Investor-State Disputes: When Can Governments Break Contracts?

Since 1990, governments around the developing world have broken contracts made with multinational corporations (MNCs), but the incidence of breach varies across countries and over time. I argue that shared firm nationality is a key determinant of contract sanctity. MNCs are likely to divert investments or exit in response to breach with a firm of the same nationality but unlikely to react in ways costly to the host government otherwise. At the level of the economy as a whole, host governments gain permissive space to trade-off among national groups of investors when a greater diversity of foreign direct investment nationalities is present. I use national-, firm-, and dyadic-level data from 1990 to 2008 to demonstrate nationality-tied firm responses to breach. Counterintuitively, deeper integration with more nationally diverse MNCs enables more breach, as governments gain space to prioritize other goals over the property and preferences of foreign capital.