Tài liệu An Economic Analysis of Bilateral Investment Treaties pdf

Jan Peter Sasse

An Economic Analysis of Bilateral Investment Treaties

GABLER RESEARCH

Ökonomische Analyse des Rechts

Herausgegeben von

Professor Dr. Peter Behrens

Professor Dr. Thomas Eger

Professor Dr. Manfred Holler

Professor Dr. Claus Ott

Professor Dr. Hans-Bernd Schäfer

Professor Dr. Stefan Voigt (schriftführend)

Universität Hamburg, Fakultät für Rechtswissenschaft

und Fakultät für Wirtschafts- und Sozialwissenschaft

Die ökonomische Analyse des Rechts untersucht Rechtsnormen auf ihre gesell￾schaftlichen Folgewirkungen und bedient sich dabei des methodischen Instru￾mentariums der Wirtschaftswissenschaften, insbesondere der Mikroökonomie,

der Neuen Institutionen- und Konstitutionenökonomie. Sie ist ein interdisziplinäres

Forschungsgebiet, in dem sowohl Rechtswissenschaftler als auch Wirtschafts￾wissenschaftler tätig sind und das zu wesentlichen neuen Erkenntnissen über

Funktion und Wirkungen von Rechtsnormen geführt hat.

Die Schriftenreihe enthält Monographien zu verschiedenen Rechtsgebieten und

Rechtsentwicklungen. Sie behandelt Fragestellungen aus den Bereichen Wirt￾schaftsrecht, Vertragsrecht, Haftungsrecht, Sachenrecht und verwaltungsrecht￾liche Regulierung.

Jan Peter Sasse

An Economic Analysis

of Bilateral Investment Treaties

With a foreword by Prof. Dr. Thomas Eger

RESEARCH

Bibliographic information published by the Deutsche Nationalbibliothek

The Deutsche Nationalbibliothek lists this publication in the Deutsche Nationalbibliografi e;

detailed bibliographic data are available in the Internet at http://dnb.d-nb.de.

Dissertation Universität Hamburg, 2010

1st Edition 2011

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Foreword

The global economy is characterized not only by a steady increase of international

trade, but also by growing flows and stocks of foreign direct investment (FDI). This

development has manifested itself especially since the mid-1980s. The importance of

FDI in providing foreign markets with goods and services has become comparable to

trade. FDI also constitutes a crucial source of external finance for developing

countries.

An important prerequisite for a high level of FDI is that investors view the political

risk of the host country as manageable. Political risk may, for example, comprise the

danger of expropriation of the investment without adequate compensation, or more

subtle regulatory measures with comparable effects, which are often referred to as

indirect expropriation. The most important legal instruments in international

investment law that may mitigate this kind of risk are bilateral investment treaties

(BITs). Since the first BIT, concluded between Germany and Pakistan in 1959, the

number of such treaties has risen to the impressive number of more than 2700 in 2010.

Despite the undeniable importance of FDI for the global economy and the growing

prominence of BITs, the economic analysis has mainly focussed on international trade

law and has thus far neglected the analysis of international investment law. This

contribution by Jan Peter Sasse seeks, and succeeds, to fill that gap in the existing

literature.

Jan Peter Sasse begins his research by providing a comprehensive analysis of the

economic and legal tools available to international investors who wish to safeguard

their assets abroad. In contrast to the domestic context, international law is generally

characterized by the absence of a supranational authority that may enforce legal

obligations through coercion. Consequently, investors have to rely on economic

devices (the exchange of hostages, for example) or on legal protection through

international law and the possibly unfavourable domestic legislation and judiciary of

host-states. Especially in the light of the lack of a truly multinational treaty on the

protection of FDI, bilateral investment treaties can be considered a cornerstone of

international investment law. Consequently, a number of recent empirical studies find

a positive relationship between the conclusion of BITs and the amount of FDI flows.

The economic analysis of the functioning of BITs must first of all illuminate the

relationship between the investor and the host-state. This relationship may be

characterized by problems of hold-up and asymmetric information. Based on the

rational choice principle as advanced recently by scholars of international law and

economics, Jan Peter Sasse shows to what extent the host-state can overcome the hold-

VI Foreword

up problem through self-commitment. Furthermore, the author convincingly argues

that signaling is only of limited value in counteracting the asymmetry of information

between investors and host-states.

