Investor-state dispute settlement (ISDS) procedures have been linked with political risk that may negatively impact foreign firms’ host-country investments. As these studies focus mainly on ‘disputing firms’ filing ISDS, the consequences of country-specific ISDS-signals for the vast number of ‘spectator firms’ observing disputes are less well understood. We address this gap by theorizing spillover effects on the part of the most salient events of ISDS (i.e. their filing and award) and argue how information being transmitted between disputing firms and their conationals influence the investment behavior of spectator firms. We test our theoretical predictions on a sample of almost 27,000 firm-host-country investments and find significant remarkably robust effects: Whereas ISDS is negatively related to spectator firms’ host-country investments, conational ISDS-involvement encourages spectator firms’ host-country investments.
