1 Although the first bilateral investment treaty was concluded in 1959, more than two-thirds of the agreements have been signed since 1990. For a listing, see United Nations Centre on Transnational Corporations [UNCTC], Bilateral Investment Treaties in the Mid 1990s (forthcoming). The International Centre for Settlement of Investment Disputes separately compiled a list of more than 1100 treaties involving 155 countries through the end of 1996. See International Centre for Settlement of Investment Disputes [ICSID], Bilateral Investment Treaties 1959–1996 (1997).

2 On the BITs, see generally Rudolf Dolzer & Margrete Stevens, Bilateral Investment Treaties (1995); Kenneth J. Vandevelde, United States Investment Treaties: Policy and Practice (1992) [hereinafter U.S. Investment Treaties] ; Kenneth J. Vandevelde, U.S. Bilateral Investment Treaties: The Second Wave, 14 Mich. J. Int'l L. 621 (1993); Mohamed I. Khalil, Treatment of Foreign Investment in Bilateral Investment Treaties, 8 ICSID Rev. 339 (1992); Robert K. Paterson, Canadian Investment Promotion and Protection Treaties, 29 Can. Y.B. Int'l L. 373 (1991); Jeswald Salacuse, BIT by BIT: The Growth of Bilateral Investment Treaties and Their Impact on Foreign Investment in Developing Countries, 24 Int'l L. 655 (1990); Kenneth J. Vandevelde, The Bilateral Investment Treaty Program of the United States, 21 Cornell Int'l L.J. 201 (1988); Adeoye Akinsanya, International Protection of Foreign Direct Investment in the Third World, 36 Int'l & Comp. L.Q. 58 (1987); Eileen Denza & Shelagh Brooks, Investment Protection Treaties: United Kingdom Experience, 36 Int'l & Comp. L.Q. 908 (1987); Palitha T. B. Kohona, Investment Protection Agreements: An Australian Perspective, 21 J. World Trade L. 79 (1987); T. Modibo Ocran, Bilateral Investment Protection Treaties: A Comparative Study, 8 N.Y.L. Sch. J. Int'l & Comp. L.Q. 401 (1987); M. Sornarajah, State Responsibility and Bilateral Investment Treaties, 20 J. World Trade L. 79 (1986); Pamela B. Gann, The U.S. Bilateral Investment Treaty Program, 21 Stan. J. Int'l L. 373 (1985).

3 The UN Centre on Transnational Corporations counted 1306 BITs as of the end of 1996. UNCTC, supra note 1.

4 On the circumstances that have given rise to the current flurry of BIT negotiations, see Kenneth J. Vandevelde, Sustainable Liberalism and the International Investment Regime, 19 Mich. J. Int'l L. 373 (1998).

5 See George T. Crane & Abla Amawi, The Theoretical Evolution of International Political Economy (1997); International Political Economy (C. Roe Goddard, John Passe-Smith & John Conklin eds., 1996) [hereinafter Goddard et al.]; The International Political Economy: Perspectives on Global Power and Wealth (Jeffrey A. Frieden & David A. Lake eds., 1995) [hereinafter Perspectives] ; International Relations Theory: Realism, Pluralism, Globalism (Paul R. Viotti & Mark V. Kauppi eds., 1993); Torbjorn L. Knutsen, A History of International Relations Theory 237–39 (1992); and Robert Gilpin, The Political Economy of International Relations (1987).

6 See Crane & Amawi, supra note 5, at 5.

7 Id.; Gilpin, supra note 5, at 31–32.

8 See Crane & Amawi, supra note 5, at 5; Jeffrey A. Frieden & David Lake, International Politics and International Economics, in Goddard et al., supra note 5, at 25, 31–32; Gilpin, supra note 5, at 31. Of course, those interests are defined by those who, at any given moment, hold power within the state. Id. at 48.

9 See Gilpin, supra note 5, at 32.

10 See John Rapley, Understanding Development: Theory and Practice in the Third World 27–44 (1996).

11 Protective tariffs encourage foreign investment because they make it expensive for a foreign producer to export to the protected economy, thus creating an incentive to establish a production facility inside the territory of the target economy and thereby avoid the tariff. See Richard Caves, Multinational Enterprise and Economic Analysis 27, 31–34 (2d ed. 1996); Bo Sodersten & Geoffrey Reed, International Economics 474 (3d ed. 1994); UNCTC, The Determinants of Foreign Direct Investment: A Survey of the Evidence 33–34, 42, UN Doc. ST/CTC/121, UN Sales No. E.92.II.A.2 (1992).

