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


One of the most important characteristics of an investment treaty is that often it grants aggrieved investors access to international arbitration. This arbitration system does not require a foreign investor to petition his home state in order to bring claims against a host state, and provides an alternative to resolving disputes in the host state’s local court. Although international investment arbitration is beneficial for countries in terms of foreign direct investment, it has been accused of not being transparent or effective especially in relation to environment or public health cases. Some countries expressed their discomfort with the current international investment law regime by radical exit solutions such as denunciation of the Convention on the settlement of investment disputes between states and nationals of other states, rejection of investor-state dispute settlement provisions and unilateral denunciation of investment treaties. Based on a vast law, economics and political science literature, this paper proposes arguments to examine these criticisms. First, it is argued that investor-state arbitration is currently a concern in both developing and developed countries. Second, although assessing the spillover effects of arbitration outcomes on some dimensions of public interests such as the environment or public health is not straightforward, the uncertainty that leads to arbitrariness and sometimes inconsistencies in arbitral decision-making exists and needs to be properly identified. Finally, this article argues that exit is not efficient at either the national or international levels, and that it is possible for countries to adapt the current regime to new situations without wholesale exit.

This is a preview of subscription content, access via your institution.

Fig. 1

Source: Author’s calculations based on data from the World Bank

Fig. 2

Source: Author’s calculations based on UNCTAD data

Fig. 3

Source: Author’s calculations based on UNCTAD data


  1. 1.

    UNCTAD data on treaty-based disputes show the top 6 cases where more than USD 1 billion of compensation were awarded to foreign investors as of December 2017: Crystallex v. Venezuela (USD 1,2 billion), Mobil and others v. Venezuela (USD 1,6 billion), Occidental v. Ecuador (USD 1,7 billion), Hulley Enterprises v. Russia (USD 40 billion), Veteran Petroleum v. Russia (USD 8,2 billion), Yukos Universal v. Russia. More information on: Accessed July 1, 2018.

  2. 2.

    More information on: Accessed July 1, 2018.

  3. 3.

    More information on Accessed July 1, 2018.

  4. 4.

    Source: Accessed July 1, 2018.

  5. 5.

    As of December 2017, according to UNCTAD data, New Zealand has not experienced any treaty-based dispute as respondent state or home state of investors. See Accessed July 1, 2018.

  6. 6.

    The authors use Worldwide Governance Indicators (WGI) project data.

  7. 7.

    The arbitrator adopts expansive or restrictive approaches to respectively increase or reduce the damage awarded to claimants, and the risk of liability for respondents. E.g. with respect to the concept of "corporate person investor", a tribunal adopting a restrictive approach would refuse a claim brought by a foreign company owned and controlled by nationals of the host state whereas an expansive approach would be characterized by allowance of this claim. The author notes also that the coding process considers only resolution of an issue which depends largely on the arbitrator’s discretion. This means that if the treaty provides some "guidelines" about how it should be resolved, the resolution is excluded from the database. The database contains 515 individual arbitrator decisions on the resolution of jurisdictional issues for 115 awards. See Harten (2012), appendix two.

  8. 8.

    See cases: Emmanuel Too v. Greater Modesto Insurance Associates and USA (award dated December 29, 1989), administered by the Iran-United States Claims Tribunal; Methanex v. USA (award dated August 3, 2005), administered by ICSID under the UNCITRAL arbitration rules; Saluka v. Czech Republic (partial Award dated March 17, 2006), administered by the Permanent Court of Arbitration under the UNCITRAL arbitration rules. In the case of Tecmed v. Mexico, the ICSID tribunal said in the final award dated May 29, 2003 that "the principle that the state’s exercise of its sovereign power within the framework of its police power may cause economic damage to those subject to its powers as administrator without entitling them to any compensation whatsoever is undisputable". However, while most international investment treaties provide protection against indirect expropriation or measures tantamount to expropriation, they do not highlight the treatment of the non-compensable governmental regulation. Moreover, the line between indirect expropriation and non-compensable regulatory measures has not been systematically clarified in arbitral jurisprudence, and depends on the facts of each case. See OECD (2004) for more information.

  9. 9.

