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Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues
No. 270 January 27, 2020
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Alexa Busser ([log in to unmask])
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The surge in FDI over the past three decades has been accompanied by a surge in bilateral investment treaties (BITs). The latter could be seen as a reaction to the former—or its cause, due to the protections that BITs offer to foreign investors. The rise in BITs has also caused a surge in the scholarly literature investigating their impact on FDI flows, which still provides mixed findings.[1] Yet, the literature has neglected the case of Brazil, a country that has attracted increased FDI flows despite not ratifying any BIT. Consequently, Brazil has been used as an example that BITs do not have any effects on FDI inflows and, hence, that countries can do without them.
Even though Latin American countries were reticent to negotiate BITs, influenced by the Calvo doctrine’s underlying belief that foreign investors should receive the same treatment as domestic investors, all countries in the region eventually ratified multiple BITs. Brazil signed fourteen BITs in the early 1990s, yet the Brazilian Congress never ratified them. The opposition feared that most-favored-nation provisions jeopardize Brazil’s sovereignty by offering preferred terms to foreign investors and, most importantly, that investor-state dispute settlement (ISDS) was incompatible with the constitution. Brazilian officials argued at the time that the inexistence of BITs had not affected the country’s position as an important FDI destination. Brazil’s stable domestic legal regime and the strength of Brazil’s economy were arguably the reasons why. In the absence of a clear negative impact on FDI inflows, Brazil did not seem to have the crucial pressure other countries had when considering entering into BITs. Brazil became the example that a major host country does not need BITs to attract FDI if it has a strong economy and proper domestic protections for foreign investors.
Analyzing Brazil’s BITs position on FDI inflows meets with the obstacle that there are no two countries that resemble each other in all factors that impact FDI inflows. The synthetic control method allows construction of a hypothetical version of Brazil as a weighted average of the available control units, consequently enabling a better comparative analysis.[2] The factors considered in this analysis are the main covariates used in the literature,[3] the strength of domestic institutions and the level of property-rights protection. The donor pool, i.e., the countries from which the weights are selected, is comprised of all developing countries that have received FDI before 1990 and enacted BITs after 1990. The synthetic Brazil is constructed then as the convex combination of countries in the donor pool that most closely resemble pre-1990 Brazil considering 20 years pre- and post-periods.
Importantly, this counterfactual analysis shows that Brazil would have received additional FDI inflows had it enacted BITs, i.e., it had not achieved its full potential in terms of attractiveness. This suggests that not all foreign investors were willing to trust Brazil’s institutions, but if the economic determinants are right, some investors were willing to take the risk. One would need to weigh the “benefit” of that additional FDI against the related risk in terms of increased exposure to ISDS.
The fact that Brazil, an increasingly important home country, is now pursuing its own brand of BITs (Cooperation and Facilitation Investment Agreements) is an interesting change in direction. Brazil, which was swimming against the tide before by resisting the enactment of BITs, is swimming against the tide again as its BITs advocacy comes at a time when a number of countries are abrogating such treaties. Brazil is still not a member of ICSID, and its BIT model neither follows its rules nor provides for ISDS. These abrogating countries are now accepting Brazil’s initial position that potential increases in FDI are not worth exposure to ISDS.[4] Yet, the fact that these countries are not necessarily rejecting BITs completely, coupled with the results of the counterfactual analysis and Brazil’s late push toward investment treaties, reveal the importance to FDI inflows of protecting the property rights of foreign investors. Thus, policy-makers frustrated with the system should be careful when abrogating BITs if they want to continue attracting a maximum of foreign capital. They can pressure ICSID for change and reform the system,[5] but they should not underestimate the importance of investor protection. Or they can imitate Brazil and pursue alternatives.
* The Columbia FDI Perspectives are a forum for public debate. The views expressed by the author(s) do not reflect the opinion of CCSI or Columbia University or our partners and supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed series.
** Paulo Cavallo ([log in to unmask]) is a PhD candidate in Public Policy and Political Economy at the University of Texas at Dallas. This Perspective is based on “Brazil, BITs and FDI: A synthetic control approach,” forthcoming in The Journal of World Investment & Trade, 2019, 20(1). The author is grateful to Clint Peinhardt for his advice and to Pedro Cavalcante, Carlianne Patrick and Jason Yackee for their helpful peer reviews.
[1] For a collection of studies, see Karl P. Sauvant and Lisa Sachs, eds., The Effect of Treaties on Foreign Direct Investment (New York: OUP, 2009).
[2] For a detailed explanation of the method, see Alberto Abadie et al., “Synthetic control methods for comparative case studies: Estimating the effect of California’s tobacco control program,” Journal of the American Statistical Association, vol. 105 (2010), pp. 493-505.
[3] Population size, GDP per capita, GDP growth, urban population, trade openness, and population skill level.
[4] Clint Peinhardt and Rachel Wellhausen, “Withdrawing from investment treaties but protecting investment,” Global Policy, vol. 7 (2016), pp. 571-576.
[5] Meg Kinnear, “Moving with the times: amending the ICSID rules,” Columbia FDI Perspectives, no. 233, August 27, 2018.
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The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Paulo Cavallo, ‘Learning from Brazil’s bilateral investment treaties,’ Columbia FDI Perspectives, January 27, 2020. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).” A copy should kindly be sent to the Columbia Center on Sustainable Investment at [log in to unmask].
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For further information, including information regarding submission to the Perspectives, please contact: Columbia Center on Sustainable Investment, Alexa Busser, [log in to unmask].
Most recent Columbia FDI Perspectives
- No. 269, Orlando F. Cabrera C., ‘The US-Mexico-Canada Agreement: the new gold standard to enforce investment treaty protection?,’ January 13, 2020
- No. 268, Xavier M. Forneris, ‘Political risk: Not just the investor’s affair,’ December 30, 2019
- No. 267, Maria Laura Marceddu, ‘Another brick in the wall: the EU-India investment-facilitation mechanism,’ December 16, 2019
All previous FDI Perspectives are available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.
Other relevant CCSI news and announcements
- On February 24, 2020, CCSI and the European Institute at Columbia University are co-sponsoring a Weatherhead East Asian Institute Lectures and Panels event, "The Global Rush to Foreign Direct Investment Screenings," with Giulio Napolitano, Professor, Roma Tre University, moderated by Karl P. Sauvant, Columbia University Law School.
- CCSI announces a call for papers for the Global Research Alliance for Sustainable Finance and Investment (GRASFI) 3rd Annual Conference, hosted by CCSI on September 10-11, 2020. The deadline for paper submission is February 28, 2020. Themes for papers include climate-related risks and finance, the role of the state (e.g., central banks, development banks, and regulators) in advancing sustainable finance, and social and human rights dimensions of sustainable finance, among others. A full list of themes, further information about the conference and submission details can be found on our website.
- CCSI is pleased to announce a call for papers for the 2019 edition of the Yearbook on International Investment Law and Policy, published by Oxford University Press (OUP). The Yearbook monitors current developments in international investment law and policy. Original contributions to be considered for publication in the Yearbook are accepted on a rolling basis until February 2, 2020; more information including submission details is available on our website.
- CCSI is hiring an Economics and Policy Researcher to help develop and execute the Center’s applied research agenda on energy, extractive industries and sustainable development. Specifically, the incumbent will lead research on the economic and policy frameworks shaping investments in oil, mining and gas globally, and their impacts on sustainable development, as well as on implications for investment of the energy transition. For more details and qualifications, please see our website.
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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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