International arbitration of investment disputes: are poor and badly governed respondent states more likely to lose?

ABSTRACT

Compelling empirical evidence on whether investor–state dispute settlement (ISDS) is systematically biased against poor respondent states hardly exists. We focus on disentangling the effects of the respondent state’s per-capita income and the strength of domestic rule of law on ISDS outcomes. We find that both higher income and stronger than ‘normal’ rule of law reduce the probability of investor wins in international arbitration of disputes.

KEYWORDS:

• Investor–state disputes
• international arbitration
• poor respondent states
• rule of law

JEL CLASSIFICATION:

• F53

Disclosure statement

No potential conflict of interest was reported by the authors.

Notes

¹ In 2011, the number of new disputes exceeded 50 for the first time. See UNCTAD’s database on investor–state disputes for details: http://investmentpolicyhub.unctad.org/ISDS.

² In a companion paper, Donaubauer, Neumayer, and Nunnenkamp (2017) focus on the role of arbitrators for investor–state dispute settlement (ISDS) outcomes.

³ The period of observation ranges back to cases initiated in the early 1990s.

⁴ GDP per capita is taken from the World Development Indicators; rule of law is taken from the Worldwide Governance Indicators of the World Bank. See Table 1 for summary statistics.

⁵ Investors from these regions initiated the largest shares of all ISDS cases throughout the period of observation.

⁶ Donaubauer, Neumayer, and Nunnenkamp (2017) provide details on the bias and experience of the tribunals’ presidents and party-appointed arbitrators and the consolidated measures of the tribunal’s bias and experience used as control variables here.

⁷ As shown in Table 1, the average probability of an investor win is 39.2%. Average marginal effects are computed as means of marginal effects evaluated at each observation.

⁸ Both alternative indicators are also taken from the Worldwide Governance Indicators of the World Bank. As before with rule of law, we consider the deviation of these indicators from the ‘normal’ pattern to be expected for the country’s GDP per capita in year t.

⁹ Among the control variables, the bias of arbitration tribunals turns out to be marginally insignificant at conventional levels in columns 6 and 7.

¹⁰ This also holds when using alternative indicators of governance (not shown).