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

the effect of treaties on foreign
direct investment: bilateral
investment treaties, double
taxation treaties, and
investment flows
This page intentionally left blank
the effect of treaties on foreign
direct investment: bilateral
investment treaties, double
taxation treaties, and
investment flows
edited by
karl p. sauvant and lisa e. sachs
1
1
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The effect of treaties on foreign direct investment: bilateral investment treaties, double
taxation treaties, and investment fl ows / edited by Karl P. Sauvant and Lisa E. Sachs.
p. cm.
Includes bibliographical references and index.

ISBN 978-0-19-538853-4 ((hardback): alk. paper)
1. Investments, Foreign—Taxation—Law and legislation. 2. Double taxation.
3. Treaties. I. Sauvant, Karl P. II. Sachs, Lisa E.
K4528.E34 2009
332.67’3—dc22
200844052
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To Alaion Jr., Ana Maria, Clarissa, Marcelo, Samira, Tanja, and Vitor,
whom I wish every success in their lives
Karl
To my parents Jeffrey and Sonia—my best teachers and
my greatest inspiration
Lisa
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contents
Contributors xi
Foreword xxi
andreas f. lowenfeld
Preface xxv
john h. dunning
BITs, DTTs, and FDI fl ows: An Overview xxvii
lisa e. sachs and karl p. sauvant
part i: introduction
1. A Brief History of International Investment Agreements 3
kenneth j. vandevelde
2. The Framework of Investment Protection: The Content of BITs 37
peter muchlinski
3. Explaining the Popularity of Bilateral Investment Treaties 73
andrew t. guzman
4. Double Tax Treaties: An Introduction 99
reuven s. avi-yonah
part ii: exploring the impact of bilateral investment
treaties on foreign direct investment flows
5. Do BITs Really Work?: An Evaluation of Bilateral Investment
Treaties and Their Grand Bargain 109
jeswald w. salacuse and nicholas p. sullivan
6. Bilateral Investment Treaties and Foreign Direct

Investment: A Political Analysis 171
tim büthe and helen v. milner
7. Do Bilateral Investment Treaties Increase Foreign Direct
Investment to Developing Countries? 225
eric neumayer and laura spess
8. The Impact of Bilateral Investment Treaties on
Foreign Direct Investment 253
peter egger and michael pfaffermayr
9. New Institutional Economics and FDI Location in
Central and Eastern Europe 273
robert grosse and len j. trevino
viii contents
10. Do Investment Agreements Attract Investment?
Evidence from Latin America 295
kevin p. gallagher and melissa b.l. birch
11. The Global BITs Regime and the Domestic Environment
for Investment 311
susan rose-ackerman
12. The Impact on Foreign Direct Investment of BITs 323
unctad
13. Do Bilateral Investment Treaties Attract FDI?
Only a Bit . . . And They Could Bite 349
mary hallward-driemeier
14. Do BITs Really Work?: Revisiting the Empirical Link between
Investment Treaties and Foreign Direct Investment 379
jason yackee
15. Bilateral Investment Treaties and Foreign Direct
Investment: Correlation versus Causation 395
emma aisbett
16. Why Do Developing Countries Sign BITs? 437

deborah l. swenson
part iii: exploring the impact of double taxation treaties on
foreign direct investment flows
17. Do Bilateral Tax Treaties Promote Foreign Direct Investment? 461
bruce a. blonigen and ronald b. davies
18. The Effects of Bilateral Tax Treaties on U.S. FDI Activity 485
bruce a. blonigen and ronald b. davies
19. The Impact of Endogenous Tax Treaties on Foreign Direct
Investment: Theory and Empirical Evidence 513
peter egger, mario larch, michael pfaffermayr and
hannes winner
20. Host-Country Governance, Tax Treaties, and U.S. Direct
Investment Abroad 541
henry j. louie and donald j. rousslang
21. Tax Treaties for Investment and Aid to Sub-Saharan
Africa: A Case Study 563
allison christians
22. It’s All in the Timing: Assessing the Impact of Bilateral
Tax Treaties on U.S. FDI Activity 635
daniel l. millimet and abdullah kumas
contents ix
23. Do Double Taxation Treaties Increase Foreign Direct
Investment to Developing Countries? 659
eric neumayer
part iv: exploring the impact of tax and foreign investment
treaties on foreign direct investment flows
24. The Effect of Tax and Investment Treaties on Bilateral
FDI Flows to Transition Economies 687
tom coupé, irina orlova and alexandre skiba
Selected Bibliography on Bilateral Investment Treaties

