Why Settle?: Partisan-Based Explanation of Investor-State Dispute Outcomes

• In Event: Political Risk and Foreign Direct Investment

Abstract

Why do some investor-state dispute cases get settled before reaching the ruling stage? In this paper, we offer an explanation based on the respondent country's domestic politics. Our argument is that, in democracies, the likelihood of settlement depends on the executives’ partisan orientation. When faced with investor claims, respondent governments face a trade-off between the protection of domestic social welfare and investment promotion. Business-friendly right-wing governments are more likely to settle as they may be more open to making regulatory concessions to appease foreign investors. On the contrary, left-wing governments will prefer arbitral ruling to settlement since settling can be seen as an action of capitulating to foreign investors’ demands at the expense of public welfare. Using original data on 336 concluded investor-state disputes triggered by regulatory actions of democratic host countries in 1987-2021, we find strong support for our claim. Moreover, we use qualitative evidence from two investor-state dispute cases to confirm our hypothesized causal pathway linking executives’ partisanship with the likelihood of settlement.

Authors

• Haillie Na-Kyung Lee, Seoul National University

• Jong Hyun Lee