
Duffield 2003.


w o r l d p o li t i c s

This rational design project remains a popular but polarizing way

of thinking about international institutions. Indeed, the special issue
remains a mainstay of graduate syllabi: the lead article in the volume
has been cited in social science scholarship more than nine hundred
times,62 and the approach continues to spark new research.63 Yet the
project has attracted its share of skeptics, largely due to the lack of
careful, large-N empirical tests of the abstract propositions.64 Such
tests likely have remained elusive due to the challenges of measurement
and the potential for strong criticism of nearly any empirical test.65 But
we believe that the rational design approach deserves to be tested rigorously and objectively and that our understanding of bit design could
potentially benefit from the insights of such a carefully crafted theory.
Indeed, bits provide fertile ground for putting the rational design
approach to an appropriate quantitative test. One obvious benefit is
that focusing on bits, which always have two signatories and a substantive emphasis on fdi, holds constant many potentially conflating
factors that otherwise would complicate empirical evaluation. Second,
past research on rational design, including Walter Mattlis article in the
original volume and subsequent work by project co-originator Barbara
Koremenos, has emphasized dispute settlement as a particularly good
match for testing the validity of the propositions.66 Finally, the substantive problems that plague foreign direct investment, such as unexpected shocks and incentives to violate the agreement, conform closely
to several of the cooperation problems highlighted by the rational
design literature.
Most importantly, two of the design features emphasized by rational
design, flexibility and centralization, map nicely to the components of
bits we prioritize and code. bits that require consent to arbitration on
a case-by-case basis and that list several venues as dispute-settlement
options can be thought of as providing greater flexibility to parties.
Lack of advanced consent allows for international, domestic, or alternative dispute resolution on a case-by-case basis, and a greater number
of possible arbitration settings allows the parties to choose from among
A Google Scholar search on December 10, 2012, returned 907 citations of the lead theoretical
article in the project (Koremenos, Lipson, and Snidal 2001).
For example, Copelovitch and Putnam 2010; Thompson 2010b.
See Duffield 2003. Koremenos and Snidal 2003, 437, in fact acknowledge that Duffields most
valuable critique regards the empirical shortcomings of the Rational Design project and echo his call
for large-N empirical tests of the theory.
Duffield 2003 notes that the original Rational Design volume offers little guidance for translating abstract concepts like uncertainty or centralization into precisely measured indicators.
Koremenos 2007; Mattli 2001.

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a wider variety of venues, each with its own strengths and weakness.67
Likewise, arbitration institutions that are more institutionalized can
be thought of as heavily centralized, since dispute-settlement authority is located in a central, permanent actor that can provide important
information-provision and interpretive functions. For example, icsid
is part of the World Bank group and contains an administrative council, a secretary-general, and a professional staff that provide numerous types of institutional support.68 Furthermore, icsid awards help to
clarify the application of investment law. Thus, a recent study finds that
icsid awards in 2006 included an average reference to 9.3 previous icsid rulings, and icsid now requires publication of the legal reasoning in
all cases.69 Moreover, other studies in the rational design tradition have
conceptualized flexibility and centralization of arbitration institutions
in similar ways, and that further increases our confidence in the conceptual match.70 Three rational design conjectures, which were among
the most supported by case studies in the original 2001 volume, are
directly relevant.
The first two conjectures identify centralization and flexibility, respectively, as rational responses to high levels of uncertainty about the
state of the world, which is defined within rational design as states
knowledge about the consequence of their own actions, the actions
of other states, or the actions of international institutions.71 Governments that sign investment treaties may do so in an environment where
there is either little or conflicting information about the myriad consequences of the agreement they are about to sign. This uncertainty may
increase or decrease over the life of a treaty depending on the amount
of available information, as well as the nature of any unexpected developments or shocks within the relevant issue-area.72
Thus, the first rational design conjecture predicts that uncertainty
about the state of the world should lead to greater centralization within
bits.73 When uncertainty is high, states may desire to have one or more
centralized international institutions provide additional information
about the state of the world and to clarify ambiguities in the treaties they
have signed. Delegating dispute-settlement authority to centralized
Diel-Grigor 2011; Kreindler 2005.
Diel-Grigor 2011; Schreuer 2001; Shihata 1992; Sornarajah 2000.
Commission 2007.
Koremenos 2007; Mattli 2001.
Koremenos, Lipson, and Snidal 2001, 778.
See Koremenos 2005; Mattli 2001; Oatley 2001. Unforeseen developments in the world of fdi
could include dramatic fluctuations in investment patterns or currency crises, for instance.
This is conjecture C1 in the original edited volume (Koremenos, Lipson, and Snidal 2001).


