Why Not Arbitrate?: Alternative Strategies that MNCs Adopt Against Expropriation

• In Event: Multinational Firms and the Politics of Arbitration

Abstract

In the pursuit of short-term economic or political gains, governments often resort to expropriation of foreign direct investment. When faced with host expropriation, investors have the option of filing for investor-state arbitration at a public arbitration venue to receive compensation for the loss incurred. Yet investors do not always use investor-state arbitration despite the potential benefits, as demonstrated by Lee (2019). For example, among the 240 cases of likely host expropriation in the World Bank’s Private-Public Infrastructure data set, just 28 % (67 cases) saw investors initiate arbitration against the host state. In this paper, I seek to better understand these cases that end without arbitration filings. In the process, I introduce a novel data set that contains information on non-arbitration strategies that foreign companies choose when faced with host expropriation. I show that four alternative strategies are available for expropriated companies: 1) reach an informal settlement; 2) challenge the host government in the host country's domestic court; 3) threaten to use arbitration; and 4) exit without seeking compensation. Firm-level characteristics, as well as the relationship between the company’s home country and the host country, together shape each firm's decision. While existing data sets allow us to observe only the cases that end with investor-state arbitration, this paper represents the first attempt in the field to understand why firms select alternatives to arbitration when faced with expropriation.

Author

• Haillie Na-Kyung Lee, Seoul National University