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World Investment Report 1996

Overview

Part 3 – Towards a multilateral framework for foreign direct investment?

The question of international arrangements governing FDI is now prominent on the international agenda…

Foreign direct investment and trade are inextricably intertwined, both at the microeconomic level of firms’ strategies and operations and at the macroeconomic level of national economies. They contribute not only individually and directly to the development process, but also jointly and indirectly, through linkages with one another. Governments are increasingly establishing national policy frameworks to create a framework within which FDI and trade can flourish, knowing full well that, once an appropriate enabling framework is created, other factors determine FDI and trade flows.

The principal manner in which governments are pursuing this objective vis-à-vis FDI regimes is through liberalization. They reduce restrictive investment measures; strengthen standards of treatment; provide investment protection; and pay more attention to ensuring the proper functioning of the market. In 1995 alone, 106 of 112 regulatory changes in 64 countries that altered investment regimes were in the direction of greater liberalization or the promotion of FDI (table 6).

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Despite these significant changes, the question has been raised whether current international arrangements have been overtaken by global economic reality and, therefore, a “catching up with the market” is necessary. The vigorous growth of bilateral and regional investment agreements, the inclusion of certain FDI-related issues in the Uruguay Round agreements and the beginning of negotiations on a Multilateral Agreement on Investment in the OECD suggest that many governments believe that this is, indeed, the case. Some governments — but also TNCs, as well as labour organizations, consumer groups and other non-governmental organizations, all for their own reasons — are driving the process, though, of course, there exists a diversity of views and approaches among these groups as to how international arrangements guiding FDI should be further developed.

…and is being pursued at the bilateral,…

At the bilateral level, key investment concepts, principles and standards have been developed through the conclusion of treaties for the protection and promotion of FDI (bilateral investment treaties or BITs). Their distinctive feature is their exclusive concern with investment. Introduced years ago, these treaties have remained virtually unchanged in their format, and the issues they address continue to be among the most important for investors. They contain mostly general standards of treatment after entry and establishment and specific protection standards on particular key issues. As far as development is concerned, BITs emphasize the importance of FDI for development and therefore seek to promote it; they generally recognize the effect of national laws and policies on FDI; and they contain various exceptions or qualifications, e.g., exceptions for balance-of-payments considerations in relation to the principle of free transfer of funds.

The network of BITs is expanding constantly. Some two-thirds of the nearly 1,160 treaties existing in June 1996 were concluded in the 1990s (172 in 1995 alone), involving 158 countries. Originally concluded between developed and developing countries, recently more BITs are between developed countries and economies in transition, between developing countries, and between developing countries and economies in transition.

… regional…

At the regional level, the mix of investment issues covered is broader than that found at the bilateral level, and the operational approaches to deal with them are less uniform. This reflects, among other things, differences in interests and needs, levels of development, perspectives of future development and that investment issues are typically only one of the issues covered in a regional agreement. Most regional instruments are legally binding, although there are exceptions and the definition of investment varies considerably, depending on the purpose and context of an agreement.

Issues typically (though by no means uniformly) dealt with at the regional level include the liberalization of investment measures; standards of treatment; protection of investments and dispute settlement; and issues related to the conduct of foreign investors, e.g., illicit payments, restrictive business practices, disclosure of information, transfer pricing, environmental protection, and employment and labour relations. Where the questions of providing special treatment to certain partners on account of different levels of development arises, it is dealt with primarily through exceptions, derogations, safeguards and the phasing of commitments.

…and, in partial ways, the multilateral levels.

At the multilateral level, most agreements relate to sectoral or to specific issues, moving in on central FDI concerns from the outside. Particularly important among them are services, performance requirements, intellectual property rights, insurance, settlement of disputes and employment and labour relations. Attention is also being paid to restrictive business practices, competition policy, incentives and consumer protection. It is at the multilateral level that concern for development is most apparent. This is particularly so in the case of the GATS, TRIPS and TRIMs agreements, as well as the (non-binding) Restrictive Business Practices Set, where special provisions are made that explicitly recognize the needs of developing countries.

Lessons can be learned from past efforts, including that 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 1980s, the earlier post-war approaches to investment, which often stressed restrictions, controls and conditions on entry and establishment of FDI, were reversed, mainly as a result of the debt crisis (which made FDI a more desirable alternative to bank lending) and of the changing perceptions of the role that FDI can play in growth and development. As a result, laws and policies in many developing countries began to change dramatically in the direction of liberalization, protection and promotion of FDI. Liberalization also expanded and deepened in developed countries. These changes are now being reflected in regional instruments, and in sectoral or issue-specific multilateral agreements.

Two lessons can be drawn from past pendular swings on FDI policies. One is that progress in the development of international investment rules is linked to the convergence of rules adopted by individual countries. The other is that an approach to FDI issues that takes into account the interests of all parties, and hence is to their common advantage, is more likely to gain widespread acceptance and, ultimately, to be more effective. In practice, this raises the question of how an appropriate balance of rights and obligations among affected actors can be found.

