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preferential—and thus less rewarding—to the rich state.  We test these hypotheses using 

annual data on pairs of developing and developed countries between 1960 and 2004, and 

find strong support of our argument. 

Two implications follow.  First, to the extent that the presence of a BIT tells us 

something about the likelihood that a pair of countries signs a North-South trade agree-

ment, they can hardly be dismissed as cheap talk.  But second, having many BITs does 

not make it more likely that a poorer country will get one of these PTAs.  Our results in-

dicate that the tipping point is five, which is roughly two fewer than the average develop-

ing country in our sample has ratified.  This finding cautions against the argument that 

poor states should negotiate a multitude of BITs to signal that they are “open for busi-

ness,” since their welfare gains are likely to be greater where investment and trade liber-

alization coincide (Egger, Larch and Pfaffermayr 2007). 




 

3

This paper proceeds as follows.  Section II elaborates our argument.  Section III 



discusses our research design.  Section IV presents our results.  Section V concludes by 

discussing some of the more salient implications that follow. 

 

II. Argument 



 

 

By ruling out expropriation (save with compensation) and offering recourse to 



international dispute settlement, BITs are thought to lower the risk that foreign investors 

face in a developing country, leading to the expectation that they increase FDI.  Govern-

ments seem more than convinced: according to UNCTAD (2006), the number of BITs 

rose from 385 in 1990 to 2,392 in 1999, and, by 2005, fully 177 countries had signed on 

to at least one investment treaty.  Just as telling, providers of political risk insurance, like 

the governments of France and Germany, will not underwrite an investment unless a BIT 

is in place.  For its part, the Multilateral Investment Guarantee Agency (MIGA) encour-

ages countries to adopt BITs to ensure that all investments are sufficiently safeguarded 

(UNCTAD 1998). 

 

Why this faith in BITs?  The idea is that developing countries “tie their hands” 



through investment treaties (Vandevelde 1998), signaling their willingness to swear off 

(uncompensated) expropriation by giving foreign investors the right to pursue legal 

remedies before a third-party, rather than from the developing country’s domestic court 

system.  BITs also ensure that a rich state’s investors are treated as favorably as others in 

the host country, meaning that they get most-favored nation (MFN) or national treatment, 

whichever is better.  For those firms looking to outsource to tap cheaper labor, move into 

new markets, or capitalize on abundant natural resources, investment treaties thus 



 

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promise to protect their assets and place them on a “level playing field” with their 



competitors. 

 

Although BITs certainly limit the ability of developing countries to expropriate



they are far from onerous for developed ones.  Indeed, curbs on expropriation are 

typically in place in wealthy states, and the efficacy of their domestic courts in handling 

such cases is not usually called into question.  For these reasons, we expect that rich 

governments are likely to supply BITs when called on by firms to guard against the risk 

of expropriation in host countries. 

 

Yet, firms that outsource have an additional concern: namely, the costs of sending 



inputs to, and importing from, foreign affiliates.  This turns attention to PTAs; firms want 

more liberal trade between, and preferred access to, the country with which they enjoy 

the protection of a BIT, and their home market.  But trade agreements are more onerous 

for rich states to sign, in that they involve deeper and reciprocal obligations, and can 

mobilize wider anti-trade groups to weigh in on politics.  This means that governments 

have to take a closer look at the expected benefits from signing a trade agreement.  At the 

same time, BITs may help prepare the groundwork for negotiating the more robust 

obligations of PTAs.  Indeed, since investment treaty and trade agreement negotiations 

cover most of the same issues, governments that sign BITs have already incurred many of 

the political and economic costs associated with concluding a PTA, including 

strengthening the domestic institutions needed to participate.  Along these lines, for 

example, the US explains that, because of Africa’s “generally low levels of economic, 

administrative, and regulatory development,” it is using BITs “to transition from U.S.-

Africa trade and investment relationships based on one-way trade preferences to deeper, 




 

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more reciprocal partnerships, such as that established by an FTA” (USTR 2007).  In this 



view, a BIT between a developing and developed country improves the odds of 

subsequently signing a PTA.  

 

Of course, one possibility is that FDI, itself, might induce the developed country 



to reduce tariffs on the developing country’s trade for precisely this reason, raising the 

possibility that BITs could substitute for PTAs.  Blanchard (2005) calls this the FDI 




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