and Double Taxation Treaties 715
lisa e. sachs
Index 725
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contributors
emma aisbett
Emma Aisbett is a lecturer at the Crawford School of Economics and Government
and Research Fellow at the Economics Program of the Research School of Social
Sciences at The Australian National University. Recently graduated from the
University of California at Berkeley, her research interests center on the ques-
tion of how globalization can be harnessed to promote sustainable development.
Aside from her contribution to this volume, recent work has analyzed the sources
of debate concerning the impact of globalization on poverty and considered the
effi ciency of the regulatory takings doctrine that is implied by the language of
most bilateral investment treaties (BITs).
reuven s. avi-yonah
Reuven S. Avi-Yonah is the Irwin I. Cohn Professor of Law and Director of the
International Tax LL.M. Program at the University of Michigan Law School. He
teaches courses on taxation, international taxation, corporate taxation, tax trea-
ties and transnational law. He has published numerous articles on domestic and
international tax issues, and is the author of International Tax as International
Law: U.S. Tax Law and the International Tax Regime (2007) and U.S. International
Taxation: Cases and Materials (with Brauner and Ring, 2005). He holds a Ph.D.
in History and a J.D. from Harvard University. He has served as consultant to
the U.S. Treasury and the Organisation for Economic Co-operation and
Development (OECD) on tax competition issues and has been a member of the
executive committee of the New York State Bar Association Tax Section and of
the Advisory Board of Tax Management, Inc. He is currently a member of the
Steering Group of the OECD International Network for Tax Research and Chair
of the ABA Tax Section VAT Committee and an International Research Fellow

of the Oxford University Centre for Business Taxation.
melissa b.l. birch
Melissa B.L. Birch is at the Fletcher School and the Global Development and
Environment Institute at Tufts University. Her expertise lies in the areas of eco-
nomic and social development, environmental sustainability, and democracy,
particularly in Latin America and the Caribbean. In addition to research relating
to sustainable development, she has worked in education in Monterrey, Mexico,
and in natural resource management and education in the United States. She
holds an M.A. in International Relations and Environmental Policy from Boston
University and is currently a doctoral candidate at the Fletcher School.
xii contributors
bruce a. blonigen
Bruce Blonigen is the Knight Professor of Social Science in the Economics
Department at the University of Oregon and a Research Associate with the
National Bureau of Economic Research. He has research interests in empirically
examining international trade issues from a microeconomic and political econ-
omy perspective, especially with respect to multinational corporations and anti-
dumping policies. His research has been funded by the National Science
Foundation and published in such journals as the American Economic Review,
the European Economic Review, the Review of Economics and Statistics, the Journal
of International Economics, and the Canadian Journal of Economics. He also
currently serves as coeditor of the Journal of International Economics.
tim büthe
Tim Büthe is an assistant professor of political science at Duke University, cur-
rently on leave as a Robert Wood Johnson Foundation Scholar at the University
of California, Berkeley. His primary research interests are the evolution and per-
sistence of institutions and the ways in which institutions enable and constrain
actors. His work in international political economy has focused on standards
and regulations in product and fi nancial markets, the effects of BITs and trade
agreements on foreign direct investment, the allocation of private-source devel-

