Assessing the Impacts of Investment Treaties: Overview of the evidence

Investment treaties grant powerful legal rights to foreign investors.

Foreign investors’ ability to frame plausible multimillion-dollar claims against a wide range of host government actions—and the fact that these claims are adjudicated through a system of private arbitration—has made investment treaties controversial. With this background in mind, this scoping study seeks to provide an overview and assessment of existing evidence of investment treaties’ impacts. The focus is on the costs and benefits of investment treaties from the perspective of developing countries.

To date, the majority of the academic literature has focused narrowly on one supposed benefit of investment treaties, namely the treaties’ effect on foreign direct investment (FDI) flows. Reviewing this literature, this study concludes that investment treaties probably do lead to a modest increase in some types of FDI to developing countries. However, due to methodological challenges, it is difficult to consistently identify this effect or to pinpoint the relevant elements of treaties that cause these impacts. There are further questions about the extent to which treaties’ impacts on the pattern of FDI flows constitute a benefit from a host state perspective. This is both because investment treaties appear to be most effective in increasing FDI in sectors that are least beneficial from a host state perspective, and because investment treaties are preferential instruments that grant legal rights to some, but not all, investors.

Studies to date have not been able to find clear evidence of other supposed benefits of investment treaties, such as facilitating domestic reforms, promoting the rule of law or depoliticizing investment disputes.

Assessing the costs of investment treaties is also challenging. Investment treaties clearly limit government policy space to some extent, but the extent to which these constraints constitute a cost remains a subject of heated disagreement in the academic and policy literature. There is evidence too that investment treaties do have significant distributive impacts, in the sense that states have been required to compensate foreign investors in circumstances where compensation would not have been paid in the absence of an investment treaty. However, it is difficult to assess the relative scale of these impacts, and there has been little research on investment treaties’ other distributive impacts—notably, their impact on investor–state bargaining in negotiations to settle investment disputes.

When weighing all the benefits and costs of investment treaties against each other, there is insufficient evidence to come to any overall conclusion about the net effect of investment treaties for developing countries. It is also highly likely that the net effect of investment treaties varies between developing countries.