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Arbitration and the Protection of Foreign Investors Through Investment Treaties

Paper Session

Friday, Jan. 3, 2020 8:00 AM - 10:00 AM (PDT)

Manchester Grand Hyatt, Old Town B
Hosted By: Society for the Study of Emerging Markets
  • Chair: Zdenek Drabek, CERGE-EI

The Association of Economic Crises and Investor-State Arbitration Cases

Christian Bellak
,
Vienna University of Economics and Business
Markus Leibrecht
,
University of Reading-Malaysia

Abstract

The number of investor-state arbitration disputes has been on the rise since the mid-1990s, but their determinants are still not fully understood. This study empirically examines the association of economic crises with investor-state arbitration claims. Economic crises frequently lead to regulatory changes which, in turn, may breach protection standards provided to international investors by international investment agreements (IIAs). We use a unique country-dyadic dataset containing 961 investor-state arbitration claims over the 1987-2017 period. We find that episodes of economic crises are positively associated with the number of investor-state arbitration cases. Furthermore, our results indicate that strength and timing of the crisis impact varies across different types of economic crisis and across countries with weak and strong institutions. Inflation and exchange rate-based crises show a lower time lag compared to economic growth crises. The impact of sovereign debt crisis is strongest. Taken together our investigation suggests that governments risk paying compensation to foreign investors for their actions in times when public spending is needed in other areas.

Economics of International Investment Agreements

Henrik Horn
,
Research Institute of Industrial Economics, Bruegel, and CEPR
Thomas Tangeras
,
Research Institute of Industrial Economics

Abstract

Nearly 2700 highly potent international investment agreements protect foreign investment against host country policies. This paper analyzes the contentious provisions regarding regulatory expropriations that are included in most agreements. These stipulations request compensation for policy interventions other than direct take-overs of assets. In the model countries negotiate the circumstances under which compensation should be paid, and when the host country can regulate without compensation. We show e.g. that: (i) Despite the simplicity of the scheme, it fully mitigates distortions both to foreign investment and to host country regulation under robust circumstances; (ii) Agreements will not cause underregulation from a joint perspective; (iii) Agreements will include investor-state dispute settlement; (iv) North-South agreements solve the inability of South to protect inward investment, while North-North agreements solve Prisoners Dilemma problems with regard to investment protection for reciprocal investment flows, benefitting investors at the expense of the rest of society.

Does Bilateral Investment Treaty Arbitration Have Any Value for Multinational Corporations?

Josef C. Brada
,
Arizona State University and CERGE-EI
Chunda Chen
,
Lamar University
Jingyi Jia
,
Southern Illinois University-Edwardsville
Ali Kutan
,
Southern Illinois University-Edwardsville

Abstract

We use event study methodology to examine whether arbitration proceedings under bilateral investment treaties (BITs) affect the value of MNCs engaged in such arbitration. If positive arbitral awards increase an MNC’s market value, then they do provide a tangible benefit to the firm’s owners and thus encourage FDI by protecting investors against losses. We examine the effects of arbitral decisions on a sample of 32 MNCs from the United States, Canada and Europe. If arbitrators rule in favor of the MNC and award it damages, the value of the firm increase on average by 3% over the ten-day period following the announcement of the arbitrators’ decision. In cases where the arbitration tribunal rules against the MNC, the value of the firm declines by as much as 2%.These changes are statistically significant. We also examine what firm- and country-specific factors influence whether an arbitral decision will change a firm’s value.

The Right to Regulate and Investor-State Dispute Settlement: Renewable Energy and the Fair and Equitable Treatment Norm

Robert Howse
,
New York University
Sarah Levin
,
New York University

Abstract

Some of the most prominent criticisms of the investment regime have focused on the potential for regulatory chill and the threat to democracy from of investor-state dispute settlement. In this paper, we use ISDS litigation against changes to host states’ regulatory framework for renewable energy as a case study to illuminate these issues and possible solutions. Governments created markets for electricity from renewable energy sources in order to change the energy mix to mitigate climate change by means of a mix of subsidies and price supports to incentivize renewable energy. In creating these programs, governments made huge assumptions regarding technology, potential capacity, and imbalances on the grid. They also faced challenges of asymmetrical information in evaluating the likely behavior of private firms in response to the different incentive structures. For these reasons, one would expect a steep learning curve and that governments would end up changing, often and substantially, the regulatory framework. Foreign investors likely bargained up front for some degree of regulatory certainty in order to protect their investments in the energy sector. Absent such a bargain, there is a strong presumption that regulatory change would occur as a normal matter. This paper focuses on three disputes where the existence of a specific commitment was unclear, at best. In Eiser the tribunal found an obligation of stabilization in the treaty's fair and equitable treatment obligation, while in the other two cases the tribunals recognized the legitimacy of regulatory change in response to new information and changing circumstances. We argue that the approach of the Eiser tribunal creates significant disincentives to efficient regulation under asymmetry of information and penalizes desirable regulatory experimentation.
Discussant(s)
M. Fabricio Perez
,
Wilfrid Laurier University
John Bonin
,
Wesleyan University
Nadia Doytch
,
City University of New York
Zdenek Drabek
,
CERGE-EI
JEL Classifications
  • F3 - International Finance
  • K2 - Regulation and Business Law