opment aid by nongovernmental organizations, and more broadly the infl uence
of noncountry actors in world politics. He has also written about methodological
issues, the politics of business confi dence, and European integration. His work
has been published in the American Political Science Review, World Politics, Law &
Contemporary Problems, Governance, and other journals. He is online at http://
www.buthe.info.
allison christians
Allison Christians is an assistant professor of law at the University of Wisconsin
Law School. She received her J.D. from Columbia University School of Law and
her LL.M. in Taxation from New York University School of Law. Prior to joining
the faculty of the University of Wisconsin Law School, she taught J.D. and LL.M.
courses in federal and international income taxation at Northwestern University
School of Law, and before that practiced tax law at the law fi rms of Wachtell,
Lipton, Rosen & Katz and Debevoise & Plimpton in New York, where she focused
on the taxation of domestic and cross-border mergers and acquisitions; spin-
offs; restructurings and associated issues; and transactions involving private and
public companies. Her scholarly interests include foreign policy, globalization,
competition, and development aspects of taxation.
tom coupé
Tom Coupé obtained his Ph.D. from the Free University of Brussels in 2002 and
has since been working in Ukraine, initially as assistant professor and currently as
contributors xiii
director of the Kyiv School of Economics. His research interests are labor economics,
transition economics, economics of education, and political economy.
ronald b. davies
Ronald B. Davies received his Ph.D. from the Pennsylvania State University in
1999. After spending nine years at the University of Oregon, he accepted a pro-
fessor position at University College, Dublin, in Ireland. His research focuses on
foreign direct investment, with a particular focus on the use of tax policy to
manipulate the behavior of multinationals. His work has been published in jour-

nals such as American Economic Review, European Economic Review, Journal of
Public Economics, and Journal of International Economics.
john h. dunning
John Dunning is an emeritus professor of international business at the University
of Reading, UK, and at Rutgers University. He has been researching into the
economics of international direct investment and the multinational enterprise
since the 1950s. He has authored, coauthored or edited forty-two books on this
subject, and on industrial and regional economics. His latest publications are a
book of essays, Globalisation at Bay, a two- volume compendium of his more
infl uential contributions to international business during the past 30 years
(Edward Elgar, 2002), and a newly edited volume on Making Globalization Good
(Oxford University Press, 2003). The revised edition of his textbook Multinational
Enterprises and the Global Economy (with Sarianna Lundan), fi rst published in
1993, was published in July 2008 by Edward Elgar.
peter egger
Peter Egger is a professor of economics at the University of Munich and head of
the department at the Ifo Institute of Economic Research in Munich. He is inter-
ested in applied theoretical and empirical work in international trade and foreign
direct investment. More specifi cally, his research interests include the determi-
nants of bilateral trade and foreign direct investment, the determinants of
economic policy choice with regard to taxation, tariffs, and investment costs,
the endogenous choice of fi rm organization, and the role of imperfect labor mar-
kets for international trade and foreign investment. He has published in
journals such as the Journal of Econometrics, Journal of International Economics,
European Economic Review, Journal of Applied Econometrics, and Journal of Urban
Economics.
kevin p. gallagher
Kevin P. Gallagher is an assistant professor of international relations at Boston
University, where he also serves as a Research Fellow at the Frederick S. Pardee
Center for the Study of the Longer-Range Future. He is the author of The Enclave

Economy: Foreign Investment and Sustainable Development in Mexico’s Silicon
xiv contributors
Valley (with Lyuba Zarsky), and Free Trade and the Environment: Mexico, NAFTA,
and Beyond, in addition to numerous reports, articles, and opinion pieces on trade
policy, development, and the environment. He has been the editor or coeditor
for a number of books, including Putting Development First: the Importance of
Policy Space in the WTO and IFIs, International Trade and Sustainable Development,
and others. He is also a research associate at the Global Development and
Environment Institute of the Fletcher School of Law and Diplomacy and Tufts
University, an adjunct fellow at Research and Information System for Developing
Countries in Delhi, India, and a member of the U.S Mexico Futures Forum.
robert grosse
Robert Grosse is director of Global Leadership Development and Learning at
Standard Bank in Johannesburg, South Africa. He has taught international
fi nance in the M.B.A. programs at Thunderbird, the University of Miami, the
University of Michigan, and at the Instituto de Empresa (Madrid, Spain), as well
as in many universities in Latin America. He is a leading author on international
business in Latin America. His latest book is Can Latin American Firms Compete?
(Oxford, 2007). He holds a B.A. degree from Princeton University and a doctor-
ate from the University of North Carolina, both in international economics. He is
a Fellow of the Academy of International Business.
andrew t. guzman
Andrew T. Guzman is a professor of law and director of the International Legal
Studies Program at Boalt Hall School of Law, at the University of California,
Berkeley. He holds a J.D. and a Ph.D. in economics from Harvard University. He
has written extensively on international trade, international regulatory matters,
foreign direct investment and public international law, and served as editor on
the recently published Handbook of International Economic Law and authored
How International Law Works. He is a member of the Institute for Transnational
Arbitration’s Academic Council and is on the board of several academic jour-