    Case Pac Rim v. El Salvador, case Commerce Group v. El Salvador.

  10. 10.

    Case Aven and others v. Costa Rica.

  11. 11.

    Case Compañía de Aguas del Aconquija v. Argentina, case Eureko v. Poland, case CME v. Czech Republic.

  12. 12.

    Case CMS v. Argentina, case Occidental v. Ecuador.

  13. 13.

    Case Eureko v. Poland, partial award dated August 19, 2005, paragraph 145.

  14. 14.

    According to Boute (2012), among green certificates, feed-in-tariffs, and premium schemes, only green certificates qualify as individual investments that could be subject to partial expropriation, because they are usually and independently tradable in a secondary market. Tariff-based mechanisms such as feed-in tariffs or premium schemes usually entitle the operators of renewable energy installations to fixed prices. Since this fixed support may not be traded independently from the main electricity transaction, it may not easily qualify as an independent investment when the tribunal examines a state interference.

  15. 15.

    More information on: Accessed July 1, 2018. See also case Blusun v. Italy, award dated December 27, 2016; case Charanne and Construction Investments v. Spain, award dated January 21, 2016.

  16. 16.

    Case Empresa Nacional de Electricidad v. Argentina.

  17. 17.

    Case Blusun v. Italy.

  18. 18.

    Case Charanne and Construction Investments v. Spain.

  19. 19.

    Case Eiser and Energía Solar v. Spain, case Isolux v. Spain.

  20. 20.

    Case JSW Solar and Wirtgen v. Czech Republic.

  21. 21.

    In Eiser and Energía Solar v. Spain, the investors successfully recovered over USD 139 million from Spain. All the claimants’ claims were dismissed at the merits stage in the other four cases.

  22. 22.

    More information on: Accessed July 1, 2018.

  23. 23.

    Drugs are commonly used to treat attention deficit disorders such as hyperactivity disorder, schizophrenia and bipolar disorder.

  24. 24.

    There is also an intellectual property dispute concerning public health regulations between Shell and Nicaragua. However, this ICSID arbitration was discontinued by a pre-award settlement. The details of the settlement deed were not made public.

  25. 25.

    The law and economics approaches to judicial behavior try to discover how the interaction between the law and non-legal factors influences arbitrators’ decision-making. The starting point of this economic analysis is that, like everyone else, arbitrators as well as both parties to the dispute are maximizers of their own utility (financial and non-financial interests including but not limited to arbitral (re)appointments, reputation of the host state, or future investment opportunities for investors).

  26. 26.

    The authors state that under certain conditions, including interpretation of article 72 of the ICSID Convention on the validity of consent to the jurisdiction of the Centre, the wording used in the dispute settlement provisions of investment treaties or the period of 6 months before date of entry into effect of the denunciation, the country’s decision to withdraw from the ICSID Convention may have no impact on the binding consent granted by the host state in its treaties to refer disputes to ICSID arbitration.

  27. 27.

    Article 11 of the Vienna Convention on the Law of Treaties (1969): Means of expressing consent to be bound by a treaty.

  28. 28.

    Article 39 of the Vienna Convention on the Law of Treaties (1969): General rule regarding the amendment of treaties.

  29. 29.

    Among the options, UNCTAD proposes also termination of old investment agreements. However, UNCTAD and Peinhardt and Wellhausen (2016) recommend that this option should apply only when the country's treaty network is too dense and overlapping, and is causing inconsistencies in the application of international law (e.g. regional FTAs overlap with bilateral agreements in the region).

  30. 30.

    This solution can reduce transaction costs significantly and does not alter the overall design and philosophy of the old agreement (UNCTAD 2017).

  31. 31.

    This means also that a BIT can be replaced by a FTA with an investment chapter. E.g. Panama-Mexico BIT (2005) is replaced by Mexico-Panama FTA (2014), Nicaragua–Taiwan BIT (1992) is replaced by Nicaragua–Taiwan FTA (2006), EU–Viet Nam FTA will replace 22 BITs between Vietnam and EU member states.

  32. 32.

