Patterns of investor-state dispute settlement and implications for institutional reform

This paper examines patterns of investor-state dispute settlement (ISDS) decisions, based on an empirical assessment of aggregated ISDS case data, and their implications for possible institutional reform. The motivation for the study is the public debate over the legitimacy of treaty-based ISDS, which has driven much of the recent opposition to bilateral and larger trade-and-investment treaties. However, given the revealed preference of most countries to encourage both inbound and outbound foreign direct investment (FDI), institutions to establish rules for FDI and dispute settlement are justified as means of reducing transaction costs and addressing bounded rationality problems. Investors and host countries can be expected to view ISDS arbitration in terms of costs and benefits, in which information from prior cases informs views on investor decisions to file a case, and on both parties’ decision to seek an “out-of-court” settlement. International investment agreements (IIAs) exhibit asymmetry between pre- and post-agreement bargaining power among investment home countries and host countries, as well as asymmetry between private investor interests and government interests in dispute settlement. These features make it difficult to establish a mutually acceptable global institution regulating FDI. So far, the institutional framework for IIAs and ISDS has been fragmentary, with many varieties of investment agreements and different arbitration panels to handle disputes. The World Trade Organization (WTO) provides a possible model for global institutional integration, but presents high barriers to achieving consensus. Global consensus will have to wait for stronger economic growth, convergence of investment interests among emerging markets with major developed countries, and global leadership. In the meantime, incremental institutional change may be possible at the regional level. In addition, the development of more legal expertise in developing countries, or legal aid along the lines of the WTO’s Advisory Centre on WTO Law, could improve outcomes for those countries.

Methodology: The ISDS database compiled by UNCTAD will be the subject of a multivariate probit analysis. Four basic outcomes are possible in a case: investor win, state win, settlement, and discontinuation. Hypotheses to be tested include the impact of the following factors on determining these outcomes: prior case outcome patterns, prior case award patterns, the specific sector of a case filing, institutional arbitral frameworks, firm variable, and (firm) home and (FDI) host country variables.