nals. He has taught as a visiting professor at Harvard Law School, the University
of Chicago Law School, the University of Virginia Law School, Vanderbilt Law
School, the University of Hamburg, and the National University Law School in
Bangalore, India.
mary hallward-driemeier
Mary Hallward-Driemeier is a senior economist in the Development Research
Group of the World Bank. She has published articles on fi rm productivity, the
impact of the investment climate on fi rm performance and determinants of
foreign direct investment. She was the deputy director for the World Development
Report 2005: A Better Investment Climate for Everyone. She helped establish
the World Bank’s Enterprise Surveys Program, now covering more than 70,000
enterprises in 100 countries. She is also a founding member of the Microeconomics
contributors xv
of Growth Network. She received her M.Sc. in development economics from
Oxford University as a Rhodes Scholar and received her Ph.D. in economics
from M.I.T.
abdullah kumas
Abdullah Kumas received his B.S. in mathematics education from Bogazici
University, Turkey, in 2000, his M.S. in applied mathematics from Oklahoma
State University in 2004, and his M.A. in economics from Southern Methodist
University (SMU) in 2006. He is now a fourth-year Ph.D. student at SMU. His
research focuses mainly on international trade, applied econometrics, and labor
economics.
henry j. louie
Henry Louie is an international economist in the U.S. Treasury Department’s
Offi ce of Tax Policy. He joined the Treasury Department in 1996. His principle
work areas encompass economic research, analysis of current law and legislative
proposals relating to international taxation, and the negotiation of bilateral
income tax treaties on behalf of the United States. He represents the United
States at the OECD’s working party that examines issues regarding the OECD

Model Tax Convention. He received his M.A. in economics from Duke University
in 1995 and his B.A. in 1990 from Georgetown University.
andreas f. lowenfeld
Andreas F. Lowenfeld is Rubin Professor of International Law at New York
University Law School, where he has been on the faculty since 1967. He has
taught, practiced, and written in nearly all aspects of international law for more
than fi ve decades and is frequently an arbitrator in international controversies,
public and private. He is the author of a major treatise on International Economic
Law, as well as casebooks and textbooks on confl ict of laws and aviation law and
a series of teaching books on international economic law. He was associate
reporter of the American Law Institute’s Restatement (Third) of Foreign Relations
Law, and coreporter of the Institute’s Project on International Jurisdiction and
Judgments. He is an elected member of the Institut de Droit International and
of the International Academy of Comparative Law. He is a graduate of Harvard
College and Harvard Law School.
mario larch
Mario Larch is a researcher in the International Trade and Foreign Direct
Investment Department at the Ifo Institute for Economic Research. He has
research interests in the theory of multinational fi rms and trade, international
economics, economic geography, and spatial econometrics. He has published
in such journals as the European Economic Review, the Canadian Journal of
Economics and the Journal of Comparative Economics.
xvi contributors
daniel l. milliment
Daniel L. Millimet received his B.A. in economics from the University of
Michigan in 1994, and his Ph.D. in economics from Brown University in 1999.
He is currently an associate professor in the Department of Economics at
Southern Methodist University in Dallas, Texas. He also serves as a member of
the Editorial Council for the Journal of Environmental Economics and Management.
His research focuses mainly on the empirical analysis of issues related to inter-