Apart from the relationship between investors and host-states, a thorough analysis of

bilateral investment treaties has to take into account the strategic interaction among

host-states that may consider BITs as an instrument in the competition for FDI. Jan

Peter Sasse analyses this competition in great institutional detail with special attention

devoted to the environmental conflicts that have emerged in the context of

international arbitration. His results show that BITs, if drafted and interpreted with

care, may help capture the beneficial effects of institutional competition and mitigate

the potentially detrimental effects. The author then contributes to two ongoing

discussions in the area of international investment law. Firstly, Jan Peter Sasse

provides an empirical analysis of the impact of BITs on the institutional quality of

developing countries. He finds that external effects of BITs on institutional quality

cannot be verified. The study thus lends empirical support neither to the optimistic

calls for BITs as serving as a positive example for developing countries, nor to the

pessimistic accounts that regard BITs as detrimental to domestic institutional quality.

Secondly, the author provides a systematic analysis of the issue of transparency vs.

confidentiality in international arbitration. Jan Peter Sasse explains why more

transparency may be harmful for the parties involved and that, as a consequence, a

movement towards more transparency in international investment arbitration will be

hard to achieve.

This publication in the field of international law and economics makes a valuable

contribution to our understanding of the functioning of bilateral investment treaties.

Jan Peter Sasse also provides an insightful and well-researched analysis of different

aspects of the protection of FDI through BITs, including institutional competition,

institutional quality, and transparency.

Prof. Dr. Thomas Eger

Acknowledgements

This thesis was written while I was a student at the Doctoral College for Law and

Economics (Graduiertenkolleg für Recht und Ökonomik) and, subsequently, a research

assistant at the Institute of Law and Economics, both at the University of Hamburg. It

would not have been successfully finished without the help and support of a number of

people. I am especially grateful to Thomas Eger, who supervised the thesis and

allowed me to benefit from his helpful comments and advice. Hans-Bernd Schäfer

agreed to act as the second reviewer and was of great support to me (and my fellow

colleagues) as the Speaker of the Graduiertenkolleg. I am grateful to him, other

professors and fellow colleagues, in and around the Graduiertenkolleg, for many

inspiring interactions und discussions during my time in Hamburg. Also, I want to

thank the chairman of the disputation committee, Manfred Holler, who not only

handled the formal dissertation process very efficiently, but also provided helpful

comments during the research process. My thanks go to the editors of the scientific

series “Ökonomische Analyse des Rechts” for giving me the opportunity to publish my

thesis in the series: Peter Behrens, Thomas Eger, Manfred Holler, Claus Ott, Hans￾Bernd Schäfer and Stefan Voigt. I had the pleasure of conducting research as a visiting

scholar at Columbia University (New York) and my gratitude goes to Avery W. Katz

for making this possible. The German Research Foundation (DFG) financially

supported my research both in Germany and the United States with generous research

grants and I am thankful for that.

Additionally, I am indebted to Anne van Aaken, Peter Behrens, Stephania Bonilla,

Eberhard Feess, Henning Fräßdorf, Andrew Guzman, Jonathan Klick, Frank Müller￾Langer, Jan Matauschek, Susan Russell, Stephan Wittig, Katherine Walker and

Tammy de Wright for helpful advice, comments and inspiration during my research

process. Focusing on interdisciplinary research may not be the obvious choice for a

young student of economics. I owe my passion for the economic analysis of law to two

professors who exposed me to this field of research while I was still a graduate student

at the Humboldt University in Berlin: Charles B. Blankart and Christian Kirchner. I

want to thank them for putting me on the right track.

Most importantly, I would like to take this opportunity to thank my father, my sister

and Katrin Stägert for their loving support, kind words, patience and encouragement.

This book is dedicated to the memory of my mother, Hanne Sasse.

