Investor-State Dispute Settlement and Multinational Firm Behavior

This paper shows that Investor-State Dispute Settlements (ISDS) makes 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.