12 Out of 103 states surveyed in the early 1990s, only 4 did not offer some kind of tax incentive to foreign investment. See generally United Nations Conference on Trade and Development [UNCTAD], Incentives and Foreign Direct Investment 46, UN Doc. UNCTAD/DTCI/28, UN Sales No. E.96.II.A.6 (1996); United Nations Conference on Trade and Development, Division on Transnational Corporations and Investment [UNDTCI], World Investment Report 1995 at 291, UN Doc. UNCTAD/DTCI/26, UN Sales No. E.95.II.A.9 (1995).

13 Investment screening refers to mechanisms that require prior approval for, or prohibit entirely, the establishment of foreign investment. Such mechanisms typically are embodied in a foreign investment code.

14 There is no widely accepted definition of a performance requirement, but generally the term is considered to refer to regulations on the use of inputs and outputs by the investment. Performance requirements may stipulate, for example, that the investment use local content, employ local workers, or export a certain percentage of the production. A 1985 study found that half of the foreign investments surveyed were subject to some type of performance requirement involving either export targets or domestic content. See Caves, supra note 11, at 222.

15 See Rhys Jenkins, Theoretical Perspectives and the Transnational Corporation, in Goddard et al., supra note 5, at 439, 445–46.

16 See World Bank, The East Asian Miracle: Economic Growth and Public Policy 235–37 (1993). Controls on outward investment are imposed by the great majority of developing states, including those with transitional economies. See UNDTCI, supra note 12, at 308, 321–31.

17 Of course, outward foreign investment does not necessarily lead to a loss of capital. In fact, one economic nationalist criticism of inward foreign investment is that it leads to a net loss of foreign exchange through repatriation of the returns on the investment. See text infra at note 54. Indeed, the establishment of foreign investment may not entail the loss of any capital even initially by the home state because the investment may be financed through funds borrowed in the host state. See UNDTCI, supra note 12, at 346–49. In other words, in a particular case, the effect of a prohibition on outward investment may simply be to prevent a home state investor from acquiring control over foreign assets.

18 See UNDTCI, supra note 12, at 322–23, 331–39.

19 See Gilpin, supra note 5, at 241–45.

20 See UNDTCI, supra note 12, at 313–21.

21 See Shah M. Tarzi, Third World Governments and Multinational Corporations: Dynamics of Host's Bargaining Power, in Perspectives, supra note 5, at 154, 163; Kenneth J. Vandevelde, Reassessing the Hickenlooper Amendment, 29 Va. J. Int'l L. 117 (1988).

22 Such controls, however, have largely disappeared in developed states. For example, as of the end of 1994, only three members of the Organisation for Economic Co-operation and Development retained controls on outward foreign direct investment: Japan, Portugal and Turkey. See UNDTCI, supra note 12, at 310. Restrictions on outward investment may not necessarily involve restrictions on capital movements. They also may be in the form of limitations on technology transfer, which could have the effect of impeding certain outward investment flows. Loss of technological lead is one potential cost to a home state of outward investment. See Dominick Salvatore, International Economics 379 (5th ed. 1995).

23 Crane & Amawi, supra note 5, at 6–7, 55–58; Frieden & Lake, supra note 8, at 26.

24 See Gilpin, supra note 5, at 27, 43–45; Rapley, supra note 10, at 8.

25 See Crane & Amawi, supra note 5, at 55; Michael P. Todaro, Economic Development 85–86 (5th ed. 1994); Frieden & Lake, supra note 8, at 27; Jenkins, supra note 15, at 442–43.

26 See generally Paul H. Rubin, Growing a Legal System in the Post-Communist Economies, 27 Cornell Int'l L.J. 1 (1994); Tamar Frankel, The Legal Infrastructure of Markets: The Role of Contract and Property Law, 73 B.U. L. Rev. 389 (1993).

27 See Frieden & Lake, supra note 8, at 27–28; Gilpin, supra note 5, at 29; Rapley, supra note 10, at 7.

28 Gilpin, supra note 5, at 29.

29 A state has a comparative advantage in a good if its opportunity costs to produce the good are lower than those of another state. For a discussion of the theory of comparative advantage, see Sodersten & Reed, supra note 11, at 3–71; Peter B. Kenen, The International Economy 46–85 (3d ed. 1994).

30 See Rapley, supra note 10, at 59–76.

31 See E. Wayne Nafziger, The Economics of Developing Countries 110–13 (3d ed. 1997); Todaro, supra note 25, at 531–33.

32 For example, if a state enacts a protective tariff, a foreign producer can establish a production facility in the protected market and thereby sell in that market while avoiding the tariff. See note 11 supra.

