Why settle?: Partisan-based explanation of investor-state dispute outcomes

Abstract

AbstractThis paper seeks to explain why some investor-state dispute cases are settled before reaching the ruling stage in democracies, focusing on disputes triggered by regulatory changes made by host government. Our argument is grounded in the domestic politics of the respondent country, specifically the partisan orientation of the incumbent government. When faced with regulatory investor claims, respondent governments must balance protecting domestic social welfare with promoting investment. Our theory is that right-leaning governments are more likely to settle because they are more willing to make regulatory concessions to appease foreign investors and attract investment. In contrast, left-leaning governments prefer arbitral rulings over settlements, as they view settlements as a capitulation to foreign investors’ demands at the expense of public welfare. Using original data from 335 investor-state disputes involving democratic host countries between 1994 and 2020, we find support for this claim. Moreover, we provide qualitative evidence from the investor-state dispute between TC Energy Corporation, a Canadian energy company, and the United States, as well as the investor-state disputes triggered by Argentina’s 2002 emergency measures, to confirm our hypothesized causal pathway linking government partisanship to the likelihood of settlement.