w o r l d p o li t i c s

international institutions can therefore help governments obtain more

certainty about how the agreement operates and a better understanding of its costs and benefits.74 For instance, awards recently issued by
investment arbitration panels have helped to clarify the meaning and
application of components within bits, such as most-favored-nation
status,75 as well as the requirement that foreign investment make a significant contribution to the host states economic development.76
A second rational design proposition similarly holds that flexibility
increases with uncertainty about the state of the world.77 As noted
earlier, two of the bit features we attempt to explain, (lack of ) Preconsent to International Arbitration and the Number of Dispute-Settlement
Options, correspond nicely to the rational design concept of flexibility.
Withholding advanced consent to arbitration increases flexibility because it provides a greater number of pathways to resolution should a
dispute arise. Likewise, when a dispute is sent to arbitration, the greater
the number of venues that are available to the parties, the more flexibility they have.78 These elements of flexibility in the treaties are most
likely to occur when current information is scant or murky, a dynamic
that is suggested by several recent unctad reports.79
A pair of related variables measures uncertainty about the state of
the world in the context of bits and fdi.80 The first indicator reflects
that fluctuating amounts of information revealed by waves of treaty
making and subsequent investment disputes should affect the degree
of certainty governments possess at the time of bit signing. In particular, recent award rulings by investment arbitration bodies provide
clarity about treaty obligations, thereby raising the level of certainty
about the fdi regime at the time of bit signing. We therefore include
in the regressions a tally of the number of investment disputes resolved
through international arbitration in the past five years (number of recent
Koremenos, Lipson, and Snidal 2001, 794.
Hsu 2006.
On the former, see Maffezini v. Spain, Salini v. Jordan, and Plama v. Bulgaria, and on the latter,
see discussions of Malaysian Historical Salvors v. Malaysia and Mitchell v. Congo, discussed in Dolzer
and Schreuer 2008, 69.
This is conjecture F1 in the 2001 edited volume.
As Mattli 2001, 926, observed in his rational design case study of commercial arbitration,
(f )lexibility characterizes not only arbitral procedures but also the actual institutions of arbitration.
A mid-1990s unctad (1998) study concluded that governments were seeking flexibility in dispute settlement due to concerns with the enforceability of icsid awards and the success of uncitral
rules in US-Iran tribunals. However, the reverse also should be true. A more recent unctad 2007
study, in fact, concluded that governments were including narrower investor-state dispute-settlement
options in treaties due to information gained through recent icsid rulings.
Because both of these measures fit the rational design logic but are not correlated, each is included separately in empirical tests.

d es i g n o f b i l at er a l i n v es t m en t t r e at i es


investment disputes).81 The second measure emphasizes shocks as an

indicator of current uncertainty about the state of the world. The logic
is that unexpected recent events generate greater uncertainty among
bit signatories about the current state of the world in fdiand thus
should produce greater centralization and flexibility in such treaties. To
capture shocks directly relevant to bits and fdi, we tally the number of
global balance-of-payments crises during the past three years (recent
FDI-related shocks).82
The final rational design hypothesis predicts that structural concerns
about whether the treaty will be enforced, also known as enforcement
problems, will lead to greater centralization.83 Despite the inherent
vagueness of the term, within the rational design literature enforcement problems are equated with incentives to cheat on an agreement.84 Two features distinguish rational design theory from the two
theoretical explanations considered earlier. First, although the tying
hands and power and preferences approaches shine the spotlight directly on either the host or the home country, respectively, the rational
design approach is agnostic toward the undifferentiated states that sign
treaties.85 Any incentives to cheat emanate from the structural situation facing the treaty signatories at the time of signing, not from particular features of one of the governments, such as its domestic politics
or reputation. A second point deals with short-term versus long-term
incentives. Governments sign bits knowing that the treaties promise
long-term gains, yet, depending on current conditions, signatories to a
particular treaty may have short-term incentives to seize a foreign asset
or to change the terms of investment. Third-party dispute resolution
through centralized international institutions is a way to deter opportunism; it moves dispute settlement outside of the potentially biased
and slow-moving institutions of the defecting state and instead to a
neutral venue with established rules and timelines.86
Two distinct variables measure rational designbased incentives to
cheat on investment agreements and thus capture the severity of the
enforcement problem. A first indicator reflects the idea that enforcement problems will be more severe when the benefits of cheating are
See Allee and Peinhardt 2012.
Kaminsky 2006; Kaminsky and Reinhart 1999.
This is conjecture C4 in the original 2001 edited volume.
Koremenos, Lipson, and Snidal 2001, 776.
This failure to differentiate among the treaty-signing states and to consider their individual
characteristics is a common criticism. See Wendt 2001; Duffield 2003.
Franck 2007b.