national trade, environmental quality, and schooling.
helen v. milner
Helen V. Milner is the B.C. Forbes Professor of Politics and International Affairs
at Princeton University, the chair of the Department of Politics, and the director
of the Center for Globalization and Governance at Princeton’s Woodrow Wilson
School. She has written extensively on issues related to international trade, the
connections between domestic politics and foreign policy, globalization and
regionalism, and the relationship between democracy and trade policy. Some of
her writings include The Political Economy of Economic Regionalism (coedited
with Edward Mansfi eld, 1997), Internationalization and Domestic Politics (coed-
ited with Robert Keohane, 1996), “Why the Move to Free Trade? Democracy and
Trade Policy in the Developing Countries” (International Organization, 2005),
“Why Democracies Cooperate More: Electoral Control and International Trade
Agreements” (coauthored with Edward Mansfi eld and B. Peter Rosendorff,
International Organization, 2002), and “The Optimal Design of International
Institutions: Why Escape Clauses are Essential.” (coauthored with B. Peter
Rosendorff, International Organization, 2001).
peter muchlinski
Peter Muchlinski is a professor in international commercial law at the School of
Oriental and African Studies, University of London. He is the author of Multinational
Enterprises and the Law (Second edition, Oxford University Press, 2007) and is
coeditor (with Dr Federico Ortino and Professor Christoph Schreuer) of the Oxford
Handbook of International Investment Law (Oxford University Press, 2008). He acts
as an adviser to the United Nations Conference on Trade and Development
(UNCTAD) on investment law issues. He is corapporteur to the International Law
Association Committee on the International Law on Foreign Investment and occa-
sionally advises in international investment arbitrations.
eric neumayer
Eric Neumayer is a professor in the department of geography and environment
at the London School of Economics and Political Science since 1998. Before, he

was an academic assistant at the Centre for Law and Economics at the University
of Saarbrücken, Germany. An economist by training, he is the coeditor of the
Handbook of Sustainable Development (with Giles Atkinson and Simon Dietz), the
contributors xvii
author of Weak versus Strong Sustainability: Exploring the Limits of Two Opposing
Paradigms, Greening Trade and Investment: Environmental Protection Without
Protectionism and The Pattern of Aid Giving: The Impact of Good Governance on
Development Assistance, as well as numerous journal articles. He has broad
research interests that all relate to evidence-based public policy.
irina orlova
Irina Orlova is a 2005 graduate of Economics Education and Research Consortium
M.A. Program in Economics. She is currently working with CASE Ukraine. Her
research interests lie in the areas of international trade, capital fl ows, and transi-
tion economies.
michael pfaffermayr
Michael Pfaffermayr is a professor of international economics in the Department
of Economic Policy, Economic Theory and Economic History at the University of
Innsbruck, Austria. He is managing editor of EMPIRCA, a CESifo Research
Fellow and an International Research Fellow at the Oxford University Centre for
Business Taxation. His research interests include international and industrial
economics, applied econometrics, and especially foreign direct investment as it
relates to multinational fi rms and trade. Currently, a major focus of his research
is international tax competition. He has authored a number of publications.
susan rose-ackerman
Susan Rose-Ackerman is the Henry R. Luce Professor of Jurisprudence (Law
and Political Science) and codirector of the Yale Law School’s Center for Law,
Economics, and Public Policy. She has held fellowships from the Guggenheim
Foundation and the Fulbright Commission and was a Visiting Research Fellow
at the World Bank and a fellow at the Center for Advanced Study in the Behavioral
Sciences, Stanford, California. She is the author of Corruption and Government:

