Investment Dispute Settlement Mechanism and Domestic Institutions

• In Event: Domestic and International Institutions and Foreign Investment

Abstract

Dispute settlement mechanisms of bilateral investment treaties (BITs) are the last resort safety net for investors to address a host country’s treaty violation. While home governments of investors prefer strong BIT arbitration clauses, host countries who need to give up their control over domestic issues to an independent judicial body may be hesitant to include such clauses. Given that it is costly to offer dispute settle mechanisms, some suggest that democratic host states with existing political and judicial institutions may find it easier to include BIT arbitration clauses. Conversely, others argue that nondemocratic host countries that lack existing institutions will guarantee dispute settlement bodies in BITs more readily to credibly commit to protecting investors' properties. This article builds on both strands of literature and formally explores which types of host countries are willing to include dispute settlement mechanisms in their BITs. The equilibrium results show that, while democratic host states are more likely to offer arbitration clauses, nondemocratic host states tend to offer stronger means to settle disputes. Using a data set of about 1,056 BITs from 1970 to 2006, I empirically test hypotheses derived from the model's implications.

Author

• Yeon Kyung Park, Bogazici University