Need for international arrangements?

Given the importance of foreign direct investment (FDI), the question of international arrangements dealing with it has become a prominent issue on the international policy agenda. The secretariat of the United Nations Conference on Trade and Development (UNCTAD) has published a report intended to lay out the extent to which FDI issues have been covered at the bilateral, regional and multilateral levels and to draw a number of lessons from past experience. These are excerpts from that report (TD/B/(43)/5).

The evolution of international arrangements for FDI has followed and interacted with developments at the national level and reflects the priorities and concerns of a particular period. In the days after the Second World War, FDI concerns related mainly to natural resources and key industries. With decolonization, the principal concern for host developing countries became how to regain control over their economies and natural wealth in order to consolidate their political independence. These efforts were epitomized in the principle of permanent sovereignty over natural wealth and resources which eventually was widely accepted. For foreign investors and their home countries, the main preoccupation was to protect their investments from political risks, especially from nationalization. In this climate, standards for protection of investment emerged, albeit on a bilateral basis and at the initiative of the capital exporting countries.

In the 1980s, these trends were reversed, mainly as a result of the debt crisis in many developing countries (which made FDI a more desirable alternative to bank lending) and of the changing perceptions in these countries as to the role that FDI could play in the growth and development of their economies. As a result, laws and policies began to change dramatically in the direction of liberalization, protection and promotion of FDI, and continue to do so. Liberalization efforts in developed countries were also expanded and deepened during this period. At the same time, a shift in the development strategies pursued by Governments, from highly protective import-substitution models to outward-looking policies emphasizing exported growth, stressed the opportunities offered by FDI to establish linkages with globally-integrated production, distribution and marketing networks and led to a more coherent policy approach towards trade and investment.

Two lessons can be drawn from past pendular swings on FDI policies: one is...