Against a backdrop of continued economic uncertainty, turmoil in financial markets and slow growth, countries worldwide continued to liberalize and promote foreign investment as a means to support economic growth and development. At the same time, regulatory activities with regard to FDI continued.
Investment policy measures undertaken in 2011 were generally favourable to foreign investors. Compared with 2010, the percentage of more restrictive policy measures showed a significant decrease, from approximately 32 per cent to 22 per cent (table 5). It would, however, be premature to interpret this decrease as an indication of a reversal of the trend towards a more stringent policy environment for investment that has been observed in previous years – also because the 2011 restrictive measures add to the stock accumulated in previous years. The share of measures introducing new restrictions or regulations was roughly equal between the developing and transition economies and the developed countries.
The overall policy trend towards investment liberalization and promotion appears more and more to be targeted at specific industries, in particular some services industries (e.g. electricity, gas and water supply; transport and communication). Several countries pursued privatization policies. Other important measures related to the facilitation of admission procedures for foreign investment.
As in previous years, extractive industries proved the main exception inasmuch as most policy measures related to this industry were less favourable. Agribusiness and financial services were the other two industries with a relatively high share of less favourable measures.
More State regulation became manifest primarily in two policy areas: (i) an adjustment of entry policies with regard to inward FDI by introducing new entry barriers or by reinforcing screening procedures (in e.g. agriculture, pharmaceuticals) and (ii) more regulatory policies in extractive industries, including nationalization, expropriation or divestment requirements as well as increases in corporate taxation rates, royalties and contract renegotiations. Both policy types were partly driven by industrial policy considerations.
In 2011–2012, several countries took a more critical approach towards outward FDI. In light of high domestic unemployment, concerns are rising that outward FDI may contribute to job exports and a weakening of the domestic industrial base. Other policy objectives include foreign exchange stability and an improved balance of payments. Policy measures undertaken included outward FDI restrictions and incentives to repatriate foreign investment.
By the end of 2011, the overall IIA universe consisted of 3,164 agreements, which include 2,833 bilateral investment treaties (BITs) and 331 “other IIAs”, including, principally, free trade agreements (FTAs) with investment provisions, economic partnership agreements and regional agreements (WIR12 no longer includes double taxation treaties among IIAs). With a total of 47 IIAs signed in 2011 (33 BITs and 14 other IIAs), compared with 69 in 2010, traditional investment treaty making continued to lose momentum (figure 5). This may have several causes, including (i) a gradual shift towards regional treaty making, and (ii) the fact that IIAs are becoming increasingly controversial and politically sensitive.
In quantitative terms, bilateral agreements still dominate; however, in terms of economic significance, regionalism becomes more important. The increasing economic weight and impact of regional treaty making is evidenced by investment negotiations under way for the Trans-Pacific Partnership (TPP) Agreement; the conclusion of the 2012 trilateral investment agreement between China, Japan and the Republic of Korea; the Mexico–Central America FTA, which includes an investment chapter; the fact that at the EU level the European Commission now negotiates investment agreements on behalf of all EU member States; and developments in ASEAN.
In most cases, regional treaties are FTAs. By addressing comprehensively the trade and investment elements of international economic activities, such broader agreements often respond better to today’s economic realities, in which international trade and investment are increasingly interconnected (see WIR11). While this shift can bring about the consolidation and harmonization of investment rules and represent a step towards multilateralism, where the new treaties do not entail the phase-out of the old ones, the result can also be the opposite. Instead of simplification and growing consistency, regionalization may lead to a multiplication of treaty layers, making the IIA network even more complex and prone to overlaps and inconsistencies.
While some IIAs concluded in 2011 keep to the traditional treaty model that focuses on investment protection as the sole aim of the treaty, others include innovations. Some new IIAs include a number of features to ensure that the treaty does not interfere with, but instead contributes to countries’ sustainable development strategies that focus on the environmental and social impact of investment.