w o r l d p o li t i c s

greater or when opportunism is high.87 Within the realm of fdi, the

temptation to cheat will be heightened when global raw materials prices
are higher.88 This measure reflects that expropriation occurs disproportionately in the raw materials industries, where asset specificity is high,
and thus greater opportunism hangs over bit negotiations at times
when the value of what might be seized increases. The second indicator reflects the level of desperation at the time of treaty signing, another potential short-term motivation for cheating on the agreement.89
Poor economic conditions may produce an immediate temptation to
engage in some type of expropriation. The functional response, then, is
to include more centralized dispute settlement in the bit in an attempt
to deter such cheating. We examine the amount of gdp growth or decline in the two signatories to capture the degree to which economic
conditions generate short-term incentives to cheat and thus present a
greater enforcement problem.90 Because rational design does not distinguish among the treaty signatories, we take the lowest GDP growth
rate among the two states, measured as the amount of gdp growth (decline) within the past year.91
Empirical Tests
We now conduct a series of estimations to test the above propositions
using our original data set on variation across 1,473 bits. Our empirical strategy is to make a comprehensive assessment of each of the three
theoretical explanations for bit variation, one at a time, to see how well
each explains the important differences across bits. As a result, Tables
35 are organized by theoretical explanation (power and preferences, tying hands, and rational design), rather than by dependent variable. Because of the clear predictions made by each theoretical approach, all
relevant explanatory variables associated with each theory are evaluated using one-tailed statistical tests, with asterisks denoting statistical significance at conventional levels. Control variables and constant
terms receive two-tailed tests and are denoted by plus signs, which also
Cole and English 1991.
We compile data on annual prices (in constant dollars) of an index of minerals, ores, and metals,
taken from the unctads Commodity Prices Database (cpd).
Cole and English 1991.
See Simmons 2014 for a more specific way of thinking about bit design as a function of economic conditions in the host state.
We measure the economic conditions in the signatories at the time of bit signing, since conditions at that time represent the two sides best guess as to future economic conditions and potential
near-term enforcement problems. Measures of economic growth are taken from the World Banks
World Development Indicators.

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are used in the small number of situations where relevant variables

exhibit the opposite relationship than was predicted by the theory.
Table 6 supplements the three primary tables (Tables 35) by presenting findings from supermodels that include all possible explanatory
variables. Finally, Table 7 presents comparisons of the overall performance of each theoretical approach vis--vis the others, using multiple
test statistics that assess comparative model fit.
The three dependent variables that capture institutional diversity
within bits, along with the fourth variable that combines them into a
collective measure of Overall Enforceability, are scaled differently and
thus require different estimators. Recall that the Preconsent to International Arbitration variable is a simple indicator variable, and thus we
use probit estimation to predict whether a bit has a preconsent clause.
The second dependent variable, Number of Dispute-Settlement Options, is a count variable, and thus we utilize a poisson estimator for
this case. The third variable, Institutionalization of Arbitration, is an
ordered, three-category variable, and thus ordered probit is the appropriate estimator. The final variable, the combined indicator of Overall
Enforceability, varies from 03 but takes on more than ten values and is
normally distributed, and thus ordinary least squares (ols) regression is
We add two types of control variables to all of the models we estimate. First, we add a series of controls for time, in the form of fiveyear-period dummies, to capture any period effects.92 We do so because
it is important to control for any potential temporal evolution in the
investment regime, and our results are not dependent upon the length
of time selected.93 Second, we add a control variable for the average
value of the respective dependent variable for states in the same geographic region as either or both of the signatories.94 The idea is that institutional design choices could be affected by what peer states within
the same region are including in their bits.95
Even after controlling for these temporal and regional effects, we
find strong, robust support for the theoretical explanation that emphaThe five-year dummy for 20002004 is omitted.
We also estimated all models with annual dummy variables as well as decade dummy variables,
and our results are robust to these temporal distinctions.
Given the varying emphases of each of the three theories, regional averages are taken for both
states in the case of rational design, the host state in the case of credible commitment, and the home
state in the case of power and preferences.
To identify peer countries, we use the regional classifications of the International Financial Statistics (ifs) database. We then calculate the average dependent variable values in all treaties signed up
until that time by those peer countries.