    As an illustration, to ease the tension between public health and intellectual property, Vadi (2009) and Mercurio (2012) suggest borrowing the TRIPS agreement language (compulsory license, article 31 of the TRIPS agreement) to allow a government to authorize a third party to "use" intellectual property rights in the public interest and without discrimination, without the consent of the rights holder. See examples in Korea-United States FTA (2007), Australia-Chile FTA (2009), New Zealand-China FTA (2008).

  33. 33.

    According to Boute (2012), an expansive concept of "investment" in the treaty should cover low-carbon investors’ rights associated to public support schemes, given the vulnerability of this kind of investment.

  34. 34.

    Peterson and Gray (2003) propose another solution to inject private responsibilities into an investment treaty. Accordingly, a treaty may require investors’ compliance with minimum human rights or environmental protection responsibilities, as well as other rights set out in domestic law (e.g. contribution to the host state’s economic development) as a condition for invoking international arbitration. See examples in Burundi-Turkey BIT (2017), Ukraine-Turkey BIT (2017), Turkey-Mozambique BIT (2017).

  35. 35.

    As of end 2017, 138 terminated investment agreements had been replaced by new ones, 81 agreements had been denounced unilaterally, 20 agreements had been terminated by mutual consent, 3 agreements had expired. More information on: Accessed July 1, 2018.

  36. 36.

    FTAs between the EU and Japan were signed in July 2018. However, this instrument does not include the investment chapter or the mechanism for resolving investment disputes between investors and host states, given the divergence between the EU and Japan on the initiative to create a permanent multilateral court. See Roberts (2018). This divergence is found also in the cases of Canada and Mexico. In the new CPTPP agreement, Canada and Mexico agree to maintain the traditional approach to ISDS. By contrast, in their respective agreements with the EU, they favor establishing a permanent investment court (UNCTAD 2018).

  37. 37. Accessed July 1, 2018


  1. Allee, T., & Peinhardt, C. (2011). Contingent credibility: The impact of investment treaty violations on foreign direct investment. International Organization, 65(3), 401–432.

    Article  Google Scholar 

  2. Australia Government—Department of Foreign Affairs and Trade. (2011). Gillard government trade policy statement: Trading our way to more jobs and prosperity.

  3. Bagwell, K., & Staiger, R. W. (2002). The economics of the world trading system. Cambridge: MIT Press.

    Book  Google Scholar 

  4. Behn, D., Fauchald, O. K., & Létourneau-Tremblay, L. (2017). Promoting renewable energy in the EU: Shifting trends in member state policy space. European Business Law Review, 28(2), 217–243.

    Google Scholar 

  5. Billingsley, J. (2015). Eli Lilly and company v the government of canada and the perils of investor-state arbitration. Journal University of Victoria, 20, 27–41.

    Google Scholar 

  6. Boute, A. (2009). The potential contribution of international investment protection law to combat climate change. Journal of Energy Natural Resources Law, 27(3), 333–376.

    Article  Google Scholar 

  7. Boute, A. (2012). Combating climate change through investment arbitration. Fordham International Law Journal, 35(3), 613–664.

    Google Scholar 

  8. Brabandere, E. D. (2011). NGOs and the “Public Interest”: The legality and rationale of amicus curiae interventions in international economic and investment disputes. Chicago Journal of International Law, 12(1), 85–113.

    Google Scholar 

  9. Broude, T., Haftel, Y. Z., & Thompson, A. (2016). Legitimation through renegotiation: Do states seek more regulatory space in their BITs? Hebrew University of Jerusalem Legal Research Paper.

    Article  Google Scholar 

  10. Busse, M., & Hefeker, C. (2005). Political risk, institutions and foreign direct investment. HWWA Discussion papers, 315, Hamburg Institute of International Economics.

  11. Busse, M., Koniger, J., & Nunnenkamp, P. (2010). FDI promotion through bilateral investment treaties: More than a bit? Review of World Economics, 146(1), 147–177.

    Article  Google Scholar 

  12. Büthe, T., & Milner, H. V. (2014). Foreign direct investment and institutional diversity in trade agreements: Credibility, commitment, and economic flows in the developing world, 1971–2007. World Politics, 66(1), 88–122.