…that widespread recognition is emerging on the principal issues that need to be addressed in the FDI area,…

With the growing appreciation of the role of FDI in development and the convergence of national attitudes in favour of market-oriented policies, some issues have moved from the national to the international arena and have become standard substantive items in international discussions on FDI (even though the extent to which these are at present incorporated in specific international instruments varies considerably, as does the strength with which they are addressed).

These include (but are not necessarily limited to) general standards of treatment of foreign investors; questions relating to entry and establishment and operational conditions; protection standards, including dispute settlement; issues relating to corporate behaviour; and other issues, such as the promotion of FDI. In a rapidly globalizing world economy, the list of substantive issues entering international FDI discussions is becoming increasingly broader and may eventually include the entire range of questions concerning factor mobility. Issues that receive relatively little attention at this time may, therefore, acquire increased importance in the future.

…that, so far, progress has been made gradually, helped by increasingly greater transparency and monitoring,…

Regarding the functional characteristics of present arrangements, there are, with many variations, also some common features. Thus, restrictions are eliminated gradually (in the case of the OECD, for example, it took 25 years from the adoption of the Liberalisation Codes until the right of establishment was confirmed). Transparency is increased through the reporting of investment measures and relevant normative changes and monitoring, follow-up and dispute-settlement mechanisms of varying degrees of strength and binding force are set up. A key lesson from these functional approaches is that implementing and strengthening standards is a lengthy process. But it may well be that globalization pressures and changing corporate strategies will require faster normative responsiveness in the future.

…that the interrelations between investment and trade are seen increasingly in a common framework,…

The Uruguay Round of Multilateral Trade Negotiations was the first time that some investment issues were directly introduced as part of the disciplines of the multilateral trading system. This occurred most markedly in the negotiations of GATS which defines trade in services as including the provision of services through commercial presence. The TRIMs Agreement, in fact, focuses on one aspect of the policy interrelationship between trade and investment (performance requirements). Possible future work on investment and competition may lead to even deeper policy integration. A major question is the extent to which this new trend should be accommodated through the development of concepts designed to capture the relationships between investment and trade.

…and, in particular, that development issues must be and can be addressed.

It was observed earlier that, for international agreements to be effective and stable, they need to take into account the interests of all parties, incorporate a balance of interests and allow for common advantage. This applies particularly to developing countries and, more generally, to agreements between countries at different levels of development. In particular, any agreement involving developed and developing countries must take into account the special importance of development policies and objectives. The development dimension can be addressed in international investment accords at all levels and in several ways.

Current international arrangements could either be allowed to evolve organically…

For analytical purposes, two basic approaches, two ideal types, regarding the further evolution of international arrangements for FDI can be distinguished. One approach involves allowing current arrangements to evolve organically, while improving them actively by deepening and expanding them, as appropriate. The overarching rationale for this approach is that current arrangements are working well in providing an enabling framework that allows FDI to contribute to growth and development and are supporting high and growing volumes of FDI. Moreover, such arrangements allow for groups of countries to enter into agreements having the degree of “strength” that is suitable to their circumstances.

…or a comprehensive multilateral investment framework could be sought,…

Another approach involves the construction, through negotiation, of a comprehensive multilateral framework for FDI. The overarching rationale for this approach is that the globalization of business, increased volumes and the growing importance of FDI, intertwined of FDI and trade and the emergence of an integrated international production system require a similarly global policy framework. In brief, in this view a global economy requires a global policy approach to create a stable, predictable and transparent enabling framework for FDI.

…although, in reality, these two policy approaches are not mutually exclusive.

These two policy approaches have been presented for expositional purposes as stylized alternatives, to highlight differences, even at the risk of oversimplification. In reality, even the proponents of each option seldom make such a clear distinction. Those in favour of an approach that allows current arrangements to evolve organically include a diverse range of governments; their support for this approach, however, does not necessarily preclude support for an eventual multilateral framework. Conversely, governments seeking a comprehensive multilateral framework are actively strengthening bilateral, regional, interregional and specific multilateral agreements on FDI. There appears, indeed, to be a consensus that greater international cooperation on FDI issues is desirable. This underlying consensus is reflected in both of the policy approaches. The differences among governments and others in their support for either of the above options — or some combination of the two — lie more in their opinions on how best to achieve greater cooperation. In this perspective, the two approaches can be seen as coexisting and, indeed, developing in a complementary manner.