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sizes the power and preferences of the home state. In contrast, the sister
argument about hand-tying behavior, which emphasizes the credibility
problem in host countries, is not supported. Furthermore, the rational
design projects conjectures receive only middling, ephemeral support.
In the subsections below we discuss in detail the individual findings for
each of the three explanations, beginning with the supportive findings
for the power and preferences approach and then proceeding to the
comparatively weak findings for the other two approaches.
Power and Preferences
Among the three approaches, the one that emphasizes the power and
preferences of the home country produces by far the greatest number
of statistically significant findings. Table 3 reveals the many supported
relationships between the three power and preferences variables and the
four bit-design-feature dependent variables. Several coefficient estimates for each of the three relevant explanatory variables, home-state
presence of MNCs, right-wing government, and relative bargaining power,
are statistically significant in the hypothesized direction as predictors
of bit variation. In fact, three-quarters of the relationships of interest
in Table 3 turn out as predicted, at high levels of confidence.
A first conclusion to be drawn from the results in Table 3 is that the
preferences of important domestic actors within the country become
integrated into the treaties. Home countries in general should prefer
bits to include investor protections that facilitate enforcement, and we
postulated that countries with many large multinationals and rightwing governments should have particularly strong preferences in this
regard. Indeed, Table 3 indicates that the inclusion of investor-friendly
bit provisions is more likely when such actors are present on the more
powerful side of the bit pairing. Right-wing governments in home
countries are more likely to conclude bits with preconsent clauses, several enforcement options, and greater overall enforceabilitywith all
of these findings significant at the 95 percent level of confidence or
greater. Similarly, when there are numerous large, and likely outwardly
investing, mncs in the home country, bits are more likely to include
preconsent to international arbitration and greater institutionalization
of enforcement.
A second conclusion that emerges from Table 3 is the importance of
home-country bargaining power as a predictor of bit variation. States
that have significant leverage over the treaty partner are more likely to
get all of the features they and their investors desire included in the
treaty: preconsent to international arbitration, a greater number of ven-

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Table 3
Power and Preferences as an Explanation for BIT Variation

Dependent Variable


to Intl
Power and Preferences Variables
Presence of MNCs (+)

Right-Wing Government in
Home (+)
Relative Bargaining Power (+)

DV Average among Regional

of Disp.
Settlement tionalized
Arbitration Enforceability

.968 *
1.22 *
(.648) (.230) (.930) (.332)
.186 ***
.060 **
.105 ***
.481 ***
.068 *
.667 ***
.268 ***
(.137) (.048) (.160) (.062)
3.61 ***
.320 ***
1.23 +++
.752 +++
1.34 +++
(.162) (.093) (.104)

Time Period Dummies Estimated

*p < .10, **p < .05, ***p < .01 (one-tailed tests)
but Not Reported
+p < .10, ++p < .05, +++p < .01 (two-tailed tests)
Robust Standard Errors in Parentheses
Number of Observations
Probit Poisson Ordered Probit

ues through which investors can pursue grievances, and at least one institutionalized arbitration optionall of which enhance overall treaty
enforceability. In fact, all four estimated relationships between bargaining power and desired treaty features are supported in Table 3, three
of them at the 99 percent level of confidence. Thus power politics is a
strong determinant of bit design.
We also emphasize that these strong results for the power and preferences variables hold even after controlling for time-period effects and
the behavior of regional peers, both of which have considerable explanatory power in our models. Taken together, the results in Table 3 suggest that powerful states with actors who prefer strong enforceability
are able to achieve what they want in bits.
Tying Hands
In sharp contrast, there is no support in Table 4 for the overarching
claim that the need for host states to establish credible commitment
and to tie their own hands affects the design of bits. This theoretical perspective maintains that the ubiquitous hand-tying argument in


w o r l d p o li t i c s

international political economy should also apply to bit design, thus

leading one to expect treaties involving host states with the greatest
commitment problems to include the strongest enforcement provisions. Yet the results across Table 4 suggest this is not the case.

