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The influence of interest: Real US interest rates and bilateral investment treaties

Author

Listed:
  • Timm Betz

    (Texas A&M University)

  • Andrew Kerner

    (University of Michigan, Ann Arbor)

Abstract

Bilateral Investment Treaties (BITs) present developing countries with a trade-off. BITs plausibly increase access to international capital in the form of foreign direct investment (FDI), but at the cost of substantially curtailing a government’s policy autonomy. Nearly 3000 BITs have been entered into, suggesting that many countries have found this trade-off acceptable. But governments’ enthusiasm for signing and ratifying BITs has varied considerably across countries and across time. Why are BITs more popular in some places and times than others? We argue that capital scarcity is an important driver of BIT signings: The trade-off inherent in BITs becomes more attractive to governments as the need to secure access to international capital increases. More specifically, we argue that the coincidence of high US interest rates and net external financial liabilities heightens governments’ incentives to secure access to foreign capital, and therefore results in BIT signings. Empirical evidence is consistent with our theory.

Suggested Citation

  • Timm Betz & Andrew Kerner, 2016. "The influence of interest: Real US interest rates and bilateral investment treaties," The Review of International Organizations, Springer, vol. 11(4), pages 419-448, December.
  • Handle: RePEc:spr:revint:v:11:y:2016:i:4:d:10.1007_s11558-015-9236-6
    DOI: 10.1007/s11558-015-9236-6
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