33 The traditional view is that productivity at any given level of technology depends on the endowments of land, labor and capital. Because technology was assumed to be a constant, it was not treated as a factor of production. Modern economics, however, treats technology as a variable determining productivity, whether classified as a factor of production or not. See Kenen, supra note 29, at 46–48.

34 The most obvious effect of a foreign investment is to increase the capital supply, but it may have other effects on productivity. The investment, for example, may bring in foreign currency, which can be used to purchase scarce resources, thus augmenting the “land” endowment; or it may provide employee training, thus improving the quality of the labor pool; or it may introduce new technology.

35 See Salvatore, supra note 22, at 379; Gilpin, supra note 5, at 270.

36 See Introduction: International Politics and International Economics, in Perspectives, supra note 5, at 1, 11.

37 See Gilpin, supra note 5, at 36–37.

38 See Frieden & Lake, supra note 8, at 29–30; Crane & Amawi, supra note 5, at 10, 83–85.

39 Early Marxist theory thus saw foreign investment as beneficial to developing states.

40 See Gilpin, supra note 5, at 38–40, 270–73; Jenkins, supra note 15, at 450–52; Crane & Amawi, supra note 5, at 85.

41 See generally Rapley, supra note 10, at 18–20; Nafziger, supra note 31, at 106–08. For a summary of dependency theory, see Theotonio dos Santos, The Structure of Dependence, in Goddard et al., supra note 5, at 165; Immanuel Wallerstein, Dependence in an Interdependent World, in id. at 176.

42 See International Relations Theory, supra note 5, at 455–58; Subrata Ghatak, Introduction to Development Economics 65 (3d ed. 1995); M. Sornarajah, The International Law on Foreign Investment 43–45 (1994); Todaro, supra note 25, at 81–82; Nafziger, supra note 31, at 106–07; Jenkins, supra note 15, at 448–50; Rapley, supra note 10, at 18–20.

43 See Nafziger, supra note 31, at 107–08; Gilpin, supra note 5, at 291–94; Rapley, supra note 10, at 20; Sornarajah, supra note 42, at 43–45; Crane & Amawi, supra note 5, at 15; Richard Grabowski & Michael P. Shields, Development Economics 10 (1996).

44 See Crane & Amawi, supra note 5, at 14–15; Grabowski & Shields, supra note 43, at 4–10; Todaro, supra note 25, at 81–84; Ghatak, supra note 42, at 66–67.

45 See Gilpin, supra note 5, at 56.

46 See Frieden & Lake, supra note 8, at 30.

47 See Gilpin, supra note 5, at 265–70; Todaro, supra note 25, at 85–86, 484–86.

48 See Todaro, supra note 25, at 85–86; Jenkins, supra note 15, at 442–43.

49 See Crane & Amawi, supra note 5, at 21. Gilpin, for example, sees dependency theory as drawing equally on Marxist economics and economic nationalism. Gilpin, supra note 5, at 282–88.

50 The philosophy is inward looking in that it favors greater reliance on domestic resources by using local producers to supply goods and local markets to consume them.

51 Todaro, supra note 25, at 533–35.

52 See Gilpin, supra note 5, at 247, 285–88; Crane & Amawi, supra note 5, at 14; Rapley, supra note 10, at 18–20.

53 See Sornarajah, supra note 42, at 43–45.

54 The concern is that the foreign investment may deplete foreign currency reserves through the purchase of imported inputs from the home state or another state, the payment of royalty or management fees to the parent company, and the repatriation of profits. Salvatore, supra note 22, at 178; Todaro, supra note 25, at 532.

55 The foreign investment may substitute capital-intensive means of production for labor intensive, reducing employment while raising productivity. See note 126 infra.

56 See Todaro, supra note 25, at 87, 588–91; Grabowski &: Shields, supra note 43, at 268–73.

57 See Nafziger, supra note 31, at 38, 163–64.

58 See Ghatak, supra note 42, at 34, 242–43; Todaro, supra note 25, at 132.

59 Thus, foreign direct investment may be opposed by potential local competitors who are unable to compete with much larger transnational enterprises. See Ghatak, supra note 42, at 169. In Mexico, for example, liberalization of foreign investment regimes favored the export sector, while disfavoring firms that manufactured for the local market. See Alex E. Fernandez Jilberto & Barbara Hogenboom, Mexico's Integration in NAFTA: Neoliberal Restructuring and Changing Political Alliances, in Liberalization in the Developing World 138, 150 (Alex E. Fernandez Jilberto & Andre Mommen eds., 1996).