The lack of supportive findings is striking and is also robust to alternate empirical measures. States with a past history of expropriation are
no more likely to include in their bits any of the credibility-enhancing elements we have identified. This lack of a relationship holds even
when we examine shorter (three-year) or longer (ten-year) windows of
their expropriation history. Similarly, the quality of the host states legal
institutions is not a significant predictor. We expected that poor legal
institutions in the host would lead to hand-tying behavior via stronger enforcement provisions, but there is no evidence of this in Table
4. Moreover, this lack of a relationship persists when we substitute the
icrg measure of host-state corruption as a measure of the quality of
legal institutions in place of the original measure of law and order. Finally, there is no support in Table 4 for the prediction that fewer constraints on host-country executives would lead to stronger enforcement
provisions. Furthermore, these null results persist when we substitute
the conceptually similar checks on executive variable from the Database
of Political Institutions.96
An illuminating overall story for bit design begins to emerge when
one adds the previous findings for power and preferences variables with
some additional striking patterns from Table 4. Several of the estimated relationships in Table 4 between the tying hands variables and
variation in bits suggest the opposite pattern from what was expected.
For instance, at high levels of confidence we find that bits are more
likely to contain institutionalized enforcement and greater overall enforceability when executives in the host are actually highly constrained
domestically. Similarly, bits appear more likely to have various enforcement-enhancing provisions when host states have better legal institutions and a past history of not expropriating foreign assets; these relationships are always wrong signed in this way but never reach statistical
The fact that bits involving host states with less of a credible commitment problem are at least as likely to include stronger enforcement
is striking. It suggest that powerful home states with strong preferences
for investor protection completely disregard the fact that some treaty
partners may have better domestic institutions and present less of a

Keefer and Stasavage 2003.

d es i g n o f b i l at er a l i n v es t m en t t r e at i es


Table 4
Tying Hands as an Explanation for BIT Variation

Dependent Variable


to Intl
Tying Hands Variables
Political Constraints on
Executive ()
Quality of Legal Institutions ()

Recent History of
Expropriation (+)
DV Average among Regional

of Disp.
Settlement tionalized
Arbitration Enforceability

1.46 +++
.354 +++
(.036) (.013) (.041) (.013)
1.90 ***
.341 ***
.352 ***
.796 +++
.275 +++
1.36 +++
(.186) (.089) (.136)

Time Period Dummies Estimated

*p < .10, **p < .05, ***p < .01 (one-tailed tests)
but Not Reported
+p < .10, ++p < .05, +++p < .01 (two-tailed tests)
Robust Standard Errors in Parentheses
Number of Observations
Poisson Ordered Probit

credibility problem. This is particularly damning evidence against the

hand-tying logic. The design of bits clearly seems to be determined
more by the characteristics of the home stateand its ability to achieve
what it wantsthan by any features of the host state, including its alleged need to tie hands by instilling more credibility in the treaties.
Rational Design
We likewise uncover very little support for the rational design predictions for variation across bits. None of the three conjectures, which
emphasize uncertainty about the state of the world as predictors of bit
centralization and flexibility, as well as enforcement problems as a predictor of bit centralization, receives more than occasional, modest support. Only two of the dozen hypothesized relationships are supported
by the estimated findings in Table 5. On the supportive side, less uncertainty about the state of the world, as captured by more information being provided by a greater number of recent investment dispute
outcomes, leads states to specify fewer venues for dispute settlement in
the treaty. Also, when the temptation to cheat on the treaty is high, due


w o r l d p o li t i c s

Table 5
Rational Design as an Explanation for BIT Variation

Dependent Variable


to Intl


of Disp.
Settlement tionalized
Arbitration Enforceability

Uncertainty about the State of

the World:
Recent FDI-related Shocks (+) .005

(.017) (.006) (.022) (.010)
# of Recent Investment
.005 **
Disputes ()
Enforcement Problems:
GDP Growth Rate ()
.013 *

(.008) (.003)
Raw Material Prices (+)
.004 ++

(.004) (.002)
DV Average among Regional
4.27 ***
.290 ***
(.533) (.109) (.304) (.088)
.852 ++
.426 +++
2.17 +++

