The proliferation of international investment agreements (IIAs) has generated concern that developing countries are surrendering needed policy space. Investor-state dispute settlement provisions enable foreign investors to sue host states should they perceive their treaty rights to be violated. This enables foreign investors to interfere in democratic processes while constraining governments’ abilities to introduce policies in defence of citizen interests. Despite the burgeoning literature on IIAs, there has not yet been an adequate analysis of how states exercise and defend policy space under the agreements. IIAs are commonly theorized as a cohesive regime that imposes similar constraints on states regardless of the context, which renders invisible the agency of domestic actors and limits our understanding of how domestic actors shape the impacts of investment rules by contesting or reinforcing their authority. This study provides a new theoretical framework that enables us to explore the role domestic actors play in shaping the impacts of IIAs. This study argues that real impacts of IIAs on policy space lies in the middle messy ground between the constraints they could potentially impose and the responses evoked at the domestic level, be it acquiescence or contestation. The power of IIAs is therefore theorized as contingent upon the heterogeneous assortment of actors, institutions and expertise involved in processes of enforcement. Policy space is also reconceptualized as fluid, dynamic and structured by multiple factors operating at once. This theoretical framework is applied to the cases of Argentina and Ecuador, focusing on disputes involving foreign-owned utility and oil companies respectively. Both cases demonstrate that signing on to IIAs does not ensure a government will abide by investment rules consistently across time. Rather, governments will introduce policies in conflict with investor rights to advance significant national interests, including the delivery of basic services and development goals. IIAs significantly raised the costs of introducing these policies however state actors employ defence strategies to mitigate these costs with some degree of success. This study challenges the assertion that IIAs constrain policy space evenly across contexts and demonstrates the importance of recognizing state agency in studies of policy space and global economic integration.