Navigating Investor-State Disputes: The Role of Global Politics and Diplomacy

• In Event: International Institutions and Foreign Investment

Abstract

In this paper, I explore the pivotal role of state politics in foreign direct investment (FDI), particularly examining how interstate relations impact the success of commercial diplomacy in resolving FDI disputes. My focus is on cases from developing countries where companies grapple with property rights disputes with host governments, a scenario exacerbated by recent global geopolitical tensions. My central argument is that the strength of interstate relations is a key factor influencing the success of diplomatic interventions in investor-state conflicts. This becomes crucial in scenarios where legal options, such as investor-state arbitration under bilateral investment treaties, are impractical due to their time-consuming or costly nature. The research suggests that strong political connections between a company's home country and the host nation often lead to more favorable outcomes for businesses. This is especially the case when the host government has substantial control over domestic veto players who could otherwise obstruct conciliatory efforts. To support these arguments, I adopt a multi-methodological approach. Qualitative evidence is derived from in-depth interviews with government officials and investment lawyers, as well as paired comparative case studies of Korean companies in China and Japan. These studies reveal how varying degrees of governmental control in host countries affect the efficacy of commercial diplomacy. Furthermore, I examine Indonesia's democratic transition in 1998 to assess how changes in government control influence the outcomes of commercial diplomacy. Quantitative analysis involves project-level cross-national data from the World Bank’s Private Participation in Infrastructure database and detailed records from embassies. This data sheds light on the resolution of investor-state disputes, examining the nature, duration, and effectiveness of diplomatic interventions.

Author

• Haillie Na-Kyung Lee, Seoul National University