    Article  Google Scholar 

  13. Charlier, C. (2012). Distrust and barriers to international trade in food products: An analysis of the US-poultry dispute. Working papers, 2, Groupe de Recherche en Droit, Economie, Gestion (GREDEG-CNRS), University of Nice Sophia Antipolis.

  14. Choudhury, B. (2008). Recapturing public power: Is investment arbitration’s engagement of the public interest contributing to the democratic deficit? Vanderbilt Journal of Transnational Law, 41(3), 775–832.

    Google Scholar 

  15. Downs, G. W., & Jones, M. A. (2002). Reputation, compliance and international law. Journal of Legal Studies, 31(1), 95–114.

    Article  Google Scholar 

  16. Dreher, A., Mikosch, H., & Voigt, S. (2010). Membership has its privileges—The effect of membership in international organizations on FDI. Working papers, 114, Center for European, Governance and Economic Development Research.

  17. Dreher, A., & Voigt, S. (2011). Does membership in international organizations increase governments’ credibility? Testing the effects of delegating powers. Journal of Comparative Economics, 39, 326–348.

    Article  Google Scholar 

  18. Dupont, C., Schultz, T., & Angin, M. (2016). Political risk and investment arbitration: An empirical study. Journal of International Dispute Settlement, 7(1), 1–25.

    Article  Google Scholar 

  19. Feldstein, M. (1999). A self-help guide for emerging markets. Foreign Affairs, 78(2), 93–117.

    Article  Google Scholar 

  20. Franck, S. D. (2007). Empirically evaluating claims about investment treaty arbitration. North Carolina Law Review, 86(1), 1–88.

    Google Scholar 

  21. Franck, S. D. (2009). Development and outcomes of investment treaty arbitration. Harvard International Law Journal, 50(2), 435–489.

    Google Scholar 

  22. Franck, S. D. (2011). The ICSID effect? Considering potential variations in arbitration awards. Virginia Journal of International Law, 51(4), 825–914.

    Google Scholar 

  23. Franck, S. D., & Wylie, L. E. (2015). Predicting outcomes in investment treaty arbitration. Duke Law Journal, 65(3), 459–526.

    Google Scholar 

  24. Gordon, K., & Pohl, J. (2011). Environmental concerns in international investment agreements: A survey. OECD working papers on international investment, 2011/01, OECD Publishing.

  25. Gordon, K., & Pohl, J. (2015). Investment treaties over timeTreaty practice and interpretation in a changing world. OECD working papers on international investment, 2015/02, OECD Publishing.

  26. Hafner-Burton, E. M., & Victor, D. G. (2016). Secrecy in international investment arbitration: An empirical analysis. Journal of International Dispute Settlement, 7(1), 161–182.

    Google Scholar 

  27. Haftel, Y. Z., & Thompson, A. (2018). When do states renegotiate investment agreements? The impact of arbitration. Review of International Organizations, 13(1), 25–48.

    Article  Google Scholar 

  28. Harten, G. V. (2011). Fairness and independence in investment arbitration: A critique of Susan Franck’s “Development and Outcomes of Investment Treaty Arbitration”. Working papers, 30, York University—Osgoode Hall Law School.

  29. Harten, G. V. (2012). Arbitrator behaviour in asymmetrical adjudication: An empirical study of investment treaty arbitration. Osgoode Hall Law Journal, 50(1), 211–268.

    Google Scholar 

  30. Henckels, C. (2016). Protecting regulatory autonomy through greater precision in investment treaties: The TPP, CETA and TTIP. Journal of International Economic Law, 19(1), 27–50.

    Article  Google Scholar 

  31. Kaja, A., & Werker, E. (2010). Corporate governance at the World Bank and the dilemma of Global Governance. The World Bank Economic Review, 24(2), 171–198.

    Article  Google Scholar 

  32. Kapeliuk, D. (2012). Collegial games: Analyzing the effect of panel composition on outcome in investment arbitration. Review of Litigation, 31(2), 267–310.

    Google Scholar 

  33. Kawharu, A., & Nottage, L. (2018). Renouncing investor-state dispute settlement in Australia, Then New Zealand: Déjà Vu. Sydney Law School Research Paper, 18/03, available at SSRN:

  34. Kerner, A. (2009). Why should I believe you? The costs and consequences of bilateral investment treaties. International Studies Quarterly, 53(1), 73–102.

