Do Investor-State Dispute Settlement Cases Influence Domestic Environmental Regulation? The Role of Respondent State Capacity

Abstract

There is currently a debate about whether investor-state dispute settlement cases unduly influence respondent-state domestic regulation. While anecdotes of adverse regulatory responses to investor-state cases have flourished, this article represents the first systematic test of this relationship in a cross-country, large-N setting. Using two unique datasets, we examine whether investor-state cases targeting environmental measures influence respondent states’ environmental regulation between 1987 and 2015. We make two theoretical contributions to the field of study. First, we present an integrated typology that maps potential regulatory responses to investor-state cases along the lifespan of cases, with appropriate methods of study for each type of response. Second, we propose a novel, conditional theory of regulatory response to investor-state cases: states’ responses should depend on their regulatory and economic capacities. In our analysis, we find that bureaucratic capacity in respondent states conditions the relationship between pending environmental investor-state cases and concurrent regulatory behavior, while respondent-state economic capacity conditions the relationship between losing environmental cases and subsequent environmental regulation. Contrary to conventional wisdom, we find a more pronounced negative relationship between investor-state cases and regulatory behavior in states with higher bureaucratic and economic capacities.