60 See Todaro, supra note 25, at 534.

61 See Amy L. Chua, The Privatization-Nationalization Cycle: The Link Between Markets and Ethnicity in Developing Countries, 95 Colum. L. Rev. 223 (1995).

62 See Todaro, supra note 25, at 533. The fact that foreign investments generally pay relatively high wages has been cited as an indication that foreign investment exacerbates inequality, particularly between urban and rural sectors of the economy. Ghatak, supra note 42, at 169.

63 See United Nations Transnational Corporations and Management Division [UNTCMD], Formulation and Implementation of Foreign Investment Policies 25–26, UN Sales No. E.92.II.A.21 (1992).

64 See Edward M. Graham & Paul R. Krugman, Foreign Direct Investment in the United States 86–93 (1995).

65 See Caves, supra note 11, at 252.

66 See Dean Hanink, The International Economy: A Geographical Perspective 234 (1994). The colonialization is not seen as merely economic. There is concern that multinational companies will seek to exercise political control over the state in order to protect investment, see Todaro, supra note 25, at 534, although direct political intervention by foreign investments seems a “thing of the past.” UNTCMD, supra note 63, at 26.

67 See Todaro, supra note 25, at 534; Gilpin, supra note 5, at 247–48.

68 For a discussion of economic nationalist concerns about foreign direct investment in the United States, see Jose E. Alvarez, Political Protectionism and United States International Investment Obligations in Conflict: The Hazards of Exon-Florio, 30 Va. J. Int'l L. 1 (1989); Graham & Krugman, supra note 64, at 59–67, 79–90.

69 Economic nationalists do not inevitably oppose outward investment flows. As noted in text at note 19 supra, economic nationalists in developed states often favor the promotion and protection of outward investment. Although economic nationalists agree that investment activity should further national policy, they may disagree over national policy itself and thus about the desirability of capital movements.

70 BIT preambles sometimes recite other goals as well, such as improved economic relations between the two parties.

71 The first BIT was that between Germany and Pakistan, which was signed on November 25, 1959, and entered into force on November 28, 1962. The first BIT to enter into force, that between Germany and the Dominican Republic, was signed on December 16, 1959, and entered into force on June 3, 1960.

72 For chronological listings of the BITs, see UNCTC, supra note 1, and ICSID, supra note 1.

73 See generally Sornarajah, supra note 42.

74 See Vandevelde, U.S. Investment Treaties, supra note 2, at 21.

75 See id. at 25–26.

76 The United States began to prepare for treaty negotiations in 1977, but did not sign its first BIT, that with Egypt, until 1982. Id. at 29, 35.

77 The claim here is not that the affirmation of liberalism is the only or even the dominant purpose of the BITs. Indeed, as will be argued below, BITs are primarily economic nationalist documents. The claim is only that a purpose of BIT negotiations in the 1970s and early 1980s was to counteract illiberal ideological hostility to foreign investment and that the BITs were held out as liberal instruments. In other words, BITs were intended to affirm liberalism, even if they were not primarily liberal documents.

78 France signed its first BIT, with Tunisia, on June 30, 1972. France and Tunisia also had exchanged notes relating to investment in 1963. UNCTC, supra note 1.

79 The United Kingdom signed its first BIT, with Egypt, on June 11, 1975. Id.

80 Austria signed its first BIT, with Romania, on September 30, 1976. Id.

81 Japan signed its first BIT, with Egypt, on January 28, 1977. Id.

82 See Michael Mandelbaum, Coup de Grace: The End of the Soviet Union, Foreign Aff., Winter 1991–92, at 164; Michael Mandelbaum, The Bush Foreign Policy, Foreign Aff., Winter 1990–91, at 5; Coit D. Blacker, The Collapse of Soviet Power in Europe, id. at 88.

83 See UNCTC, supra note 1.

84 See text supra at note 72.

85 See text supra at note 25.

86 See text supra at notes 26–27.

87 See UNCTAD & World Bank, Liberalizing International Transactions in Services: A Handbook 50 (1994).

88 See text supra at notes 11–22.

89 See text supra at notes 19–21.

90 See text supra at notes 11–15.

91 See text supra at notes 11–22.

92 See Rapley, supra note 10, at 44–45.

93 Id. at 44.

94 Typical is Article 2(1) of the BIT between Germany and Dominica. Treaty concerning the Encouragement and Reciprocal Protection of Investments, Oct. 1, 1984, Dominica-Ger., reprinted in 2 ICSID, Investment Promotion and Protection Treaties (loose-leaf).

