Do Not Forget About Politics! Explaining the Selective Breach of Bilateral Investment Treaties

Objective This study investigates when a state violates its treaty obligations by looking into OECD‐non‐OECD bilateral investment treaties (BITs). Method Maximum likelihood estimations are performed on dyadic data covering BIT‐based investment disputes and ideological distance from 1980 to 2012 while controlling for potentially confounding variables as well as temporal dependence and unobserved regional time‐invariant factors. Results It finds that host state is more likely to breach a BIT when it has lower political affinity with a capital‐exporting treaty partner. It also shows this effect has somewhat intensified since the early part of this century and appears stronger in non‐democracies than in democracies. Conclusions This study demonstrates that it is impossible for BITs to fully depoliticize FDI because whether to comply with such treaties is essentially a political decision. It has broader implications for international institutions literature, in particular that on compliance, as it reveals that the cost of honoring an international agreement is endogenous to the political distance between the members.