To Fight or Not to Fight: A Study on the Likelihood of Investor-State Disputes between Two Countries

ABSTRACT

This study investigates the importance of the relative positioning of foreign investors’ country and that of the host country in investor-state disputes. We find that investors accustomed to strong institutions at home are more likely to file a dispute against a host state with poorer institutions. Investment disputes are less likely among politically aligned nations and when the host country is dependent on the investor’s country for its exports. Familiarity, facilitated by geographically proximity and language similarity is associated with higher instances of disputes. Our findings highlight the need for a nuanced approach to foreign investment policymaking and reforms that is responsive to the relative positioning of the parties involved.

KEYWORDS:

• Investor-State dispute
• foreign direct investment
• geographic distance
• institutional distance
• economic proximity
• political proximity

JEL:

• F21
• F23
• F53
• F55
• K23
• K33
• K41
• P45
• P48

Disclosure Statement

No potential conflict of interest was reported by the author(s).

Supplementary Material

Supplemental data for this article can be accessed online at https://doi.org/10.1080/1540496X.2022.2103405

Notes

1. Previous literature in distance suggests that institutional, political, economic, and geographic proximities affect various financial and economic outcomes, including trade, FDI, and portfolio investments (Baek, Maskara, and Miller 2019; Dajud 2013; Gupta and Yu 2007; Michaels and Zhi 2010; O’Brien and Tan 2015; Sarkissian and Schill 2004; Xu and Shenkar 2002).

2. http://www.oecd.org/investment/internationalinvestmentagreements/50291642.pdf

3. UN estimates that it takes 392 days on average between the hearing of the merits and the issuance of the final award; some cases take as many as 941 days. https://unctad.org/en/Docs/diaeia200911_en.pdf

4. Familiarity pertains to possession of knowledge on a subject (Norton, Frost, and Ariely 2007). In the present context, it refers to knowledge and understanding of customs and tradition, history, language and culture, business practices, systems, and processes, and possibly strengths and weaknesses, among other things.

5. The value of UN Voting Affinity is 0 when voting in concordance 50% of the times. It is 1 when countries vote similarly every time. Log (1 / 1.28) = −0.25