Do Legal Remedies Promote Investment? New Evidence from a Natural Experiment in the Investment Treaty Network

Many developing countries are considering curtailing legal remedies available to investors in bilateral investment treaties (BITs). This change will likely benefit developing countries by restoring a portion of their sovereign autonomy, but perhaps at the cost of a decline in foreign investment. As with any trade or investment policy, there are two primary challenges to evaluating whether and how the strength of legal remedies in a BIT affect investment: (1) studying a change in policy at the provision level requires provision-level information on a large number of BITs, and (2) investment policy is likely correlated with unobserved drivers of investment. To address the first challenge I introduce a new comprehensive database, created by me in partnership with the United Nations Conference on Trade and Development (UNCTAD), that contains provision-level information for over 2,500 BITs. I also identify a natural experiment to address the second challenge: an arbitration decision that endowed some investors with new and stronger legal remedies through an unanticipated application of the "most favored nation" principal. Using this database and natural experiment, I present robust evidence that stronger legal remedies in a BIT do not lead to more investment. I also present suggestive evidence that stronger legal remedies imposed on a host economy by an arbitration tribunal may lead to a decline in investment as host economies react to their increased exposure to arbitration and tighter constraints on their regulation of foreign capital.