    Article  Google Scholar 

  35. Kurtz, J. (2012). Australia’s rejection of investor-state arbitration: Causation, omission and implication. ICSID Review, 27(1), 65–86.

    Article  Google Scholar 

  36. Lavopa, F. M., Barreiros, L. E., & Bruno, M. V. (2013). How to kill a BIT and not die trying: Legal and political challenges of denouncing or renegotiating bilateral investment treaties. Journal of International Economic Law, 16(4), 869–891.

    Article  Google Scholar 

  37. Lesher, M., & Miroudot, S. (2006). Analysis of the economic impact of investment provisions in regional trade agreements. OECD trade policy papers, 36, OECD Publishing.

  38. Levchenko, A. A. (2007). Institutional quality and international trade. Review of Economic Studies, 74(3), 791–819.

    Article  Google Scholar 

  39. Mann, H. (2013). Reconceptualizing international investment law: Its role in sustainable development. Lewis Clark Law Review, 17(2), 521–544.

    Google Scholar 

  40. Marata, G., Ferrer, O. S., Dorrill, J. W., & Watkins, E. L. (2010). Renewable energy incentives in the United States and Spain: Different paths-same destination? Journal of Energy Natural Resources Law, 28(4), 481–502.

    Article  Google Scholar 

  41. McArthur, K. S., & Ormachea, P. A. (2009). International investor-state arbitration: An empirical analysis of ICSID decisions on jurisdiction. Review of Litigation, 28(3), 559–581.

    Google Scholar 

  42. Mercurio, B. (2012). Awakening the sleeping giant: Intellectual property rights in international investment agreements. Journal of International Economic Law, 15(3), 871–915.

    Article  Google Scholar 

  43. Mercurio, B. (2014). International investment agreements and public health: Neutralizing a threat through treaty drafting. Bulletin of the World Health Organization, 92(7), 520–525.

    Article  Google Scholar 

  44. Meyer, T., & Park, T. J. (2018). Renegotiating international investment law. Journal of International Economic Law.

    Article  Google Scholar 

  45. MIGA. (2013). World investment and political risk report. Washington, DC: World Bank Group.

    Google Scholar 

  46. Neumayer, E., Nunnenkamp, P., & Roy, M. (2016). Are stricter investment rules contagious? Host country competition for foreign direct investment through international agreements. Review of World Economics, 152, 177–213.

    Article  Google Scholar 

  47. OECD (2004). “Indirect Expropriation” and the “Right to Regulate” in international investment law. OECD working papers on international investment, 4, OECD Publishing.

  48. Peinhardt, C., & Wellhausen, R. L. (2016). Withdrawing from investment treaties but protecting investment. Global Policy, 7, 571–576.

    Article  Google Scholar 

  49. Peterson, L. E., & Gray, K. R. (2003). International human rights in bilateral investment treaties and in investment treaty arbitration. Research papers, The International Institute for Sustainable Development (IISD).

  50. Pevehouse, J. C. (2003). Democratization, Credible Commitments, and Joining International Organizations. In D. W. Drezner (Ed.), Locating the proper authorities: The interaction of domestic and international institutions (pp. 25–48). Michigan: University of Michigan Press.

    Google Scholar 

  51. Posner, R. (1993). What do judges and justices maximize? (The same thing everybody else does). Supreme Court Economic Review, 3, 1–41.

    Article  Google Scholar 

  52. Poulsen, L., & Aisbett, E. (2013). When the Claim hits: bilateral investment treaties and bounded rational learning. World Politics, 65(2), 273–313.

    Article  Google Scholar 

  53. Puig, S. (2014). Social capital in the arbitration market. European Journal of International Law, 25(2), 387–424.

    Article  Google Scholar 

  54. Reiner, C., & Schreuer, C. (2009). Human rights and international investment arbitration. In P.-M. Dupuy, et al. (Eds.), Human rights in international investment law and arbitration (pp. 82–114). Oxford: Oxford University Press.

