Local businesses are more successful than foreign firms in legal disputes because courts are nationalistic, finds a new study by ISB’s Anand Nandkumar.

Courts are expected to remain neutral and independent, which often influences when multinational firms should operate in a host country.

A new ISB study examines this assumption and reveals that judges—often thought to be impartial— are, on average, more likely to favour domestic firms over foreign ones.

Anand Nandkumar, Associate Professor of Strategy at ISB, along with his co-authors Arnab Choudhary from Columbia Business School and Srividya Jandhyala from ESSEC Business School, found in their study that a ‘home court advantage’ exists, benefiting domestic companies in patent disputes.

The study identified economic nationalism as the main reason that skews judgments against foreign firms. Judges employ nationalist language in their rulings, and the individual set of beliefs and principles that influence judges’ decision-making, heightens or lessens this bias.

It specifically examines the role of judicial ideology—whether a judge is conservative or liberal—in moderating these nationalist tendencies. It provides compelling evidence that judicial ideology significantly influences the extent to which courts exhibit a home court advantage for domestic firms.

The study does not conclude that judges are biased. Since judging most cases involves exercising judicial discretion, judges’ beliefs and judicial ideology shape how they apply this discretion, which may sometimes tilt the balance in favor of domestic firms.

An analysis of patent disputes

The authors of the study tested their arguments using data from federal district courts in the United States, which are known for their strong de facto patent regime that treats domestic and foreign firms impartially.

The study used data from the United States Patent and Trademark Office, covering over 58,000 intellectual property lawsuits filed between 1983 and 2016. It analysed the chances of a domestic patent holder winning a dispute against a foreign challenger, compared to winning against another domestic challenger.

Here’s what it found:

1. Domestic patent holders are 10% more likely to win lawsuits against foreign challengers compared to cases against other domestic challengers.

2. Lawsuits involving domestic patent holders and foreign challengers are 15% more likely to include nationalistic language in judgments than disputes between two domestic firms.

3. Under a conservative judge, foreign companies have a 55% lower chance of success in disputes against domestic companies compared to those against other foreign firms.

An edge for domestic firms

The study offers a nuanced perspective on the perception of courts as entirely insulated from broader societal influences. It suggests that elements of economic nationalism may occasionally shape legal outcomes, with decisions sometimes reflecting a focus on domestic interests.

The researchers observed that, due to the inherent discretion involved in judicial decision-making, domestic firms tend to have a somewhat higher likelihood of prevailing in lawsuits against foreign firms compared to disputes between two domestic entities. Similarly, foreign firms were found to be 14% less likely to succeed in cases against domestic counterparts than in disputes with other foreign firms.

The language of judgments

The study argues that judges, as members of a nation, differentiate between domestic and foreign groups, based on the social identity theory. The theory explains that people categorise themselves into 'in-groups' (those they identify with) and 'out-groups' (those they don’t).

“On average, judges are nationalistic,” the researchers noted, adding that their decisions are often reflective of this tendency. The findings further reveal that judgments favouring domestic firms over foreign firms are more likely to include nationalistic rhetoric to legitimise the outcomes of these decisions.

To substantiate this, the study analysed the language used in judgments and found that lawsuits involving a domestic patent holder and a foreign challenger were 15% more likely to include nationalistic rhetoric compared to disputes between two domestic firms. Similarly, cases where a foreign patent owner faced a domestic challenger displayed such rhetoric 11% more often than cases involving two foreign companies.

Conservative judges and bias magnification

The above findings are closely linked to the observation that conservative and liberal judges approach cases through differing ideological lenses, particularly in the absence of explicit legal directives regarding foreign and domestic firms.

A domestic firm has a 9% higher chance of winning a patent lawsuit against a foreign firm when a conservative judge presides over the case, according to the study's findings. Researchers suggested that this explains the role of judicial ideology in

shaping court outcomes, with conservative judges showing a stronger bias against foreign firms.

Interestingly, the results also imply that liberal judges are relatively more favourable toward foreign firms. While researchers did not identify definitive reasons, they suggested two possible explanations.

Liberal judges balance IP with broader social goals, such as free speech and justice, leading to a more moderate bias. They also typically view global engagement, like technology transfer, as advantageous for domestic growth.

The authors emphasise that these findings are important for managers of foreign multinational firms seeking to take advantage of opportunities in international markets. For policymakers, the study provides a clear difference between the benefits of adopting an overtly nationalistic policy and a more moderate approach to economic nationalism.

Author: ISB Editorial Team