Beyond the Verdict: FDI Consequences of ICSID Arbitration in South Asia

Abstract

This research paper considers whether investment arbitration outcome at International Centre of Settlement of Investment Disputes (ICSID) has any effects on future foreign direct investment (FDI) in South Asian economies. Although, existing literature is mainly concerned with the existence of bilateral investment treaties (BITs), little has been done to establish the economic implications of real-life outcomes of arbitrations. This paper uses fixed effects panel estimation on a balanced sample of five South Asian countries for the years 2000-2022 to determine the effect of losing ICSID cases and the size of damages awarded on future inflows of FDI. The empirical findings offer strong support to the idea that negative ICSID arbitration outcomes are a strong deterrent of future FDI inflows. In particular, the loss in an arbitration case causes statistically and economically significant negative impact on FDI. Furthermore, hefty monetary awards enhance the negative impact. These results are stronger in other specifications and sensitivity tests. The behaviour of control variables is consistent with theoretical expectations. Thus, market size, trade openness, macroeconomic stability and healthy political institutions are significant in shaping investment decisions. The research adds to investment treaties literature by showing that credibility in international investments governance depend on the enforcement results and not just on the formal treaty commitments itself. In terms of policy implications, the findings emphasise the relevance of dispute prevention, regulation effectiveness, and institutional reinforcement for host countries desiring to achieve sustainable FDI.

Keywords: FDI, Investment Arbitration, ICSID, Investor-State Dispute Settlement, South Asia, and Panel Data Analysis.