Settling Disputes in Authoritarian Courts: Multinational Corporations and State Capture

Abstract

Existing research on political risks in foreign direct investment focuses on supranational rights protection regimes for multinational corporations. Drawing attention to domestic institutions within host countries, we demonstrate that foreign investors frequently use host country courts to protect their interests even in a country that lacks judicial independence. Furthermore, we investigate two channels whereby foreign enterprises can influence the rulings of courts that are susceptible to political interference: personal connections and institutional capture. We argue that establishing joint venture partnerships with state actors can co-opt local authorities by incorporating the state as a stakeholder of the foreign company's performance. Therefore, institutional capture delivers more substantial litigation success than conventional types of state-business linkages built upon personal relations. By constructing a novel dataset and applying it to a broad set of empirical tests, we provide the first systematic analysis of foreign firms’ lawsuit activities in China during the period 2002–17.