Causes, Consequences and Reform, 1999 (translated into thirteen languages); From
Elections to Democracy: Building Accountable Government in Hungary and Poland
(2005); Controlling Environmental Policy: The Limits of Public Law in Germany and
the United States (1995); Rethinking the Progressive Agenda: The Reform of the
American Regulatory State (1992); and Corruption: A Study in Political Economy
(1978). She holds a B.A. from Wellesley College and a Ph.D. in economics from
Yale University.
donald j. rousslang
Dr. Donald Rousslang received his Ph.D. in economics from the University of
Oregon in 1974. He has served as a senior economist in the U.S. Department
of Labor, as chief of the Research Division in the U.S. International Trade
Commission, and as a senior economist with the Department of Treasury. He is
currently a tax specialist with the Department of Taxation in Hawaii. He has also
xviii contributors
taught part-time at George Mason University, George Washington University
and the University of Hawaii at Manoa. His main interests are applied microeco-
nomics, international fi nance, and public fi nance.
lisa e. sachs
Lisa Sachs is the program coordinator at the Vale Columbia Center on Sustainable
International Investment at Columbia University. She received a J.D. and a
Master of International Affairs from Columbia in May 2008. Her academic
research has focused on foreign investment, corporate responsibility, human
rights, and economic development.
jeswald w. salacuse
Jeswald W. Salacuse is Henry J. Braker Professor of Law at the Fletcher School
of Law and Diplomacy at Tufts University. He is the author of several books,
including most recently The Global Negotiator (2003), Leading Leaders (2006)
and Seven Secrets for Negotiating with Government (2008). He is a member of the
Council on Foreign Relations and the American Law Institute and serves as
president of an ICSID international investment arbitration tribunal.

karl p. sauvant
Karl P. Sauvant is the founding executive director of the Vale Columbia Center
on Sustainable International Investment, Research Scholar and Lecturer in Law
at Columbia Law School, codirector of the Millennium Cities Initiative, and
guest professor at Nankai University, China. Before that, he was director of
UNCTAD’s Investment Division. He is the author of, or responsible for, a sub-
stantial number of publications. In 2006, he was elected an Honorary Fellow of
the European International Business Academy. He received his Ph.D. from the
University of Pennsylvania in 1975.
alexandre skiba
Alexandre Skiba received his Ph.D. from Purdue University in 2003. Since then,
he has taught at Purdue University, the University of Kansas, and the University of
Wyoming. His research focuses on empirical investigations of international trade.
laura spess
Laura Spess is a Ph.D. candidate in the Department of Geography at Pennsylvania
State University. Her current research focuses on intranational migration in the
developing country context. She has coauthored papers on poverty and fertility in
developing countries and urban-rural differences in mortality among older
adults in China.
nicholas p. sullivan
Nicholas P. Sullivan is the author of You Can Hear Me Now: How Microloans
and Cell Phones Are Connecting the World’s Poor to the Global Economy, and
contributors xix
the publisher of Innovations: Technology/Governance/Globalization. He was a
United Nations-accredited business interlocutor to the International Financing
for Development conference. He is a partner in the Global Frontier Fund, a
private-equity fund of local funds in emerging markets, for which he compiles
the annual Wealth of Nations Index, a ranking of 70 developing countries.
A graduate of Harvard University and the Fletcher School of Law and Diplomacy,
he is currently a visiting fellow at the Feinstein International Center at Tufts

and a visiting scholar at the Legatum Center for Development & Entrepreneurship
at Massachusetts Institute of Technology.
deborah l. swenson
Deborah L. Swenson is a professor of economics at the University of California,
Davis, and a research associate with the National Bureau of Economic Research.
Her research, which focuses on issues relating to the international location deci-
sions of global fi rms, has appeared in academic journals, including the American
Economic Review, Review of Economics and Statistics, Journal of International
Economics, and Canadian Journal of Economics. Much of her work involves empir-
ical analysis of foreign investment and outsourcing decisions that examine how
the international differences in costs and policy environment affect the operat-
ing choices of multinational fi rms. She also investigates how multinational fi rms
affect the global environment, by studying the impact of multinational fi rms on
local economic performance and by studying the implications of multinational
fi rm behavior for international tax systems.
len j. trevino
Len J. Trevino, Ph.D., holds the Gerald N. Gaston Eminent Scholar Chair in
International Business in The Joseph A. Butt, S.J. College of Business at Loyola
University New Orleans. His expertise lies in strategic management/policy,
management of the multinational enterprise, global business strategy, foreign
direct investment, and strategic management in emerging markets. His research
centers on the theory of the multinational enterprise, foreign direct investment,
and the intersection of strategic management and international business. He
has published in many top academic journals, including Journal of International
Business Studies, Management International Review, Journal of World Business,
International Business Review, Journal of Labor Research, Business Horizons, and
Transnational Corporations, among others. He has consulted with such organiza-
tions as Dow Brands, Eli Lilly, Monsanto, and the United Nations Conference on
Trade and Development.
kenneth j. vandevelde