(.356) (.161) (.414)
Time Period Dummies Estimated
*p < .10, **p < .05, ***p < .01 (one-tailed tests)
but Not Reported
+p < .10, ++p < .05, +++p < .01 (two-tailed tests)
Robust Standard Errors in Parentheses
Number of Observations
Poisson Ordered Probit

to lower gdp growth in one of the signatories, the treaty is more likely
to include powerful, institutionalized enforcement options. Yet these
two supportive findings are isolated, and alternative ways of measuring
these concepts and testing the conjectured relationships fail to uncover
any consistent pattern of support.
One challenge inherent to testing the rational design theoretical approach is the difficulty of devising appropriate operational measures.
Therefore, we consider several additional ways of operationalizing
important concepts like uncertainty about the state of the world and
enforcement problems, yet in the end we still fail to find any real support. As alternative ways to think about the incentives to cheat logic
of enforcement problems, we substitute the countries inflation and unemployment rates during the past year for their gdp growth rate. After
reestimating all relevant models from Table 5, neither alternative in-

d es i g n o f b i l at er a l i n v es t m en t t r e at i es


dicator of enforcement problems predicts bit centralization. We also

consider three alternative indicators for uncertainty about the state of
the fdi world: the number of bits globally in the past five years (in
place of the number of investment arbitration rulings in the past five
years) and global currency crises during shorter (one-year) and longer
(five-year) windows. Yet none of these alternative indicators turns out
to be a statistically significant predictor of either bit centralization, bit
flexibility, or overall bit enforceability.
A related problem, which the inconsistency of results reflects, is that
rational design focuses exclusively on the cooperation problem facing the actors. By doing so, it fails to distinguish between the treaty
signatories or to consider their respective preferences and positions in
the world.97 In other words, rational design assumes that all states will
react similarly in a common strategic context. Yet our largely unsupportive findings for rational design propositions, coupled with strong
evidence for the power and preferences of the home state as predictors
of bit design, suggest this is not the case. Furthermore, rational design
provides few clues as to which actors to emphasizeeither from the
standpoint of theorizing or in terms of practical concerns with measurement. Thus, we had little guidance in terms of which indicators to
select and for which state to select them. Any future efforts to extend
rational design logic in new directions would be wise to incorporate a
richer strategic context that takes into account how different actors and
sets of actors might react differently to a cooperation problem.98
Assessing the Three Explanations
Overall, the perspective that emphasizes the power and preferences of
home states appears to have superior explanatory power when compared to the tying hands and rational design approaches. Far more of the
coefficient estimates among that approach are statistically significant
predictors of bit variation. Three-quarters of the relevant hypotheses
(nine of the twelve) from Table 3linking mncs, right-wing governments, and bargaining power to bit featuresare supported. By contrast, none of the hypotheses from Table 4 (tying hands) are borne out,
and only two of the relationships in Table 5 (rational design) exhibit the
predicted relationship.
Although our primary approach is to treat the power and preferences,
tying hands, and rational design arguments as separate, or nonnested,

Duffield 2003.
See Copelovitch and Putnam 2010.


w o r l d p o li t i c s

explanations for variation across bits, we also consider all three explanations jointly in the same empirical test. Thus in Table 6 we estimate
and report a series of supermodels that include the relevant variables
from all three models; this guards against any omitted variables bias
that might be present in the restricted, nonnested models in Tables
35.99 The findings presented in Table 6 are strikingly similar to those
reported in the previous tables and further elevate the power and preferences explanation over the other two. In Table 6 nearly all of the power
and preferences variables exhibit the same, statistically significant relationships found in Table 3. Eight of the twelve variables are statistically significant predictors of bit design, even with the inclusion in the
estimations of the many variables from the other two theoretical perspectives. In fact, several of the predicted relationships exhibit a higher
degree of confidence than previously in Table 3. In contrast, the middling support for the rational design explanation evaporates in Table 6.
Neither of the two statistically significant relationships from Table 5
survives once the variables from the power and preferences approach are
added. The previous unsupported findings for the tying hands explanation also are robust; none of the tying hands variables exhibits the expected relationship with bit provisions in Table 6. All in all, the power
and preferences explanation holds, and looks even stronger in comparison with the two alternatives, when the variables from the three approaches are folded into a single, unified empirical model.
The examination of individual variable relationships in Tables 36 is
useful and highly suggestive, yet more systematic comparison of the three
theories is needed. The final step is thus to compare the overall fit of each
of the three models vis--vis one another. Comparisons of nonnested
models can be complex, particularly when using maximum-likelihood
estimation and discrete outcomes.100 Thankfully, two information-based
measures of model fit, Akaikes information criterion (aic) and the
Bayesian information criterion (bic), provide useful ways to compare the
relative fit of competing models.101 Therefore, we calculate both aic and
bic measures for all of the models presented in Tables 35 and compare
the overall fit of each theory as a predictor of investment treaty variation.
The measures and comparisons are presented in Table 7.
The only minor difference between the estimations in Table 35 and those in Table 6 is that we
omit the Quality of Legal Institutions variable from the group of Tying Hands variables in Table 6. This
variable is never a statistically significant predictor of bit design in Table 4, nor in any other regressions we run, and its inclusion in Table 6 results in the deletion of more than one hundred treaties
from the analyses.
Clarke 2001.
Akaike 1973; and Raftery 1996, respectively. See also Long and Freese 2006 for a discussion.

