Over the past forty-five years, bilateral investment treaties (BITs)
have become the most important international legal mechanism for the
encouragement and governance of foreign direct investment. The
proliferation of BITs during the past two decades in particular has been
phenomenal. These intergovernmental treaties typically grant extensive
rights to foreign investors, including protection of contractual rights
and the right to international arbitration in the event of an investment
dispute. How can we explain the widespread adoption of BITs? We argue that
the spread of BITs is driven by international competition among potential
host countries—typically developing countries—for foreign
direct investment. We propose a set of hypotheses that derive from such an
explanation and develop a set of empirical tests that rely on network
measures of economic competition as well as more indirect evidence of
competitive pressures on the host to sign BITs. The evidence suggests that
potential hosts are more likely to sign BITs when their competitors have
done so. We find some evidence that coercion and learning play a role, but
less support for cultural explanations based on emulation. Our main
finding is that the diffusion of BITs is associated with competitive
economic pressures among developing countries to capture a share of
foreign investment. We are agnostic at this point about the benefits of
this competition for development.For useful
comments on earlier drafts of this article, we thank Bill Bernhard, Bear
Braumoeller, Frank Dobbin, Robert Franzese, Jeffry Frieden, Geoffrey
Garrett, Tom Ginsburg, Jude Hays, Lisa Martin, Bob Pahre, Mark Ramsayer,
Steven Ratner, Susan Rose-Ackerman, and John Sides. For research
assistance, we thank Elizabeth Burden, Raechel Groom, and Alexander
Noonan.