Although there is no unified international standard for the definition of small and medium-sized enterprises, it is generally believed that enterprises with small number of employees, low annual sales, low asset value and small market share are small and medium-sized enterprises (SMEs). When SMEs have investment disputes with the host country, practice shows that the investor state dispute settlement mechanism is an important way to protect the legitimate rights and interests of small and medium-sized enterprise investors. If the investment of SMEs is protected and there is an applicable dispute settlement mechanism, they will prefer overseas investment. However, for SMEs, the mechanism does have some problems, such as high cost, serious asymmetry of financial resources with the host country, difficulty in obtaining professional knowledge and legal information, and so on. International arbitration institutions such as ICSID, SCC and ICC have clearly proposed to encourage and support the application of ISDS mechanism by investors of SMEs in their successive reforms in recent years. The reform measures include many contents to encourage and facilitate SMEs to resort to ISDS, such as simplifying arbitration procedures and improving arbitration efficiency by shortening the time limit for arbitration, giving full play to the role of case management meetings, and implementing consolidated arbitration. Measures also include the establishment of multilateral advisory centers to provide advisory services to SMEs, help them with capacity-building, provide support in dispute settlement procedures, and provide financial support to SMEs through third-party funding. With the introduction of China’s policy to promote overseas investment of SMEs, the number and scale of overseas investment of SMEs in China are expanding year by year. At the same time, the political risk of overseas investment is increasing as well. In the post-epidemic era, under the background that global direct investment is not completely relieved by the pressure of COVID-19, SMEs also face multiple risks and challenges, and SMEs should be encouraged to use the mechanism as one of the relief measures. Therefore, China should actively exercise its international voice in the reform of ISDS mechanism and put forward suggestions conducive to the application of SMEs, set up an international investment advisory center to provide information consultation, financial support and legal assistance to SMEs, and add provisions to facilitate the application of SMEs in the ISDS mechanism stipulated in the bilateral investment agreement.