Table 6
Variables from All Theories as Explanations for BIT Variation

Dependent Variable


to Intl


of Disp.

Arbitration Enforceability

Power and Preferences Variables

Presence of MNCs (+)
.441 +
2.48 ***

(1.13) (.221) (.899) (.333)
Right-Wing Government in
.334 ***
.063 **
.133 *
.131 ***
Home (+)
Relative Bargaining Power (+)
.769 ***
.473 ***
.282 ***

(.235) (.049) (.156) (.061)
Tying Hands Variables
Political Constraints on
1.44 +++
.261 +++
Executive ()
Recent History of
.824 ++
Expropriation (+)
Rational Design Variables
Recent FDI-Related
Shocks (+)
# of Recent Investment
.004 +
Disputes ()
GDP Growth Rate ()

(.008) (.003)
Raw Material Prices (+)

(.005) (.002)
DV Average among Regional
6.40 ***
.264 ***
(.934) (.116) (.382) (.089)
2.22 +++
.321 ++
1.56 +++

(.640) (.171) (.417)
Time Period Dummies Estimated
*p < .10, **p < .05, ***p < .01 (one-tailed tests)
but Not Reported
+p < .10, ++p < .05, +++p < .01 (two-tailed tests)
Robust Standard Errors in Parentheses
Number of Observations
Poisson Ordered Probit


w o r l d p o li t i c s

Table 7
Comparison of Model Fit for Each Theory and BIT Design Featurea
(Using Akaikes Information Criterion, AIC,
and Bayesian Information Criterion, BIC )

Power and Preferences

Tying Hands
Rational Design

Preconsent to

Number of





Institutionalized Overall EnforceEnforcement






7691.6 2.69 5900.9


8383.1 1.84 6975.4


7259.2 2.65 5637.8

7738.3 2.66 5897.7


7749.2 1.94 6461.2

8288.8 1.90 6932.3

Smaller aic values indicate better model fit; more negative bic values indicate better model fit.

In sum, the aic- and bic-based comparisons further validate the

superiority of the power and preferences explanation. Table 7 presents
comparisons, using both statistics, for each of the three theories for
each of the four treaty outcomesfor a total of eight sets of comparisons (four aic comparisons, four bic comparisons). The shaded cells
indicate the model with the better fit. Keeping in mind that smaller aic
values and more negative bic values indicate better fit, six of the eight
comparisons indicate that the power and preferences model is a stronger predictor of bit design features than either of the other theories.
Therefore, these formal comparisons provide further and more systematic evidence that the power and preferences approach provides the best
overall explanation for variation across investment treaties.
One major contribution of this research is that we go beyond merely
speculating about differences across bits and actually code the most
important sources of treaty variation. This places our research, alongside that of Bthe and Milner, at the forefront of efforts to identify and
assess differences across bits and ptas, respectively. Drawing heavily
upon legal literatures on investment treaties, we identify investor-state
dispute-settlement provisions as the most important area of variation
across bits. We code multiple elements in the treaties regarding enforcement and dispute settlement, generating three individual measures and one composite measure across nearly fifteen hundred treaties.

