World Investment Report 2021


Chapter 3 – Investment Policy Developments

Restrictive or regulatory investment policy measures reach record levels

The policy trend towards more regulatory or restrictive measures affecting FDI accelerated in 2020. Of the 152 new investment policy measures adopted, 50 were designed to introduce new regulations or restrictions. Conversely, the number of new measures aiming to liberalize, promote or facilitate foreign investment remained stable (72 measures). Thirty measures were of a neutral nature. Accordingly, the ratio of restrictive or regulatory measures to measures aimed at liberalization or facilitation of investment reached 41 per cent, the highest on record (figure 5).

Figure 5.

Restrictive or regulatory measures were more prevalent in developed countries, where they represented 35 out of 43 policy measures adopted. The crisis caused by the pandemic prompted several developed countries to take precautionary measures to protect sensitive domestic businesses against foreign takeovers. This contrasts sharply with the situation in developing countries, where investment policy measures of a regulatory or restrictive nature corresponded to only 14 per cent of the total (only 15 out of 109 measures adopted). The heightened concerns for national security did not lead to a dramatic increase in the number of cross-border M&A deals formally blocked by the host countries for regulatory or political reasons; 15 large M&A deals (with values above $50 million) were discontinued for regulatory or political reasons, two more than in 2019, with 3 of those formally rejected because of national security concerns. However, foreign investors may also have become more hesitant to engage in transactions that could cause national security concerns in host countries (a chilling effect). Also, many host-country authorities have started to engage more aggressively at the early stages of deal negotiations, effectively terminating some transactions before they reach the national security test.

Treaty networks are consolidating

At the international investment policy level, 21 new international investment agreements (IIAs) were signed in 2020. These new treaties included 6 bilateral investment treaties (BITs) and 15 treaties with investment provisions (TIPs). The most active economy was the United Kingdom, concluding 12 agreements to maintain trade and investment relationships with third countries after Brexit. As in previous years, the number of terminations exceeded the number of newly concluded IIAs. In 2020, at least 42 IIAs were effectively terminated, of which 10 unilaterally, 7 by replacement, 24 by consent and 1 by expiry. Of these terminations, 20 were the consequence of the entry into force of the agreement to terminate all intra-EU BITs. As in 2019, India was particularly active in terminating treaties (six BITs), followed by Australia (3), and Italy and Poland (2 each). By the end of the year, the total number of effective IIA terminations reached at least 393, bringing the IIA universe to 3,360 (2,943 BITs and 417 TIPS), of which 2,646 were in force (figure 6).

Figure 6.

Megaregional IIAs have been proliferating in recent years, significantly expanding the investment treaty network as each creates multiple bilateral IIA relationships. Megaregionals regulate investment protection and liberalization in different ways because of variations in how the parties approach investment provisions. Most importantly, recently concluded megaregional IIAs include many of the IIA reform approaches identified by UNCTAD.

There are now over 1,100 ISDS cases

In 2020, investors initiated 68 publicly known ISDS cases pursuant to IIA (figure 7). As of 1 January 2021, the total number of publicly known ISDS claims reached 1,104. To date, 124 countries and one economic grouping are known to have been respondents to one or more ISDS claims. Most of the public decisions addressing jurisdictional issues upheld jurisdiction. More than half of the arbitral decisions rendered on the merits dismissed all investor claims. By the end of 2020, at least 740 ISDS proceedings had been concluded.

Figure 7.

IIA reform continues

All new IIAs contain features in line with UNCTAD’s Reform Package for the International Investment Regime, highlighting the progress on the reform of the IIA regime. As in 2019, the preservation of States’ regulatory space was the most frequent area of reform. More than 75 countries and regional economic integration organizations benefited from UNCTAD’s support in their reform efforts. In November 2020, UNCTAD launched its IIA Reform Accelerator, a tool to assist States in the process of modernizing the existing stock of old generation investment treaties. It focuses on the reform of the substantive provisions of IIAs in selected key areas.

Investing in the health sector

The COVID-19 pandemic has created enormous challenges for national health systems and policies. It has tested the resilience of global supply chains for medical goods, revealed the fragility of many national health systems and highlighted the urgent need to invest more in health. An UNCTAD survey of 70 economies sheds light on key aspects of the policy framework for investment in health. Most actively encourage domestic as well as foreign investment in the health sector.

The survey found that entry restrictions on investment in health are rare. Only 18 developing countries impose FDI bans or ceilings in at least one of the three segments of the health sector analyzed, namely the manufacturing of medical equipment, pharmaceutical production and biotechnology, and healthcare facilities and medical services.

Most countries (58) have put in place policies to promote investment in the health sector. The range of tools employed varies significantly depending on the region and level of development. While developing countries in Africa rely primarily on investment incentives that are part of general investment promotion schemes, developed countries – and increasingly also developing countries in Latin America and Asia – deploy a wider set of promotional policies. These include incentives targeted at the sector, proactive investment promotion and enhanced facilitation, and dedicated special economic zones and clusters. The pandemic has led to a rise in the use of targeted investment incentives in the health sector, mainly to foster digital medical technologies, manufacturing of medical equipment and supplies, and medical and pharmaceutical research.

At the international level, policies relevant to the health sector can help promote cross-border investment through market access and national treatment commitments for providers of health-related services (e.g. under GATS). The protection of intellectual property rights and accompanying flexibilities, most prominently regulated in the TRIPS Agreement, exerts an impact on investment in health. These international policies are complemented by BITs and the investment chapters of free trade agreements, which pursue the promotion and protection of investments while increasingly recognizing the need to safeguard national policy space to pursue legitimate public health objectives.

Thus, the overall policy framework is generally conducive to investment in health in most countries, while many maintain safeguards to address legitimate concerns about public health and national security. However, investment policies alone will not suffice to attract the levels of investment required to achieve SDG 3, which aspires to ensure health and well-being for all by 2030, particularly in low and lower-middle-income countries (LLMICs), where a more holistic approach is needed.

In LLMICs, open investment policies and investment promotion schemes cannot make up for the challenges that limit their capacity to host medical industries with adequate portfolios of medicines or vaccines, health infrastructure or services. These include (1) lack of capital, technology and skills; (2) low regulatory capacity and weak health-care systems; (3) weak policy coherence and enabling frameworks; (4) small markets and unstable demand; and (5) poor infrastructure and related services. UNCTAD’s action plan for building productive capacity in health proposes 10 main areas for establishing an adequate ecosystem at the national, regional and international levels and address these challenges, as follows:
i. Invest in skills development and technological capacity
ii. Share technologies to enable affordable mass production
iii. Improve access to finance and tap into impact investment
iv. Build partnerships to initiate “lighthouse” projects
v. Provide investment incentives to improve local firms’ sustainability
vi. Upgrade and streamline regulations and administration
vii. Invest in infrastructure
viii. Emphasize a regional approach to reduce cost
ix. Seek funding through official development assistance
x. Ensure sustainability of efforts despite an unpredictable market

Given the magnitude of the challenge, concerted actions by all stakeholders are needed to effectively build and expand productive capacity in the health sector. Countries will also need to assess which segments to prioritize and how to build the tailored support ecosystem through coherent policy, efficient regulatory institutions and infrastructure, and relevant skills and technology.