95 The United States BITs represent an exception. They guarantee to covered investors national and most-favored-nation treatment with respect to the establishment of investment in the host state. Each party, however, is allowed to specify in an annex to the treaty sectors of the economy within which it reserves the right to deny national treatment, MFN treatment or both. See, for example, Article 11(1) of the Mongolia-United States BIT. Treaty Concerning the Encouragement and Reciprocal Protection of Investment, Oct. 6, 1994, U.S.-Mong., S. Treaty Doc. No. 104–10 (1995). Thus, the United States exception is a qualified one.

96 The U.S. BITs are very unusual in that they do have such a provision, but are subject to the host state's immigration laws. The purpose of the provision in the case of the U.S. BITs is to trigger the applicability of a U.S. statute that authorizes issuance of a visa to a person who is entitled to it under the treaty. Thus, the BIT provision entities covered investors to an entry visa for the United States, but only as long as the U.S. statute so authorizes. See Vandevelde, U.S. Investment Treaties, supra note 2, at 95–98; Treaty Concerning the Encouragement and Reciprocal Protection of Investment, Jan. 19, 1993, U.S.-Kyrg., Art. 11(3), S. Treaty Doc. No. 103–13 (1993).

97 The BITs concluded by the United States again represent an exception. Most U.S. BITs, especially those concluded in recent years, contain a prohibition on performance requirements. The Moldova-United States BIT, for example, states: “Neither Party shall impose performance requirements as a condition of the establishment, expansion or maintenance of investments, which require or enforce commitments to export goods produced, or which specify that goods or services must be purchased locally, or which impose any other similar requirements.” Treaty Concerning the Encouragement and Reciprocal Protection of Investment, Apr. 21, 1993, U.S.-Mold., Art. 11(6), S. Treaty Doc. No. 103–14 (1993). This language, which was typical of U.S. BIT practice until the mid-1990s, was replaced by a more detailed provision quoted at note 147 infra.

98 In addition to the guarantees of national treatment and MFN treatment discussed in file text, many BITs separately prohibit the impairment of investment by unreasonable or discriminatory action. See, e.g., Agreement concerning the Promotion and Reciprocal Protection of Investments, Chile-Den., May 28, 1993, Art. 3(1), reprinted in 5 ICSID, supra note 94. In the U.S. BITs, this provision prohibits impairment by arbitrary and discriminatory action. See, e.g., the U.S.-Moldova BIT, supra note 97, Art. II(2) (b).

99 The BIT between Estonia and the United States, for example, provides that

100 For example, the Estonia-U.S. BIT, id., Art. X(2), states that “the provisions of this Treaty … shall apply to matters of taxation only with respect to the following: (a) expropriation … ; (b) transfers …; or (c) the observance and enforcement of terms of an investment agreement or authorization.”

101 See, for example, the Estonia-U.S. BIT, id., Art. II(10).

102 The preference for foreign investors created by BITs will be of practical significance in only very limited circumstances. Host state investors have natural advantages that, all else being equal, will usually give them a competitive advantage that foreign investors must offset through greater efficiency.

103 Developing states, for example, often offer special incentives to foreign investors not available to domestic competitors. See World Bank, supra note 16, at 228–31.

104 For example, the Jamaica-United States BIT provides that “ [i]nvestments shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case be accorded treatment less than that required by international law.” Treaty Concerning the Reciprocal Encouragement and Protection of Investment, Feb. 4, 1994, U.S.-Jam., Art. II(2)(a), S. Treaty Doc. No. 103–35 (1994).

105 See, for example, Article III(1) of the Jamaica-U.S. BIT, supra note 104.

106 See Dolzer & Stevens, supra note 2, at 108–17. On the equivalency of some of these other formulations in U.S. BITs, see Vandevelde, U.S. Investment Treaties, supra note 2, at 120–37.

107 For example, the Latvia-United States BIT provides, in Article III(3):

108 The United States-Uzbekistan BIT, for example, provides, in Article V(1):

109 See, for example, the Jamaica-U.S. BIT, supra note 104, states in Article II(2) (c) that “[e]ach Party shall observe any obligation it may have entered into with regard to investments.”

110 See, for example, the Albania-United States BIT, Article IX. Treaty Concerning the Encouragement and Reciprocal Protection of Investment, Jan. 11, 1995, U.S.-Alb., S. Treaty Doc. No. 104–19 (1995).

111 The Ecuador-United States BIT, for example, provides in Article VII:

113 Some measure of the importance of these three types of risk is suggested by the fact that they are the risks typically covered by investment insurance programs, such as those offered by the Overseas Private Investment Corporation and the Multilateral Investment Guarantee Agency. See Maura B. Perry, A Model far Efficient Foreign Aid: The Case for the Political Risk Insurance Activity of the Overseas Private Investment Corporation, 36 Va. J. Int'l L. 511 (1996); George T. Ellinidu, Foreign Direct Investment in Developing and Newly Liberalized Nations, 4 Det. C.L.J. Int'l L. & Prac. 299 (1995); Ibrahim I. F. Shihata, MIGA and Foreign Investment: Origins, Operations, Policies and Basic Documents of the Multilateral Investment Guarantee Agency (1988).