d es i g n o f b i l at er a l i n v es t m en t t r e at i es


Ours is the most comprehensive effort to date to code multiple components of a large, diverse slate of investment treaties. The fact that we
have made these data publicly available is another important contribution, which allows other scholars (such as Simmons in this volume) to
investigate this newfound variation across these important treaties.102
A second major contribution is our careful articulation and then
testing of three theoretical explanations for this treaty variation. Our
goal has been to advance the theoretical frontier and to produce more
logically grounded hypotheses about international treaty variation. Applying important theoretical ideas to our new data-collection efforts
is a mutually beneficial way to underpin empirical tests with a stronger theoretical foundation and to test important theories. We produce
compelling findings that call attention to powerful states preferences
and bargaining power to explain diversity across bilateral investment
treaties, a topic that thus far has been understudied. Our conclusions
speak directly to both established and emerging trends in international
relations that emphasize links between international institutions and
state power as well as domestic politics.
The lack of support for the rational design projects predictions is
surprising but also meaningful. We realize that others may take issue with our operational measures, coding decisions, and the degree
to which bits are a relevant fit. That said, we executed our tests of rational design as faithfully and comprehensively as possibleand came
away skeptical. We see several major problems with rational design, including the lack of conceptual clarity, the challenge of coming up with
appropriate empirical measures, and the overall inapplicability of the
propositions to real-world international institutions. As crafted to date,
the utility of the rational design of international institutions project
seems limited. We leave to others the decision regarding whether to
abandon rational design fully or whether to take it in new directions.103
For those in the latter camp, one important contribution from this research is our identification of several plausible measures for the abstract
concepts, or cooperation problems, common to rationalist studies of
international relations. Although the strategic context will differ from
issue to issue, we have done much of the conceptual heavy lifting to
produce an extensive list of indicators that can serve as a starting point
for other researchers who want to measure concepts such uncertainty
or enforcement problems.

Simmons 2014.
Thompson 2010b; Copelovitch and Putnam 2010.


w o r l d p o li t i c s

We also provide important theoretical clarity regarding what it

means for international agreements to be credible and how credible
commitments arise. In sum, our findings suggest that credible commitments in many treaties arise because of the insistence of powerful
states, not because of strategic hand tying by the actors who most need
to demonstrate credible commitments. There might still be a story
about credibility, and the strongest, or most credible, treaties might still
generate greater fdi.104 But our research shows that this is driven not
by host states and their hand-tying incentives but rather by home state
power and preferences. Capital-seeking governments do not so much
tie their own hands with bits as have their hands tied for them.
More broadly, our findings suggest that power politics is alive and
well within one of the most prominent contemporary international institutions: bits. We see this in the specific realm of treaty design. The
contents of treaties do not arise randomly or represent a functional response to a contracting problem; instead, they reflect deliberative strategies on the part of powerful states. On the whole our results strongly
suggest that future scholarship on international institutional design
should focus on the power and preferences of the most powerful states
in the international system. In fact, our findings are consistent with
other research that finds geopolitics to be an important part of powerful states economic agreements105 and dispute-settlement design in
other types of treaties.106 Our conclusions also provide additional support, drawn from a highly relevant contemporary context, to broader,
power-politics accounts of international institutions.107 We admittedly
study a bilateral context, which is susceptible to such dynamics, yet
the world continues to move toward bilateral and regional cooperation,
thus making our conclusions timely and relevant.
Our findings also shed light on the big picture regarding the international investment regime. We provide microfoundational evidence
for Simmonss more big-picture conclusions regarding the extent to
which this regime disproportionately benefits capital exporters. We
concur with her conclusion that developing countries might not have
understood the implications of dispute-settlement clauses when they
signed bits, but it appears that more powerful bit signatories knew
what they were designing. The provisions are asymmetric and increasingly contentious, which begs the question of what comes next. It is
Bthe and Milner 2014; Peinhardt and Allee 2011; Peinhardt and Allee 2012.
Evenett and Meier 2008.
Smith 2000.
For example, Drezner 2007; Gruber 2000.

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Bolivia to withdraw from the icsid Convention strike us as ineffective, but, along with moves by states like Argentina to annul arbitration awards, they challenge the emerging global rule of law. Perhaps
a previously elusive multilateral effort will emerge, yet this seems unlikely. Instead, the implications of the regime are likely to continue to
be bargained bilaterally in new and renegotiated bits. Even changing
preferences on the part of host states would still have to overcome the
bargaining asymmetry that has characterized bit design to date.
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