After graduating from Harvard Law School in 1979, Kenneth J. Vandevelde
entered private practice in Washington, D.C. In 1982, he joined the Offi ce of the
Legal Adviser at the U.S. Department of State, where his responsibilities included
arbitration of investment claims before the Iran-United States Claims Tribunal
xx contributors
and the negotiation of bilateral investment treaties. In 1988, he left the State
Department to teach and to write his book, United States Investment Treaties:
Policy and Practice. Since then, he has published numerous articles on bilateral
investment treaties; has spoken about these agreements in Europe, Asia, Africa,
and North and South America; and has served as a consultant on bilateral invest-
ment treaties to the U.S. Senate Foreign Relations Committee to foreign govern-
ments and to counsel for private investors. He currently is Professor of Law at
Thomas Jefferson School of Law in San Diego, California, where he served as
Dean from 1994 to 2005.
hannes winner
Hannes Winner is professor of economics and public fi nance at the University
of Innsbruck. He is also adjunct professor at the Free University of Bolzano-
Bozen (Italy). In 2003, he was visiting professor at the European University
Institute in Florence. His fi elds of interest include public economics and
economics of taxation, health economics, and econometrics. He has published
in academic journals including International Tax and Public Finance, Regional
Science and Urban Economics and the Canadian Journal of Economics. His current
research is on the empirical impact of taxation on international production and
location decisions of multinational fi rms.
jason yackee
Jason Yackee is an assistant professor of law at the University of Wisconsin. He
holds a Ph.D. in political science from the University of North Carolina, Chapel
Hill, and a J.D. from Duke University School of Law. His research centers on
international investment law, international economic relations, foreign arbitra-
tion, and administrative law. His research on BITs and other topics has been

published in a number of peer-reviewed journals and law reviews, including the
Journal of Politics, International Politics and the Duke Law Journal.
foreword
It would be tactless in a foreword to propose answers to the puzzle of bilateral
investment treaties (BITs) and double taxation treaties (DTTs). Perhaps, though,
it is not inappropriate to pose some questions that may whet the appetite of the
reader. Although many questions about the diffusion and implications of these
bilateral treaties are relevant to both BITs and DTTs, I focus on BITs, a topic on
which many academic and policy discussions have centered.
BITs (and investment dispute provisions in trade agreements, such as
NAFTA) keep sprouting up—more than 2,500 as of the publication of this book.
Nevertheless, all efforts to reach agreement on a multilateral investment treaty
(in the United Nations, in the Organisation for Economic Co-operation and
Development, in the World Trade Organization, and elsewhere) have failed, even
though the substantive provisions in the proposals read just like BITs. How can
this be explained?
A number of observers, including this writer, have reached for the conclusion
that the common provisions of BITs—non-discrimination, open access for inves-
tors, fair and equitable treatment, expropriation only for a public purpose and
subject to full compensation, arbitration of investor-state disputes—now com-
prise or refl ect the customary international law of foreign investment. Is this
persuasive? Or is there no such law, as shown by the failure to achieve a multi-
lateral agreement? Note that the answer to this question is not just for the scholar,
but becomes critical in dispute settlement. A customary law of foreign invest-
ment, or even of interpretation of similar BITs, would mean that arbitrators
hearing a dispute between a Xandian investor and the state of Patria could (and
should?) rely on (or at least be guided by) decisions involving treaties of Tertia,
Quarta, Quinta, etc. An opposite answer would make resolution of each dispute
into a journey from square one.
Why do developing countries in huge numbers enter into BITs and DTTs