Jan Peter Sasse

Summary Contents

FOREWORD...................................................................................................................V

ACKNOWLEDGEMENTS ........................................................................................... VII

SUMMARY CONTENTS ............................................................................................... IX

DETAILED CONTENTS............................................................................................... XI

LIST OF FIGURES.....................................................................................................XIX

LIST OF ABBREVIATIONS........................................................................................XXI

LIST OF VARIABLES ..................................................................................................... 1

1 INTRODUCTION ................................................................................................. 1

2 FOREIGN DIRECT INVESTMENT .................................................................... 6

3 ECONOMIC AND LEGAL PROTECTION OF FDI......................................... 17

4 THE ECONOMICS OF BITS ............................................................................. 67

5 BITS AND INSTITUTIONAL COMPETITION ............................................. 124

6 BITS AND INSTITUTIONAL QUALITY....................................................... 155

7 BITS AND TRANSPARENCY ........................................................................ 177

8 SUMMARY AND OUTLOOK......................................................................... 199

APPENDICES............................................................................................................. 205

BIBLIOGRAPHY......................................................................................................... 221

Detailed Contents

FOREWORD...................................................................................................................V

ACKNOWLEDGEMENTS ........................................................................................... VII

SUMMARY CONTENTS ............................................................................................... IX

DETAILED CONTENTS............................................................................................... XI

LIST OF FIGURES.....................................................................................................XIX

LIST OF ABBREVIATIONS........................................................................................XXI

LIST OF VARIABLES ..................................................................................................... 1

