University of Nevada, Reno an Investigation of the Internal
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University of Nevada, Reno An Investigation of the Internal Dynamics of Bilateral Investment Treaties: Every BIT Counts A dissertation submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy in Political Science by Michael N. Jacobs Dr. Robert L. Ostergard/Dissertation Advisor May, 2013 © by Michael N. Jacobs 2013 All Rights Reserved We recommend that the dissertation prepared under our supervision by MICHAEL N. JACOBS entitled An Investigation of the Internal Dynamics of Bilateral Investment Treaties: Every BIT Counts be accepted in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Robert L. Ostergard, Ph.D., Advisor Stacy Gordon, Ph.D., Committee Member Derek Kauneckis, Ph.D., Committee Member Bozena Welborne, Ph.D., Committee Member Elliot Parker, Ph.D., Graduate School Representative Marsha H. Read, Ph.D., Dean, Graduate School May, 2013 i Abstract To date, over 2,500 bilateral investment treaties (BITs) have been signed. The widespread use of BITs raises two questions that are addressed in this dissertation: (1) Do BITs increase foreign direct investment (FDI) to developing countries? And (2) what has driven the proliferation of BITs? This research advances the literature assessing BITs and FDI flows by developing BIT strength measures that evaluate various protections and guarantees provided by the treaties. It hypothesizes that stronger BITs, BITs that provide foreign investors more protections and guarantees, attract more investment flows to developing state treaty partners. The results of a time series model from 1985-2000 support the hypothesis. In regards to the second question, previous research argues that the proliferation of BITs is the product of competition for capital among developing states. This study hypothesizes that multinational corporations (MNCs) are driving the spread of BITs. The results from a time series logistic regression support the MNC hypothesis. ii Dedication ―I can do all this through Him who gives me strength‖ -Philippians 4:13 (NIV) iii Table of Contents CHAPTER 1: INTRODUCTION ............................................................................................................ 1 INTRODUCTION ............................................................................................................................ 1 OVERVIEW OF THE STUDY ........................................................................................................... 3 Historical Background .............................................................................................................. 3 Theory ...................................................................................................................................... 6 Literature Review ..................................................................................................................... 7 BIT Measurement Instrument.................................................................................................. 8 Do BITs Increase FDI flows to Developing States? ................................................................... 9 What has Driven the Proliferation of BITs? ............................................................................. 9 CONCLUSION .............................................................................................................................. 10 CHAPTER 2: HISTORICAL BACKGROUND ........................................................................................ 12 INTRODUCTION .......................................................................................................................... 12 DEFINING FDI AND MNCs........................................................................................................... 13 FOREIGN INVESTMENT, EARLY MNCs, AND PROPERTY RIGHTS IN THE MEDIEVAL ERA ........... 14 Early Multinationals in the Medieval Era ............................................................................... 15 The Politics of Protection in the Late Medieval Era ............................................................... 17 FOREIGN INVESTMENT, EARLY MNCs, AND PROPERTY RIGHTS IN THE AGE OF EXPLORATION 18 Early Multinationals in the Age of Exploration: The English East India Company ................. 21 The Politics of Investment Protection in the Age of Exploration ........................................... 24 FDI, MNCs, AND PROPERTY RIGHTS IN THE 19TH AND EARLY 20TH CENTURIES ......................... 24 Multinationals in the 19th and Early 20th Centuries: British Infrastructure in Latin America 28 The Politics of Investment Protection in the 19th and Early 20th Centuries ........................... 30 FDI, MNCs, AND PROPERTY RIGHTS IN THE INTERWAR ERA ..................................................... 38 Multinationals in the Interwar Era: The United Fruit Company ............................................ 40 The Politics of Protection in the Interwar Period .................................................................. 43 FDI, MNCs, AND PROPERTY RIGHTS IN THE POST WWII ERA .................................................... 45 FDI & MNCs Post WWII-1980 ..................................................................................................... 48 FDI & MNCs 1980-2000 .............................................................................................................. 50 Recent FDI Flows .................................................................................................................... 53 The Modern MNC .................................................................................................................. 54 iv The Politics of Investment Protection in the Post WWII Era ................................................. 60 SUMMARY .................................................................................................................................. 73 International Investment Law ................................................................................................ 73 Characteristics of MNC and FDI ............................................................................................. 75 The Politics of Investment...................................................................................................... 77 Enforcement of International Investment Law ...................................................................... 78 CONCLUSION .............................................................................................................................. 80 CHAPTER 3: THEORY ...................................................................................................................... 81 INTRODUCTION .......................................................................................................................... 81 REGIME THEORY ........................................................................................................................ 82 Power-Based Theories: Realism and Hegemonic Stability Theory ........................................ 82 Interest-Based Theory: Neoliberalism ................................................................................... 86 Cognitive Based Theories ....................................................................................................... 91 Summary of Approaches to Regime Theory .......................................................................... 93 Regime Theory and BITs......................................................................................................... 94 Criticisms of Regime Theory .................................................................................................. 96 STRANGE’S STRUCTURAL POWER .............................................................................................. 97 Production .............................................................................................................................. 98 Security .................................................................................................................................. 99 Finance ................................................................................................................................. 100 Knowledge ........................................................................................................................... 100 US Hegemony and Liberal Agenda ....................................................................................... 101 Consequences of Structural Change: The Rise of Multinationals and the Decline of States ............................................................................................................................................. 102 Criticizing Strange: A Solid ‘Structure’ but Flimsy Finishing Work ....................................... 103 THE POLICY DIFFUSION THEORETICAL FRAMEWORK .............................................................. 106 A Coercive Theory of Policy Diffusion .................................................................................. 108 CONCLUSION: DEVELOPING AN APPROAPRIATE LENS THROUGH WHICH TO VIEW BITS ....... 115 CHAPTER 4: LITERATURE REVIEW ................................................................................................ 117 INTRODUCTION ........................................................................................................................ 117 EXPLAINING THE BIT PARADOX: WHAT HAS DRIVEN THE PROLIFERATION OF BITs?.............