anyway? In some instances, the answer is clear. When, in the early 1990s,
President Carlos Menem saw the way out of Argentina’s doldrums to be privati-
zation of state-run utilities and other monopolies, he needed foreign capital.
Foreign private capital, however, would come in only on the basis of a stable cur-
rency linked to the dollar and a bilateral investment treaty with each potential
investor’s home state. When Mexico wanted to take part in the free trade arrange-
ments between the United States and Canada, the anticipation of increased
investment in Mexico to produce goods for the United States market depended
on a secure investment protection regime as a necessary component of the North
American Free Trade Agreement. But in other cases the answer is not so clear.
Do BITs and DTTs actually attract foreign investment? Or is it true that absence
xxii foreword
of an applicable BIT or DTT discourages potential investors? And how can one
really tell? More broadly, is the presence or absence of a BIT really an indicator
of a good or bad investment climate, as stated, for instance, in the Convention
Establishing MIGA, the Multilateral Investment Guarantee Agency sponsored
by the World Bank?
Many critics (not only in Latin America, but also in the United States and
Canada) have pointed out that under a BIT and its analogues in free trade agree-
ments, a foreign investor may enjoy greater legal protection than a domestic
investor would. U.S. jurisprudence under the “just compensation” clause of the
Fifth Amendment has a long and sometimes confusing tradition distinguishing
between a “taking” (entitled to compensation) and an exercise of regulatory
powers (generally not entitled to compensation). The Canadian constitution does
not contain a property clause at all. Most Latin American constitutions contain
variations on the concept of the “social function of property.” Typically BITs
contain a stricter form of protection for investors in case of expropriation or
deprivation of operating rights than is available under the law or in the courts of
the host state. The answer of the proponents of BITs is that the criticism may be
true, but the object of the exercise is precisely to give additional protection in

order to encourage cross-border investment. If, then, BITs are not supposed to
be neutral (as between domestic and foreign investment) can they nevertheless
be fair?
Finally, for this menu of appetizers, why do the industrial countries advocate
for these treaties? To illustrate this trend, consider the fact that there are cur-
rently 103 treaties for France, 83 for Italy, 147 for the Germany, 102 for the
United Kingdom, and 48 for the United States.
1
Policies are rarely one-dimensional, and my impression is that BITs have
rarely been subject to serious debate in the developed countries. Foreign invest-
ment was accepted as a natural feature of major corporations, nearly all of which
became multinational well before globalization swept across the planet. If the
business community wanted BITs and they did not cost much, why not employ
them? But does not foreign direct investment encourage outsourcing, loss of
domestic jobs, and a drain on the balance of payments? Can one justify BITs
and DTTs on the basis that public sector foreign assistance (whether bilateral
or through the World Bank and regional development banks) does not work?
Private investment, by contrast, is designed to bring what the public sector
cannot bring: technology, management skills, and access to global markets.
Maybe foreign direct investment can act as a catalyst, contributing to a culture
of incentives and innovation that will lift a country out of poverty. If so, by
1 Figures from ICSID. The U.S. total does not include NAFTA and Free Trade
Agreements with Australia, Chile, Singapore, and others that contain chapters substan-
tially replicating BITs.
foreword xxiii
encouraging their corporations to invest in developing countries, can the indus-
trial countries justify their minimal commitment—0.47% of GDP for France
and the United Kingdom, 0.36% for Germany, 0.28% for Japan, 0.22% for the
United States—to public sector aid?
2

My task was to raise a few preliminary questions. For answers—though not
necessarily the answers—I invite the reader to proceed to the main text.
Andreas F. Lowenfeld
2 Figures from The Economist, Pocket World in Figures, 2008 Edition.
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