The Impact of Investment Treaty Violations on Foreign Direct Investment 403 a negative but noisy signal to investors that could make them hesitant to direct future investment into that country.Second,losing an arbitral panel ruling should be particularly damaging,since it provides more precise information to investors about what a government has done and the definitive illegality of its actions. Our empirical tests reveal robust support for these hypothesized relationships between investment dispute activity and future FDI inflows.We find that signing BITs is associated with greater future investment,ceteris paribus,but BIT-signatory governments whose policies are challenged before an international arbitration body consistently receive less FDI afterwards.If the government ultimately loses the dispute,it suffers an even greater loss in inward FDI,which can more than offset any gains received from signing even multiple BITs.Overall,the empirical evi- dence reveals that BITs,through their provisions for dispute resolution,help those governments who steer clear of treaty violations but harm those who fail to com- ply with the terms of the treaties. Theoretical Development BITs arose a half-century ago to govern and stimulate investment between con- tracting parties and now serve as the primary international vehicle by which FDI is regulated.According to recent estimates from the United Nations Conference on Trade and Development(UNCTAD),179 countries are parties to at least one BIT,and these countries have signed a total of 2,676 BITs with one another.'Coun- tries as diverse as Germany,Italy,China,and Egypt have signed more than 100 BITs with various partners,which attests to the widespread global coverage of the treaties.2 Irrespective of the identity of the signatories,a defining feature of BITs is that they historically have been signed between a capital-rich"home"country, which is the likely source of any investment,and a developing"host"country that seeks to attract greater investment from investors in the home country.3 BITs represent the latest and most widespread attempt by governments to address the pervasive time inconsistency problem that plagues much foreign investment.4 Before any investment is made,investors from the home country have consider- able bargaining leverage over potential host governments who seek to attract the investment.But once the investment is made and costs are sunk,bargaining lever- age shifts to the host government,who then may face political and/or economic 1.See UNCTAD 2008a,2-3,and 2009,1. 2.UNCTAD2009.3. 3.South-South BITs represent a relatively small percentage (26 percent)of all BITs,and this per- centage is declining.UNCTAD(2009,5)reports that only thirteen out of fifty-nine (22 percent)of BITs signed in 2008 were between developing countries. 4.Vernon 1971 describes the fundamental "obsolescing bargain"problem,in which the host state cannot credibly promise to refrain from trying to extract a greater share of the return from an invest- ment once it is sunk.a negative but noisy signal to investors that could make them hesitant to direct future investment into that country+ Second, losing an arbitral panel ruling should be particularly damaging, since it provides more precise information to investors about what a government has done and the definitive illegality of its actions+ Our empirical tests reveal robust support for these hypothesized relationships between investment dispute activity and future FDI inflows+ We find that signing BITs is associated with greater future investment, ceteris paribus, but BIT-signatory governments whose policies are challenged before an international arbitration body consistently receive less FDI afterwards+ If the government ultimately loses the dispute, it suffers an even greater loss in inward FDI, which can more than offset any gains received from signing even multiple BITs+ Overall, the empirical evi￾dence reveals that BITs, through their provisions for dispute resolution, help those governments who steer clear of treaty violations but harm those who fail to com￾ply with the terms of the treaties+ Theoretical Development BITs arose a half-century ago to govern and stimulate investment between con￾tracting parties and now serve as the primary international vehicle by which FDI is regulated+ According to recent estimates from the United Nations Conference on Trade and Development ~UNCTAD!, 179 countries are parties to at least one BIT, and these countries have signed a total of 2,676 BITs with one another+ 1 Coun￾tries as diverse as Germany, Italy, China, and Egypt have signed more than 100 BITs with various partners, which attests to the widespread global coverage of the treaties+ 2 Irrespective of the identity of the signatories, a defining feature of BITs is that they historically have been signed between a capital-rich “home” country, which is the likely source of any investment, and a developing “host” country that seeks to attract greater investment from investors in the home country+ 3 BITs represent the latest and most widespread attempt by governments to address the pervasive time inconsistency problem that plagues much foreign investment+ 4 Before any investment is made, investors from the home country have consider￾able bargaining leverage over potential host governments who seek to attract the investment+ But once the investment is made and costs are sunk, bargaining lever￾age shifts to the host government, who then may face political and0or economic 1+ See UNCTAD 2008a, 2–3, and 2009, 1+ 2+ UNCTAD 2009, 3+ 3+ South-South BITs represent a relatively small percentage ~26 percent! of all BITs, and this per￾centage is declining+ UNCTAD ~2009, 5! reports that only thirteen out of fifty-nine ~22 percent! of BITs signed in 2008 were between developing countries+ 4+ Vernon 1971 describes the fundamental “obsolescing bargain” problem, in which the host state cannot credibly promise to refrain from trying to extract a greater share of the return from an invest￾ment once it is sunk+ The Impact of Investment Treaty Violations on Foreign Direct Investment 403