Poor States or Poor Governance? Explaining Outcomes in Investment Treaty Arbitration

Daniel Behn, Tarald Laudal Berge, Malcolm Langford | January 1, 2018

Is investment treaty arbitration (ITA) tarnished by a bias against developing states? The international investment regime relies heavily on arbitration for the enforcement of its substantive rules but critique has risen as the number of foreign investor claims have stacked up in recent years. Current empirical research is ambiguous in its evaluation of ITA outcomes, but an interesting strand finds that the difference in treatment afforded to developed and developing respondent states in ITA seems to be explained by a conflation of democratic governance and economic development status. We present an elaboration of this conflation theory and, using the largest dataset of ITA cases compiled to date, we conduct a more thorough empirical test of its tenets. Our findings importantly determine that, instead of an anti-developing state bias disfavoring less developed respondent states in ITA, there appears to be a strong pro-developed state bias favoring more developed respondent states in ITA. That is, higher economic development at the respondent state level is associated with lower claimant-investor success rates in ITA. However, we also find partial support for the conflation theory. While a state’s overall democratic governance levels per se do not explain the pro-developed respondent state favoritism in ITA, we find that two particular governance aspects—the strength of a state’s ability to protect property rights and the degree to which a state maintains impartial bureaucracies—can possibly explain higher degrees of respondent state success in defending against ITA claims. The strength of these state-level governance institutions also possibly explains why relatively wealthy respondent states fare better in ITA than other respondent states.