Recent Developments on Foreign Direct Investment

• Author: Bruno Manzanares Bastida
• Position: TradeLex Abogados

Introduction

Taking into account the rapid increase of investment flows in the last two decades, the regulation and policies regarding FDI are of such importance that nowadays they are considered amongst the most contentious issues in the international policy arena. The contribution of FDI in the globalisation process is crucial and, to a certain extent, we can describe FDI as one of the most important vehicles of globalisation throughout the world, spreading economic interdependence between sovereign states and eventually turning the world in a big and unified market. According to Carlos M. Correa¹, FDI flows expanded at an unprecedented rate during the 1990s thus becoming the most visible and prominent manifestation of the increasing global integration of economic activity. Indeed, Correa goes on explaining, if compared to the average annual growth of 'trade in goods and services of about 6-7 per cent over the 1990s, FDI inflows grew at an average annual rate of 20 per cent over 1991-95 and at 32 per cent during 1996- 2000'(Correa 2003: 7). The result is a huge increase of FDI inflows, primarily fuelled by cross-border merging and acquisitions, that goes from US$ 159 billion in 1991 to a whopping 1.27 trillion in 2000 (see table in Correa 2003: 8-9).Thus, we may establish a direct link between FDI and the multinational enterprises (MNEs) as most of the foreign investments are carried out by multinationals seeking economic benefits in their investments abroad. MNEs often spread their production capacities and resources over many countries, seeking a beneficial treatment of their allocation in the host country. This happens in number of different ways. For instance, they may take advantage of the host country"s intellectual property regulation, or the labour regulations of another. In this respect, we might use the terms FDI and MNEs interchangeably.

Due to the large amount of funds dedicated to investment that MNEs control, most of the countries, both developed and developing, have been competing to attract FDI in the recent decades as foreign investors are considered important tools for economic growth and development. The direct effect of this effort to attract FDI has been the liberalization of the domestic regulation in relation to the foreign investment, thus creating a favourable investment framework, or through the concession of fiscal incentives and others to the MNEs. Nonetheless, despite the economic benefits given by the MNEs, they are also seen as a recurrent disquiet by the hosting states. According to M. Sornarajah², the threat of the MNEs over the sovereign state has aroused much concern. Since they rely on a huge financial power and support from their home countries, MNEs are capable of influencing, even transforming the political course, shaping the law of foreign investment of the host states. This may be the case particularly when the host states are developing or less developed countries. Many countries have encountered problems regarding the regulation of transnational corporations due to the insufficiency of domestic law to regulate the transnational activities of the MNEs. Despite this fact, according to UNCTAD³, countries are expected to raise their efforts to attract FDI through an increase of their liberalization measures and giving additional incentives to the MNEs.

Yet, how is this amount of economic activity regulated? Is there a harmonized legal framework to regulate FDI internationally? Does this regulation really benefit developing countries engaged attracting foreign investors?

2. The Regulation Of Foreign Investment

According to S. Subedi⁴, the law of foreign investment has a long tradition and is one of the oldest areas of International Law. It has been developed mainly by bilateral agreements, and despite its tradition, this area still remains unregulated by any international treaty of a general character. In fact, the law of Foreign Investment is a complex area due to the different approaches that have been used for its regulation; bilateral, regional and multilateral approaches to be more precise. This different approach has given flexibility to the nations when regulating foreign investment, being capable to choose trade partners according to their different needs.

Traditionally, states have imposed some restrictions on foreign investment. The rationale of these restrictions has been linked with sovereignty concerns as well as an inadequate regulatory control over the foreign investor. However, as we mentioned above, the foreign investment scenario has changed dramatically due to the efforts of many countries to liberalize their investment regulation as a way to attract FDI. This liberalization process has been made in different ways.

2. 1 Bilateral Investment Treaties

The bilateral investment treaties (hereinafter, BITs) are, by far, the mostly used international agreements for protecting FDI. According to UNCTAD⁵, since 1959, when the first BIT was concluded, their figures have increased to 385 by 1989 and to 2,181 by 2002 and many are still being negotiated. Thirty one per cent of the BITs were concluded between developed and developing countries and forty five per cent between developing countries. The last BIT was signed between USA and Uruguay the 25th of October 2004.

BITs are portions of more general treaties dealing with economic relations between countries in their aim to settle a legal framework for their commitments. To an extent, the failure of the attempts made to negotiate multilateral investment treaties, gave the opportunity to the proliferation of the BITs. This failure was due to several concerns developing countries had when negotiating multilateral agreements. In M. Sornarajah words,

The reasons for the failure of these attempts are obvious. The issues that relate to foreign investment made by large multinational corporations give rise to sensitive issues of sovereignty, exploitation of natural resources and internal economic policies. It is unlikely that developing countries will commit themselves readily on such issues in a binding multilateral treaty. (Sornarajah 1994: 232).

BITs unlike multilateral treaties, allow, in theory, more flexibility due to the freedom to suit the agreement to specific interests that parties may have, being agreed in ad hoc basis. Although Bilateral Investment Treaties are entered with the intention to protect the foreign investment that one party makes in the country of the other contracting party, its contents have become more standard over the years. They usually deal with foreign investors concerns regarding expropriation or nationalisation of their investments. Developing countries have been more comfortable negotiating BITs as a form to protect their national investment policies, trying to achieve developmental benefits from the foreign investors and giving a protection framework to those investments at the same time. The establishment of a good investment climate is one of the main goals for the developing countries when negotiating BITs.They usually contain features like the definition of foreign investment; admission and establishment; national treatment in the post-stablishment phase; most favoured nation treatment; fair and equitable treatment; guarantees and compensation in the event of expropriation; guarantees of free transfers of funds and repatriations of capital and profits; and dispute settlement provisions, both State-State and investor-State⁵. However, due to the amount of BITs, variations of this features may occur.

Under this framework foreign investor"s freedom to enter and invest in the host country is quite important. For instance, under the national treatment principle the host country extends to foreign investors treatment that is at least as favourable as the treatment that it accords to national investors in like circumstances⁶. Taking into account that many of the BITs are between states at a different economic development stages, we may say that it does not always constitute a balanced relationship. Due to the lack of investment funds in developing countries, in the scope of the BITs between developed and developing states, for instance, the investment flows usually only have one way, We may ask ourselves how even a treaty made between say USA and Vietnam could actually be. Although BITs are indeed entered in a voluntary basis, it is also one of the few resources that developing and less developing countries have to attract foreign investment. Besides, in the actual practice of the BITs many of the developmental goals of the developing countries are removed from the scope of the BITs. In bilateral negotiations, it proves much more difficult for developing countries to protect their developmental interests due to their lack of power to negotiate, which often results in benefits just for only one of the parties- the developed one. We could find an example of the weakness of developing countries when negotiating bilateral treaties in the Vietnam-USA BTA.

Vietnam, like many developing countries, has actually targeted foreign investment as a source of economic development and growth and as a way of...