Conflicted Capital: The Effect of Civil Conflict on Patterns of BIT Signing

Abstract

Why do developing countries commit to costly international agreements? Massive arbitral awards and the discovery that rich countries write investment rules have led to a newfound appreciation of the costs of bilateral investment treaties (BITs). Yet, developing countries continue to sign them. This article advances a novel argument for why governments sign potentially costly agreements. We argue that civil conflict changes the decision calculus of governments by rendering them domestically insecure. This insecurity makes governments more willing to sign agreements, like BITs, that sacrifice future policy autonomy. BITs can attract foreign direct investment (FDI) and signal competence, which have important domestic political benefits. BITs are also attractive postconflict since they can be copied quickly from past templates and require few ex ante policy changes. Empirical tests of over 150 countries from 1960 to 2012 demonstrate that governments sign more BITs after civil conflict. Additional tests indicate that postconflict BITs increase FDI inflows, especially after devastating conflict. Our results provide a unique perspective on why governments cede sovereignty to international institutions.