The global market for productive capital is more integrated than ever before. The growth of foreign direct investment (FDI) is a clear example. According to World Bank data, gross FDI as a percentage of total world production increased seven-fold from 1.2 percent to 8.9 percent between 1970 and 2000. Though such investments tend to be highly skewed across jurisdictions – developed countries account for more than 93 percent of outflows and 68 percent of inflows – foreign capital has come to play a much more visible role in many more countries worldwide.

It is widely recognized that economic globalization requires market-supporting institutions to flourish. But unlike trade and monetary relations, virtually no multilateral rules for FDI exist. Direct investments in developing countries are overwhelmingly governed by bilateral investment treaties (BITs). BITs are agreements establishing the terms and conditions for private investment by nationals and companies of one country in the jurisdiction of another. Virtually all BITs cover four substantive areas: FDI admission, treatment, expropriation, and the settlement of disputes. These bilateral arrangements have proliferated over the past forty-five years, and especially in the past two decades, even as political controversies have plagued efforts to establish a multilateral regime for FDI.

Why the profusion of bilateral agreements? The popularity of BITs contrasts sharply with the collective resistance developing countries have shown toward pro-investment principles under customary international law and the failure of the international community to make progress on a multilateral investment agreement.