113 See, e.g., the Albania-U.S. BIT, supra note 110, Art. II(5). On the general problem of lack of information in developing states, see Grabowski & Shields, supra note 43, at 270–71.

114 Enterprises, particularly those that are vertically integrated, often deal with various market imperfections, such as lack of information, by acquiring foreign subsidiaries and thereby creating an internal market. See Sodersten & Reed, supra note 11, at 472; Salvatore, supra note 22, at 379. In this sense, merely facilitating foreign direct investment can reduce the effect of market imperfections. At the same time, foreign direct investment, especially that involving horizontal integration, can reduce competition, thereby creating a market failure. See note 182 infra.

115 Of course, all law may be considered redistributive, in the sense that it promotes a different result than would have occurred in its absence and thus redistributes burdens and benefits within a society. To the extent that BITs are redistributive, however, they tend to reinforce the position of wealthy foreign investors at the expense of their economically weaker domestic competitors, making their redistributive consequences inconsistent with Marxist economics.

116 See text supra at notes 70–84.

117 See text supra at note 28.

118 See text supra at notes 26–27.

119 See text supra at notes 94–103.

120 See text supra at notes 113–14.

121 See text supra at notes 94–95.

122 BITs generally have no specific prohibition on local participation requirements as a condition of the establishment of the investment. The national treatment provision of the U.S. BITs, however, would prohibit treatment of foreign investments that differed from treatment of local investments.

123 See text supra at note 97.

124 See text supra at note 101. Customs unions are referred to as trade diverting when they divert trade from a nonmember state that has a comparative advantage in a good to a member state that does not, with the result that the welfare of member states is diminished. See Sodersten & Reed, supra note 11, at 323–43; Salvatore, supra note 22, at 302–05; Todaro, supra note 25, at 511. Many economic integration agreements among developing states in particular are trade diverting. See Salvatore, supra note 22, at 315.

125 See text supra at note 100.

126 Capital-intensive, high-technology foreign investment may have the effect of reducing employment by displacing local enterprises that are more labor intensive. See Salvatore, supra note 22, at 40; Hanink, supra note 66, at 84; Todaro, supra note 25, at 235–36; Caves, supra note 11, at 228; Ghatak, supra note 42, at 169.

127 Because high-technology companies (for reasons of security or quality control) prefer to operate through subsidiaries that they control rather than through licensees, see Caves, supra note 11, at 77, host states requiring local participation are likely to steer investors toward licensing rather than direct investment and thus lose the opportunity to obtain the newest technology, see id. at 170. Or they may simply encourage the investor to utilize old technology. See Salvatore, supra note 22, at 37.

128 See supra note 124.

129 Tariffs sometimes have been used to attract foreign direct investment. The problem is that the investment is not competitive once the tariff barriers have been removed because the investment was established in a sector of the economy in which the host state does not enjoy a comparative advantage. See UNCTC, supra note 11, at 3–4, 64, 67; Graham & Krugman, supra note 64, at 50.

130 Tax incentives often have been found to be ineffective in attracting new investment because of their temporary nature and because they may be matched by other states. See Caves, supra note 11, at 205, 220; UNCTAD, supra note 12, at 46–51; UNTCMD, supra note 63, at 54; UNCTC, supra note 11, at 37. Thus, their principal effect may be simply to reduce the amount of tax revenue received by the host state. See UNTCMD, supra note 63, at 54; UNCTC, supra note 11, at 60; Caves, supra note 11, at 203. Indeed, there is evidence that overly generous incentives may discourage investment because they are perceived as a danger sign. UNCTC, supra note 11, at 50.

131 See text supra at note 8.

132 Almost all of the typical BIT's provisions are intended to provide investment security. See text supra at notes 104–12. The investment neutrality provisions generally are limited to MFN and national treatment requirements that do no more than protect existing home state investment against discrimination, while there typically are no market facilitation provisions. See text supra at notes 94–103, 113–14.

133 See note 95 supra.

134 See note 97 supra.

135 Generally, a favorable attitude toward foreign investment is highly valued by investors in deciding where to invest abroad. See UNCTC, supra note 11, at 43.

