Investor‐state dispute settlement and multinational firm behavior

Abstract

This paper shows that investor‐state dispute settlements (ISDS) make multinational firms more aggressive by increasing cost‐reducing investments with the aim to enlarge the potential compensation an ISDS provision may offer. While a larger investment reduces the market distortion, it will also make potential compensations larger. Consequently, potential compensations to a foreign investor do not imply a zero‐sum game. ISDS may decrease domestic welfare, in particular if the investment leads to the establishment of an export platform, and we find that even global welfare may decline.