The effect of unfavorable decisions: Legitimacy beliefs towards different avenues for investor-state dispute resolution

How do citizens perceive different avenues for resolving investor-state disputes in case of an unfavorable decision? This article argues that citizens form legitimacy beliefs based on process and outcome-related considerations. On the one hand, a judgment against the host government of a foreign investor should decrease the confidence in the dispute resolution procedure among citizens in the respective country. On the other hand, I expect that appropriate design choices should boost legitimacy beliefs. I use a survey experiment with 3,917 respondents in Germany, France, and the United States to test these hypotheses. The experiment exposes respondents to a hypothetical investment dispute and manipulates the outcome of the dispute (home firm wins against foreign government vs. foreign firm wins against home government) and the type of dispute resolution mechanism used (arbitration, international investment court, domestic court). First, I find that a judgment against a person’s own country causes a decline in legitimacy beliefs – no matter which dispute resolution procedure is used. Second, the data shows that citizens accredit higher legitimacy to the international investment court and domestic courts compared to conventional investor-state arbitration. These findings indicate that utilitarian considerations (winning vs. losing) affect citizens’ perceptions of the investment treaty regime, but also suggest that institutional reforms, such as the establishment of a Multilateral Investment Court as promoted by the European Union, can help to regain public legitimacy.