    Google Scholar 

  55. Roberts, A. (2018). Incremental, systemic, and paradigmatic reform of investor-state arbitration. American Journal of International Law (forthcoming).

  56. Schultz, T. (2015). Arbitral decision-making: Legal realism and law economics. Journal of International Dispute Settlement, 6(2), 231–251.

    Article  Google Scholar 

  57. Schultz, T., & Dupont, C. (2014). Investment arbitration: Promoting the rule of law or over-empowering investors? A quantitative empirical study. The European Journal of International Law, 25(4), 1147–1168.

    Article  Google Scholar 

  58. Simmons, B. A. (2014). Bargaining over BITs, arbitrating awards: The regime for protection and promotion of international investment. World Politics, 66(1), 12–46.

    Article  Google Scholar 

  59. Staiger, R. W., & Tabellini, G. (1987). Discretionary trade policy and excessive protection. The American Economic Review, 77(5), 823–837.

    Google Scholar 

  60. Stiglitz, J. (2002). Globalization and its discontents. New York: W. W. Norton Company.

    Google Scholar 

  61. Tang, M.-K., & Wei, S.-J. (2009). The value of making commitments externally: Evidence from WTO accessions. Journal of International Economics, 78(2), 216–229.

    Article  Google Scholar 

  62. Tietje, C., Baetens, F. & Ecorys-Rotterdam. (2014). The impact of investor-state dispute settlement (ISDS) in the transatlantic trade and investment partnership. Research papers, Ministry of Foreign Affairs of the Netherlands.

  63. Tietje, C., Nowrot, K., & Wackernagel, C. (2008). Once and forever? The legal effect of a denunciation of ICSID. Working papers, 74, Martin Luther University Hall-Wittenberg.

  64. Tomz, M., Goldstein, J. L., & Rivers, D. (2007). Do we really know that the WTO increases trade? Comment. American Economic Review, 97(5), 2005–2018.

    Article  Google Scholar 

  65. UNCTAD. (2012). World investment report. Geneva: United Nations Publication.

    Google Scholar 

  66. UNCTAD. (2017). World investment report. Geneva: United Nations Publication.

    Google Scholar 

  67. UNCTAD. (2018). World investment report. Geneva: United Nations Publication.

    Google Scholar 

  68. Vadi, V. S. (2009). Trade mark protection, public health and international investment law: strains and paradoxes. The European Journal of International Law, 20(3), 773–803.

    Article  Google Scholar 

  69. Vajda, C. (2018). The EU and beyond: Dispute resolution in international economic agreements. European Journal of International Law, 29(1), 205–224.

    Article  Google Scholar 

  70. Wellhausen, R. L. (2016a). Recent trends in investor-state dispute settlement. Journal of International Dispute Settlement, 7(1), 117–135.

    Article  Google Scholar 

  71. Wellhausen, R. L. (2016b). The shield of nationality—When governments break contracts with foreign firms. Cambridge: Cambridge University Press.

    Google Scholar 

  72. Yackee, J. W. (2008). Do we really need BITs? Toward a return to contract in international investment law. Asian Journal of WTO and Health law, 3(1), 121–146.

    Google Scholar 

  73. Yackee, J. W. (2009). Do BITs really work? Revisiting the empirical link between investment treaties and foreign direct investment. In K. P. Sauvant & L. E. Sachs (Eds.), The effect of treaties on foreign direct investment: Bilateral investment treaties, double taxation treaties, and investment flows (pp. 379–394). Oxford: Oxford University Press.

    Google Scholar 

Download references

Author information



Corresponding author

Correspondence to Duy Vu.

Additional information

Publisher's Note

Springer Nature remains neutral with regard to jurisdictional claims in published maps and institutional affiliations.

Rights and permissions

Reprints and Permissions

About this article

Verify currency and authenticity via CrossMark

Cite this article

Vu, D. Reasons not to exit? A survey of the effectiveness and spillover effects of international investment arbitration. Eur J Law Econ 47, 291–319 (2019).

Download citation


  • International investment
  • Investor-state dispute settlement
  • Interdisciplinary studies
  • Public interest

JEL Classification

  • K41
  • F21
  • F53