© 2014 The International Institute for Sustainable Development
IISD.org
10
Assessing the Impacts of Investment Treaties: Overview of the evidence
3.0 Investment Treaties: Impacts on developing countries
The categorization of costs and beneits proposed in the previous section provides a framework to understand the impacts of investment treaties on countries, independent of their development status. The nature and extent
of each of these impacts, however, will vary in diferent countries. Investment treaties’ impacts in any particular country are likely to depend on whether it is a net capital importer or exporter. Moreover, investment treaties’
impacts are likely to vary in light of other country characteristics, such as diferences in systems of government, natural resource endowments and national income.
Most developing countries are net capital importers relative to their developed country investment treaty partners. This means that their interests lie in the potential ability of investment treaties to attract additional
investment lows. It also means that developing countries are more exposed to the costs associated with investment treaties, including loss of policy space and adverse distributive efects.
3.1 Attraction of Foreign Investment
Section 2 provided an overview of quantitative evidence of the impact of investment treaties on foreign investment lows. The majority of this evidence relates to investment lows to developing countries. Section 3 has
reviewed qualitative evidence of the impact of investment treaties on investment lows. The evidence is mixed and subject to signiicant methodological challenges. Taken together, these studies suggest that investment
treaties probably do have some positive impact on investment inlows to developing countries in certain sectors.
Regardless of whether or not a country signs investment treaties, there is strong evidence that domestic institutional quality and other elements of the domestic investment climate have a signiicant independent
positive impact on inward FDI e.g., Bénassy-Quéré, Coupet Mayer 2007. A diferent question is how the presence of investment treaties interacts with domestic institutional quality—i.e., are investment treaties more
efective in attracting foreign investment to developing countries with better or poorer institutional quality? Experts have come to diferent conclusions in this respect.
UNCTAD 2014 implies that investment treaties complement other aspects of the investment climate—i.e., that they are more efective in increasing FDI in developing countries where foreign investment is perceived
as less risky. The logic behind this argument is unclear. Investment treaties provide foreign investors with legal protection against certain types of government interference. If anything, one would expect investment treaties to
be more valuable to foreign investors in circumstances in which otherwise viable investments are subject to high risks of such government interference, i.e., in situations where the investment climate is poor.
Evidence of whether investment treaties have a greater impact on investment lows to risky countries is, however, equivocal. Tobin and Rose-Ackerman 2011 ind that investment treaties are more efective in attracting FDI to
developing countries with relatively strong domestic institutions, whereas Neumayer and Spess 2005 provide some qualiied evidence that they are more efective in developing countries with weak institutions.
Empirically testing interaction efects between institutional quality and the impact of investment treaties on investment lows poses serious methodological challenges. These include conceptual disagreement about what
constitutes “good” institutional quality, empirical challenges in constructing metrics that measure or are suitable proxies for a speciied conception of institutional quality and controlling for the strong independent
causal impact of institutional quality on investment lows Bonnitcha, Poulsen Waibel, 2017. With regards to the irst and second of these challenges, studies often use metrics for which time series data is easily available,
such as the World Bank’s Worldwide Governance Indicators WGIs or political risk metrics published by the International Country Risk Guide ICRG. These metrics aggregate characteristics that are relevant to the
study of investment treaties with characteristics that are not relevant. They also tend to relect the perceptions of business people, as opposed to other actors, which may not be appropriate depending on the conception of
institutional quality that the study incorporates. There are no easy solutions to these challenges.
© 2014 The International Institute for Sustainable Development
IISD.org
11
Assessing the Impacts of Investment Treaties: Overview of the evidence
3.2 Loss of Policy Space
