International institutions and firms' assessment of the domestic institutional environment: Evidence from the investor‐state dispute settlement system

Research Summary How do firms assess their institutional environments? Beyond domestic cues, we examine the role of international institutions. In the global investment treaty regime, foreign firms can bring legal claims against sovereign states in international venues for alleged property rights violations. We argue that rulings by international tribunals in favor of or against the state provide domestic observer firms additional cues about property rights protection and the legitimacy of state policy. We compare domestic firms' assessment of their institutional environment shortly before versus after a tribunal ruling to obtain quasi‐random variation in firms' exposure to international institutions. Analyzing 14,338 firm responses across 16 countries, we find that domestic firms assess their institutional environment favorably when states win and unfavorably when states lose. Managerial Summary To ensure that their strategic choices fit the institutional environment in which they operate, firms must assess and update their perceptions of the institutional environment. We examine how firms' perceptions of their institutional environment are shaped by rulings of international tribunals in investor‐state disputes. When an international tribunal adjudicates an investment dispute between a foreign firm and a sovereign state, domestic firms use the ruling as cues about property rights protection and the legitimacy of state policy. Using data on firm‐level assessments of their institutional environments across 16 countries and rulings by international tribunals, we demonstrate that domestic firms perceive their domestic institutional environment more favorably when states win and less favorably when states lose.