136 See Kenneth J. Vandevelde, Investment Liberalization and Economic Development: The Role of Bilateral Investment Treaties, 36 Colum. J. Transnat'l L. 501, 516 (1998).

137 See text supra at notes 11–22, 46.

138 Even the most well-intentioned and competent developing state government may operate with such limited information about its economy that economic planning can be extremely difficult. See Rapley, supra note 10, at 61.

139 See Ghatak, supra note 42, at 364; Rapley, supra note 10, at 47, 64–67; Todaro, supra note 25, at 584–86; Grabowski & Shields, supra note 43, at 273–76.

140 See text supra at notes 102–03.

141 See Vandevelde, supra note 4.

142 This may occur, for example, because of market failures in the host state, see Todaro, supra note 25, at 588–89, or because of the effects of host state regulation of the investment. See Gilpin, supra note 5, at 267–69; Rapley, supra note 10, at 60–63.

143 See Todaro, supra note 25, at 533–34.

144 See Vandevelde, supra note 136, at 517.

145 See Vandevelde, supra note 4, at 393–94.

146 See text supra at notes 138–39.

147 Vandevelde, supra note 4, at 394–95.

148 Even the U.S. BITs, which are unique in guaranteeing MFN and national treatment with respect to the right to establish investment, permit the parties to designate sectors of the economy that will be exempt from the obligation of MFN and national treatment. See note 99 supra.

149 The model is the General Agreement on Tariffs and Trade (GATT), which, in Article XXVIII bis, provides for a series of negotiating rounds in which member states negotiate reductions in tariffs. General Agreement on Tariffs and Trade, Oct 30, 1947, TTAS No. 1700, 55 UNTS 188. Eight such rounds have been conducted since 1947.

150 On the prevalence of performance requirements, see note 14 supra. U.S. BITs generally prohibit certain types of performance requirements, but most BITs do not specifically address them. Language illustrative of that currently used in the U.S. BITs may be found in Article VI of the United States-Uzbekistan BIT, which states:

151 REIO exceptions are inconsistent with investment neutrality. As a practical matter, however, it may prove difficult to conclude a BIT without such an exception because the party that belongs to a customs union may not wish to extend the concessions it has made to other customs union members to all parties with which it concludes a BIT. The proposal in the text thus represents a compromise.

152 See GATT, supra note 149, Art. XXIV.

153 See text supra at note 100.

154 This is as opposed to advantages provided by tax treaties generally or by legislation.

155 See Organization for Economic Co-operation and Development, Model Tax Convention on Income and on Capital (1992).

156 For a typical U.S. BIT provision, see note 96 supra.

157 A typical U.S. BIT provision states: “Companies which are legally constituted under the applicable laws or regulations of one Party, and which are investments, shall be permitted to engage top managerial personnel of their choice, regardless of nationality.” Ecuador-U.S. BIT, supra note 111, Art. II(5).

158 Thus, an employee could be excluded because of a prior criminal record, if such persons are normally excludable. The employee could not be excluded, however, merely on the basis of nationality.

159 For example, a state that revises its tax code to provide for accelerated depreciation schedules should apply such schedules to all investors. The experience in east Asia suggests that tax incentives are more effective in raising productivity when the state tries generally to encourage investment, rather than attempting to target the tax incentives. World Bank, supra note 16, at 231.

160 The U.S. BITs, for example, typically provide that “[e]ach Party shall make public all laws, regulations, administrative practices and procedures, and adjudicatory decisions that pertain to or affect investments.” Mongolia-U.S. BIT, supra note 95, Art. II(7).

161 Many developed states already provide various types of information and technical assistance to their investors seeking to invest in developing states. See UNDTCI, supra note 12, at 314–15. Such information, however, appears often to be outdated, see id., and thus there could be real value in requiring the two parties to cooperate in exchanging and disseminating such information.

162 The development of a mechanism for the exchange of information is crucial to the development of markets. See Grabowski & Shields, supra note 43, at 270–71. Because information dissemination is directed at curing a market failure, there should be no objection on liberal grounds to state involvement in this activity. Some liberals, however, particularly adherents of the Chicago school of economics, are wary of any state action intended to remedy market failure. They note that governments can fail just as markets do and that state efforts to cure market failures may simply create new problems, whether because of the state's incompetence or because of the political motivations of state actors. See Warren J. Samuels, The Chicago School of Political Economy: A Constructive Critique, in The Chicago School of Political Economy 1, 13 (Warren J. Samuels ed., 1993); Grabowski & Shields, supra note 43, at 267, 273–76.