1 INTRODUCTION ............................................................................................... 1

1.1 INTERNATIONAL LAW AND ECONOMICS ............................................................ 2

1.2 STRUCTURE ........................................................................................................ 4

2 FOREIGN DIRECT INVESTMENT ................................................................ 6

2.1 TRENDS AND FIGURES ........................................................................................ 6

2.2 MULTINATIONAL ENTERPRISES AND FDI........................................................... 8

2.3 FDI AND DEVELOPMENT .................................................................................. 12

3 ECONOMIC AND LEGAL PROTECTION OF FDI ................................... 17

3.1 TIME INCONSISTENCY AND EXPROPRIATION RISK ........................................... 17

3.1.1 Time Inconsistency................................................................................... 17

3.1.2 On the Relevance of Expropriation Risk ................................................. 22

3.2 THE ECONOMICS OF FDI PROTECTION ............................................................. 22

3.2.1 Static Devices........................................................................................... 23

3.2.1.1 Hostages................................................................................................ 24

3.2.1.2 Collateral............................................................................................... 27

3.2.1.3 Hands-Tying ......................................................................................... 29

3.2.1.4 Union..................................................................................................... 30

XII Detailed Contents

3.2.1.5 Insurance............................................................................................... 31

3.2.1.6 Devaluation of Assets ........................................................................... 32

3.2.1.7 Lobbying............................................................................................... 32

3.2.2 Dynamic Devices ..................................................................................... 33

3.2.2.1 Expertise and Time ............................................................................... 33

3.2.2.2 Repetition and Reputation .................................................................... 33

3.2.2.2.1 Repetition...................................................................................... 33

3.2.2.2.2 Reputation..................................................................................... 35

3.2.3 Discussion................................................................................................ 40

3.3 LEGAL FDI PROTECTION .................................................................................. 40

3.3.1 Domestic Regulation................................................................................ 41

3.3.2 Customary International Law.................................................................. 41

3.3.3 Multilateral Treaties................................................................................ 43

3.3.3.1 WTO ..................................................................................................... 44

3.3.3.2 Energy Charter Treaty .......................................................................... 44

3.3.3.3 NAFTA ................................................................................................. 45

3.3.4 Investor-State Contracts .......................................................................... 45

3.3.5 Bilateral Investment Treaties................................................................... 45

3.3.5.1 Overview and History........................................................................... 46

3.3.5.2 Treaty Practice and Treaty Interpretation ............................................. 47

3.3.5.3 Preamble and Definitions...................................................................... 48

3.3.5.3.1 Investor ......................................................................................... 48

3.3.5.3.2 Investment..................................................................................... 49

3.3.5.4 Admission ............................................................................................. 50

3.3.5.5 Standards of Treatment......................................................................... 50

3.3.5.5.1 Fair and Equitable Treatment ....................................................... 50

3.3.5.5.2 Most-Favoured-Nation Treatment ................................................ 52

3.3.5.5.3 Additional Standards..................................................................... 53

3.3.5.6 Expropriation and Compensation ......................................................... 54

Detailed Contents XIII

3.3.5.6.1 Indirect Expropriation................................................................... 55

3.3.5.6.2 Compensation ............................................................................... 56

3.3.5.7 Public Concerns .................................................................................... 57

3.3.5.8 The Settlement of Disputes................................................................... 58

3.3.5.8.1 ICSID ............................................................................................ 59

3.3.5.8.2 Remedies....................................................................................... 61

3.3.5.8.3 Enforcement and Execution of Arbitral Awards .......................... 62

3.3.5.8.4 Costs.............................................................................................. 63

3.3.5.8.5 Empirical Aspects of Arbitration.................................................. 63

3.3.5.9 BITs and Customary International Law ............................................... 64

3.3.5.10 Summary........................................................................................... 65

4 THE ECONOMICS OF BITS .......................................................................... 67

4.1 THE (PERCEIVED) WEAKNESS OF INTERNATIONAL LAW ................................. 67

4.2 THE EFFECT OF BITS ON FDI ........................................................................... 69

4.2.1 Empirical Studies on the Effect of BITs on FDI ...................................... 69

4.2.2 Discussion................................................................................................ 72

4.3 LAW AND ECONOMICS OF INTERNATIONAL LAW............................................. 73

4.3.1 Theories of International Law ................................................................. 74

4.3.2 Rational Choice Approach....................................................................... 74

4.3.3 Methodological Individualism ................................................................. 75

4.3.4 The Three R's: Reputation, Reciprocity and Retaliation......................... 76

4.4 THE FUNCTIONING OF BITS.............................................................................. 78

4.4.1 The Costs of BITs..................................................................................... 78

4.4.1.1 Concluding BITs................................................................................... 79

4.4.1.2 Breaching BITs: The Three R's Revisited ............................................ 79

4.4.1.2.1 Reciprocity and Retaliation .......................................................... 79

4.4.1.2.2 Reputation vis-à-vis Other States ................................................. 80

4.1.1.2.3 Reputation vis-à-vis Investors ...................................................... 81

XIV Detailed Contents

4.4.1.3 Breaching BITs: Non-Reputational Costs ............................................ 83

4.4.1.4 Summary............................................................................................... 84

4.4.2 Commitment and Signalling..................................................................... 84

4.4.3 Commitment ............................................................................................. 85

4.4.3.1 Repetition Revisited.............................................................................. 86

4.4.3.2 The Commitment Game........................................................................ 86

4.4.3.2.1 The Tribunal's Decision................................................................ 89

4.4.3.2.2 The Arbitration Decision .............................................................. 89

4.4.3.2.3 The Expropriation Decision.......................................................... 90

4.4.3.2.4 The Investment Decision .............................................................. 91

4.4.3.3 Equilibria............................................................................................... 92

4.4.3.4 Hostages and Collateral ........................................................................ 93

4.4.3.5 Extensions............................................................................................. 94

4.4.3.5.1 Compliance and Enforcement in Third Countries........................ 94

4.4.3.5.2 Settlement vs. Trial....................................................................... 95

4.4.3.5.3 The Perils of Success .................................................................. 100

4.4.3.6 Summary............................................................................................. 101

4.4.4 Signalling ............................................................................................... 102

4.4.4.1 Reputation Revisited........................................................................... 102

4.4.4.2 Signalling Theory ............................................................................... 104

4.4.4.3 Rights and Treaties as Signals ............................................................ 105

4.4.4.4 The Signalling Game .......................................................................... 107

4.4.4.5 Equilibria............................................................................................. 110

4.4.4.6 Hidden Characteristics and Hidden Intentions ................................... 114

4.4.4.7 Summary............................................................................................. 116

4.4.5 Beyond Commitment and Signalling ..................................................... 117

4.4.5.1 Flexibility vs. Commitment ................................................................ 117

4.4.5.2 BITs as Development Aid................................................................... 118

4.4.5.3 Risk Aversion ..................................................................................... 119