Does the International Investment Regime Induce Frivolous Litigation?
39 Pages Posted: 19 May 2016
Date Written: May 10, 2016
The treatment of foreign investment has become the most controversial issue in global governance. At the centre of the controversy lies the mechanism of investor-state dispute settlement (ISDS), which allows private firms legal recourse against governments, if government interference has degraded their investment. Using newly released data covering 696 investment disputes, I assess some of the central claims about ISDS. I argue that the regime has indeed undergone a major shift: a majority of claims deal not with direct takings by low rule of law countries, but with regulation in democratic states. The result of this shift towards indirect expropriation affects firms’ incentives: claimants may gain even when they lose a challenge, if litigation can deter governments’ regulatory ambitions. The result, as I show, is an increase in the number of cases, accompanied by a precipitous decrease in their legal merit. Investors bringing indirect expropriation claims also appear far less likely to settle, and more likely to publicize the dispute, consistently with theoretical expectations.
Keywords: ISDS, Investment, ICSID, Dispute Settlement, Expropriation, Regulatory Chill
JEL Classification: K33
Suggested Citation: Suggested Citation