Cost of Compliance, Autocratic Time Horizon, and Investment Treaty Formation

• Published date: 01 June 2020
• Date: 01 June 2020
• DOI: 10.1177/1065912919828540
• Author: Jia Chen,Fangjin Ye
• Subject Matter: Articles

https://doi.org/10.1177/1065912919828540

Political Research Quarterly

2020, Vol. 73(2) 325 –339

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DOI: 10.1177/1065912919828540

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Article

Introduction

Bilateral investment treaties (BITs) are generally consid-

ered useful tools for promoting foreign direct investment

(FDI) to developing countries. A conventional view on

the origins of these investment treaties posits that devel-

oping countries with weak institutions sign BITs to

strengthen commitments on property rights and investor

protection (Ginsburg 2005; Kerner 2009). Previous stud-

ies have maintained that BITs, which feature a legalistic

process for dispute settlement that increases the cost of

infringing on investors’ rights, could prevent govern-

ments with weak domestic legal and political constraints

from extorting from foreign investors (Arias, Hollyer,

and Rosendorff 2018; Guzman 1997; Rosendorff and

Shin 2015; Salacuse and Sullivan 2005). If this is the

case, then BITs should be regarded as particularly valu-

able for investment promotion by autocratic regimes that

find it hard to make credible commitments to investors

(Busse and Hefeker 2007; Jensen 2008; Li 2009). As

Rosendorff and Shin (2015, 113) noted, “Autocratic

states have much to gain from FDI, but their promises . .

. are not credible. A BIT offers more credibility to the

promise, and hence it is the more autocratic states that

sign more BITs.”

The pattern of BIT signing among autocratic regimes,

however, is more divergent than expected. Even after

accounting for their different investment positions, some

autocratic governments are more enthusiastic about BITs

than their peers. Using data from 2008, Figure 1 plots the

number of signed BITs against the levels of (1) FDI

inflows and (2) FDI stocks among 93 autocratic regimes

as defined in Geddes, Wright, and Frantz (2014).

Although signing BITs is positively associated with FDI

inflows and stocks overall, much of its variation among

autocratic regimes remains insufficiently understood.

Contrasting Egypt and Sudan highlighted in Figure 1, the

two neighboring African autocracies are in similar invest-

ment positions in terms of inflows and stocks, while the

former signed many more BITs with capital exporters in

the Global North (33) than the latter (5). Also, raw statis-

tics do not seem to show that autocratic regimes favor

828540PRQXXX10.1177/1065912919828540Political Research QuarterlyChen and Ye

research-article2019

1Shanghai University of Finance and Economics, China

Corresponding Author:

Fangjin Ye, School of Public Economics and Administration, Institute

of Political Science, Shanghai University of Finance and Economics,

111 Wuchuan Road, Shanghai 200433, China.

Email: ye.fangjin@sufe.edu.cn

Cost of Compliance, Autocratic Time

Horizon, and Investment Treaty

Formation

Jia Chen1 and Fangjin Ye1

Abstract

This paper investigates the domestic political factors that shape the participation of autocratic regimes in bilateral

investment treaties (BITs). We argue that autocratic time horizon positively affects governments’ motive to sign

BITs by influencing the costs of complying with investor protection standards included in the treaties. These treaty

provisions severely constrain discretionary policy maneuvers that are critical to autocratic survival. Autocratic regimes

expecting to rule for a considerable time period are willing to relinquish some discretionary policy space in the interest

of enhancing the credibility of their investor protection commitment—and hence promoting investment inflows.

However, autocratic governments with short time horizons rely heavily on discretionary policy maneuvers to stabilize

their grip on power and are likely to infringe on investors’ interests to extract resources to ensure their political

survival, making the costs of compliance with BITs too high to bear. Using a country-dyad data set of BIT signatures

from 1971 to 2009, we find strong support for our argument.

Keywords

bilateral investment treaties, time horizon, authoritarian regime