163 In general, strong intellectual property protection is correlated with the attraction of foreign direct investment. Caves, supra note 11, at 50. This is particularly true for investment involving research and development. See Edwin Mansfield, Intellectual Property Protection, Foreign Direct Investment, and Technology Transfer 19 (1994). Failure to protect intellectual property tends to encourage foreign producers to prefer licensing over direct investment and exporting to the host state over either alternative, thereby foreclosing access to the latest technology. See Caves, supra note 11, at 170.

164 For a good overview of the subject and the text of the major agreements, see International Intellectual Property Anthology (Anthony D'Amato & Doris Estelle Long eds., 1996).

165 Typical language found in the U.S. BITs provides that “[e]ach Party shall provide effective means of asserting claims and enforcing rights with respect to investment, investment agreements, and investment authorizations.” Mongolia-U.S. BIT, supra note 95, Art. II(6).

166 See text supra at note 26.

167 The protection of local as well as foreign persons is a well-established practice in international human rights treaties. See, e.g., International Covenant on Civil and Political Rights, Dec. 16, 1966, Art. 2(1), 999 UNTS 171 (“Each State Party to the present Covenant undertakes to respect and to ensure to all individuals within its territory and subject to its jurisdiction the rights recognized in the present Covenant …”).

168 After concluding its first BIT, a host state would find that it had granted protection to all foreign investors, even though it had concluded a BIT with only one other state and had not obtained any reciprocal rights for its investors in the territory of any states other than the one with which it concluded the first BIT. These other states thus would be able to enjoy a free ride on the one BIT concluded by the host state.

169 This assumes, of course, that the state was a capital exporter as well as a capital importer and that all BITs adopt this proposal. The first state to include this language in its BITs obviously will have the greatest free rider problem, since it will have granted rights to all foreign investors, without any guarantee that its investors will benefit from any other state's BITs.

170 For a compilation of these agreements, see UNCTAD, International Investment Instruments: A Compendium (1996).

171 See Organisation for Economic Co-operation and Development [OECD], Towards Multilateral Investment Rules 3 (1996).

172 Id. at 9.

173 The April 1998 working draft of the agreement and an accompanying commentary may be found on the oecd's Web site (http://www.oecd.org).

174 OECD Meeting at Ministerial Level: Paris, 27–28 April 1998, OECD News Release (Apr. 28, 1998).

175 OECD, supra note 171, at 36–37.

176 See, e.g., North American Free Trade Agreement, Dec. 8, 11, 14 & 17, 1992, ch. 11, 32 ILM 289, 639 (1993); Energy Charter Treaty, Dec. 17, 1994, pt. II, 34 ILM 360, 385 (1995).

177 See Vandevelde, supra note 4, at 396.

178 See Vandevelde, supra note 136, at 527.

179 See Vandevelde, supra note 4, at 397.

180 Some of the difficulties of a multilateral agreement could be avoided or deferred by seeking to conclude a series of regional agreements liberalizing investments. There is a lively debate, however, over whether the negotiation of regional agreements accelerates or undermines the process of global liberalization through multilateral agreements. See James Michael Lawrence II, Japan Trade Illations and Ideal Free Trade Partners: Why the United States Should Pursue Its Next Free Trade Agreement with Japan, Not Latin America, 20 Md. J. Int'l L. & Trade 61 (1996); Frank J. Garcia, NAFTA and the Creation of the FTAA: A Critique of Piecemeal Accession, 35 Va. J. Int'l L. 539 (1995).

181 See Todaro, supra note 25, at 589.

182 See UNCTAD & World Bank, supra note 87, at 47. Indeed, foreign investment involving horizontal integration often reduces competition because the transnational enterprise proceeds by acquiring its local competition. See Sodersten & Reed, supra note 11, at 469.

183 The danger of leaving regulation of monopolies solely to host state discretion is that it may be used as a facade for economically nationalist activity or the regulatory process may be captured by host state producers. See UNCTAD & World Bank, supra note 87, at 42–44, 47.

184 See Nafziger, supra note 31, at 338.

185 See Caves, supra note 11, at 245–46.

186 See UNCTAD & World Bank, supra note 87, at 45. The relationship between labor and capital movements thus presents an interesting paradox. The text suggests that international movement of capital is in some cases facilitated by the international movement of labor. At the same time, one of the reasons that capital moves across borders is precisely that labor does not. In other words, the capital seeks out inexpensive labor. Thus, the complete international mobility of labor would eliminate one of the reasons for the international movement of capital. The point in the text is not that immigration barriers should be removed to permit complete mobility of labor, but only that it may be necessary to relax them in particular instances to attract foreign investment. On the relationship between the movement of capital and the movement of labor in the services sector, see id.

187 Vandevelde, supra note 4, at 397.