Political Risk and Investment Arbitration: An Empirical Study*

Abstract

Investment arbitrations should not happen too often, because they are costly processes for both parties. Yet they regularly happen. Why? We investigate the hypothesis that investment arbitrations are used as a means of last resort, after dissuasion has failed, and that dissuasion is most likely to fail in situations where significant political risk materializes. Investment arbitration should thus tend to target countries in which highpolitical risk has materialized. In order to test this hypothesis, we focus in this article on two drivers of political risk: bad governance and economic crises. We test various links between these two drivers of risk and arbitration claims. We use an original data-set that includes investment claims filed under the rules of all arbitration institutions as well as ad hoc arbitrations. We find that bad governance, understood as corruption and lack of rule of law (using the WGI Corruption and WGI Rule of Law indexes), has a statistically significant relation with investment arbitration claims, but economic crises do not.

Reasons not to exit? A survey of the effectiveness and spillover effects of international investment arbitration

“…In a 2007 statistical work, Franck shows that 88.9% of investors were from OECD countries while only 30.5% of the government respondents were OECD countries. Dupont et al (2016) confirm Franck's (2007) finding, emphasizing that "being a Latin American country" may be a good indicator of arbitration claims. In addition to economic conditions, Dupont et al (2016) investigated the impact of some host state institutional indexes such as corruption and rule of law 7 on the occurrence investment arbitration claims.…”

“…Dupont et al (2016) confirm Franck's (2007) finding, emphasizing that "being a Latin American country" may be a good indicator of arbitration claims. In addition to economic conditions, Dupont et al (2016) investigated the impact of some host state institutional indexes such as corruption and rule of law 7 on the occurrence investment arbitration claims. They find that bad governance (proxied by a high level of corruption or lack of rule of law) significantly increases arbitration claims.…”

“…the occurrence of financial crisis) and by governance conditions (e.g. public corruption, lack of respect of rule of law) (Dupont et al 2016). The notion of political risk is central to the legal, political, and economic literature on international investment.…”

Towards a New Heuristic Model: Investment Arbitration as a Political System

“…Instead, they appear to use it in order to vindicate their rights without much further qualification, 112 although dysfunctional rule of law institutions in the host states still constitute a political risk that increases the likelihood that there will be an arbitration claim. 113 Perhaps surprisingly, and in contradiction to what Beth Simmons has found, 114 it seems that not even the materialisation of economic political risk -economic crises or hardship in the host statecharacterises the situations in which investors file investment arbitration claims, as both our previous research 115 and our contribution to this Special Issue suggest. 116 One qualification, however, does seem to apply particularly clearly to the types of situations in which investors vindicate their rights by means of investment arbitration: a sort of short-term mimicking effect, where previous claims attract future claims in the near future.…”

“…113 Perhaps surprisingly, and in contradiction to what Beth Simmons has found, 114 it seems that not even the materialisation of economic political risk -economic crises or hardship in the host statecharacterises the situations in which investors file investment arbitration claims, as both our previous research 115 and our contribution to this Special Issue suggest. 116 One qualification, however, does seem to apply particularly clearly to the types of situations in which investors vindicate their rights by means of investment arbitration: a sort of short-term mimicking effect, where previous claims attract future claims in the near future. (Think, if you will, of a shark attracted by the blood caused by the bite of another shark.)…”