A number of other recent developments also indicate increased attention to sustainable development considerations. They include the 2012 revision of the United States Model BIT; the 2012 Joint Statement by the European Union and the United States, issued under the auspices of the Transatlantic Economic Council; and the work by the Southern African Development Community (SADC) on its model BIT.
Finally, increased attention to sustainable development also manifested itself in other international policymaking related to investment, e.g. the adoption of and follow-up work on the 2011 UN Guiding Principles on Business and Human Rights; the implementation of the UNCTAD/FAO/World Bank/IFAD Principles for Responsible Agricultural Investment; the 2011 Revision of the OECD Guidelines for Multinational Enterprises (1976); the 2012 Revision of the International Chamber of Commerce Guidelines for International Investment (1972); the Doha Mandate adopted at UNCTAD’s XIII Ministerial Conference in 2012; and the Rio+20 Conference in 2012.
In 2011, the number of known investor–State dispute settlement (ISDS) cases filed under IIAs grew by at least 46. This constitutes the highest number of known treaty-based disputes ever filed within one year. In some recent cases, investors challenged core public policies that had allegedly negatively affected their business prospects.
Some States have been expressing their concerns with today’s ISDS system (e.g. Australia’s trade-policy statement announcing that it would stop including ISDS clauses in its future IIAs; Venezuela’s recent notification that it would withdraw from the ICSID Convention). These reflect, among others, deficiencies in the system (e.g. the expansive or contradictory interpretations of key IIA provisions by arbitration tribunals, inadequate enforcement and annulment procedures, concerns regarding the qualification of arbitrators, the lack of transparency and high costs of the proceeding, and the relationship between ISDS and State–State proceedings) and a broader public discourse about the usefulness and legitimacy of the ISDS mechanism.
Based on the perceived shortcomings of the ISDS system, a number of suggestions for reform are emerging. They aim at reigning in the growing number of ISDS cases, fostering the legitimacy and increasing the transparency of ISDS proceedings, dealing with inconsistent readings of key provisions in IIAs and poor treaty interpretation, improving the impartiality and quality of arbitrators, reducing the length and costs of proceedings, assisting developing countries in handling ISDS cases, and addressing overall concerns about the functioning of the system.
While some countries have already incorporated changes into their IIAs, many others continue with business as usual. A systematic assessment of individual reform options and their feasibility, potential effectiveness and implementation methods (e.g. at the level of IIAs, arbitral rules or institutions) remains to be done. A multilateral policy dialogue on ISDS could help to develop a consensus about the preferred course for reform and ways to put it into action.
Since the early 2000s, there has been a significant proliferation of CSR codes in global supply chains, including both individual TNC codes and industrylevel codes. It is now common across a broad range of industries for TNCs to set supplier codes of conduct detailing the social and environmental performance standards for their global supply chains. Furthermore, CSR codes and standards themselves are becoming more complex and their implementation more complicated.
CSR codes in global supply chains hold out the promise of promoting sustainable and inclusive development in host countries, transferring knowledge on addressing critical social and environmental issues, and opening new business opportunities for domestic suppliers meeting these standards. However, compliance with such codes also presents considerable challenges for many suppliers, especially small and medium-sized enterprises (SMEs) in developing countries. They include, inter alia, the use of international standards exceeding the current regulations and common market practices of host countries; the existence of diverging and sometimes conflicting requirements from different TNCs; the capacity constraints of suppliers to apply international standards in day-to-day operations and to deal with complex reporting requirements and multiple on-site inspections; consumer and civil society concerns; and competitiveness concerns for SMEs that bear the cost of fully complying with CSR standards relative to other SMEs that do not attempt to fully comply.
Meeting these challenges will require an upgrade of entrepreneurial and management skills. Governments, as well as TNCs, can assist domestic suppliers, in particular SMEs, through entrepreneurship-building and capacitydevelopment programmes and by strengthening existing national institutions that promote compliance with labour and environmental laws. Policymakers can also support domestic suppliers by working with TNCs to harmonize standards at the industry level and to simplify compliance procedures.