The further development of international arrangements governing FDI needs to consider a number of issues,…

Since the further development of international FDI arrangements is being pursued at all levels, it is important to identify and analyse issues that need to be considered, especially with a view towards their implications for development. An examination of investment instruments provides a list of key issues that could reasonably be expected to be addressed:

  • Scope. In any instrument on FDI, the forms and types of transactions and operations to which it applies need to be determined.
  • Investment measures that affect entry and operations of foreign investors. Particularly relevant are issues relating to admission and establishment, ownership and control, operations, incentives and investment-related trade measures.
  • Application, with respect to FDI, of certain standards of treatment. Particularly relevant are issues of national treatment, most-favoured-nation treatment, and fair and equitable treatment.
  • Measures dealing with broader concerns, including the proper functioning of the market. Particularly relevant are issues relating to restrictive business practices, transfer pricing, transfer of technology, employment, the environment, and illicit payments
  • Investment protection and the settlement of disputes. Particularly relevant are issues relating to expropriations and property takings in general, abrogation (or unilateral amendment) of state contracts with investors, transfer of funds, and dispute settlement.
  • Procedural approaches. There is also the issue of the legal character of a given instrument and the approach adopted regarding the mechanisms used to put it into effect.

Although extensive, this list of issues is by no means exhaustive. In addition, the relative importance of particular issues varies, of course, for different participants. While investment protection and liberalization, for instance, are especially important to TNCs, the implications for sustainable growth and development of all these issues are of particular significance for governments. Social policy questions, meanwhile, are special concerns of other groups, in particular trade unions and consumer groups.

…while always keeping at the forefront the development dimension.

Because the activities of TNCs have such pervasive consequences for the development prospects of all countries, and in particular those of developing countries and economies in transition, any international arrangement involving the latter groups of countries has to be particularly sensitive to development needs. Broadly speaking, the development objective needs to be:

  • safeguarded by allowing countries in need of a transition period — through exclusions, exemptions and temporary measures — the time to adjust to more stringent standards of investment liberalization, it being recognized that many developing countries have already gone far on their own initiative;
  • advanced by agreeing that developing countries can take appropriate measures to increase the benefits that they can reap from FDI, without infringing on the essential interests of foreign investors;
  • supported by home country governments committing themselves to help developing countries attract FDI, in particular FDI that is most consonant with their development needs (e.g., because it embodies appropriate technology or is export-oriented). Governments of home countries can promote FDI flows to developing countries, e.g., through the provision of information and technical assistance; direct financial support and fiscal incentives; and investment insurance and tax-sparing provisions. While many home countries have already many measures in place in this respect, and some international instruments address this issue, not all do, and those that do, can be strengthened.

Experience has shown that development objectives can not only be accommodated but actually be promoted by international agreements. The further development of international arrangements for FDI needs to keep this objective at the centre of its attention.

The choice of forum will, of necessity, shape how the framework will evolve, with the main choices being either regional and interregional fora…

Investment issues are currently the subject of discussion or negotiation in a number of regional and interregional fora. One important recent initiative was the launching, in May 1995, of negotiations aimed at the conclusion of a Multilateral Agreement on Investment among the members of the OECD in time for the Organization’s ministerial meeting in 1997. The main aim of these negotiations is to eliminate discrimination between foreign and domestic investors. The agreement is intended to provide a broad framework for international investment, with high standards for the liberalization of investment regimes and the protection of investment, and with effective disputesettlement procedures.

While this agreement is being negotiated among OECD members only, it is meant to become a free-standing international treaty open also to non-OECD members. Evidently, one of the main challenges will be to obtain the adherence of non-OECD members. Other regional and interregional fora have already addressed investment issues, or are in the process of doing so, including APEC, ASEAN, SADC, NAFTA and MERCOSUR, as well as the initiatives pursued in the context of the Free Trade Area for the Americas and the European Energy Charter Treaty.

…or a multilateral forum.

Although multilateral rules on FDI could be established in an independent agreement, recent proposals aim at the negotiation of such rules in the framework of international organizations with global, or potentially global, membership. In particular, the WTO has been mentioned as an appropriate forum for such negotiations. An important consideration underlying this suggestion is that the intertwining of investment and trade requires a more integrated approach to international rulemaking.

This has already manifested itself in the work of the GATT and of the WTO. Thus, the WTO already deals with certain aspects of investment issues in the context of the agreements on trade in services, trade-related investment measures and trade-related aspects of intellectual property rights, and an agenda exists for the expansion and deepening of these rules. Negotiations on liberalization through the expansion of the GATS schedules of commitments are scheduled to take place before 1999, and the TRIMs Agreement provides for consideration of competition and investment issues by the same year. Members of the WTO are discussing a proposal for a decision to be taken at the WTO’s first Ministerial Conference in Singapore in December 1996 to create a body to conduct a work programme on trade and investment.

If such a decision were taken, it is likely to provide for exploratory work rather than the immediate launching of actual negotiation of a set of investment rules. Finally, the question of a possible future multilateral framework on investment was addressed at the 1996 UNCTAD IX Conference at which it was agreed that UNCTAD should identify and analyse implications for development of issues relevant to a possible multilateral framework on investment, beginning with an examination and review of existing agreements, taking into account the interests of developing countries and bearing in mind the work undertaken by other organizations. The areas of policy analysis and consensus-building, with a particular focus on the development dimension, are, indeed, areas in which UNCTAD can make a contribution.