Global Regulation of Foreign Direct Investment

Sherif Seid

• Publisher: Routledge
• Year: 2018
• Print ISBN: 9781138738676
• eBook ISBN: 9781351731720
• Topic: Social Sciences
• Subtopic: Sociology
• Index: Social Sciences

This title was first published in 2002: After the failure of the Multilateral Agreement on Investment (MAI), the world does not have a global investment agreement that would regulate FDI. A global investment agreement dealing with FDI would clearly fill a large gap in the network of regulatory measures governing the world economy. Other attempts had been made prior to the MAI to address this problem, but all have failed so far. The main reason for such failures has always been the lack of compromise in the positions held by the major stakeholders. This book analyses the pros and cons of these opposing positions and uses them as a basis for forging a hybrid model called "Regulated Openness".

Part I
The Theory of Foreign Direct Investment: The Law of FDI

Chapter 1
Introduction

Foreign Direct Investment (FDI) plays a significant role in the development process of most economies, and today it has become an integral part of higher living standards and economic prosperity. FDI is also a key determinant of trade since a large percentage of trade occurs between affiliated companies. According to the United Nations Conference on Trade and Development (UNCTAD), trade within MNCs and arms length trade associated with MNCs are estimated to account, together, for two-thirds of world trade, and intra-firm trade alone, for one-third (UNCTAD, 1999). A large number of countries around the world spend enormous resources and time in designing and implementing policies that would attract FDI to their respective territories.

Foreign investment enables investors to look beyond the constraints of their domestic investment environment and gain access to resources and bigger markets, and maximise investment returns. However, such transnational activities pose unique challenges to national governments (in addition to the opportunities they bring with them). Multinationally located and transnationally integrated company operations would give MNCs more independence from a national government’s policy directions (particularly when the host country is a small, developing nation). During the 1960s and 1970s, several clashes arose between MNCs and host governments, and between host and home governments of these companies, over a range of regulatory issues affecting MNC operations.

This book analyses the regulation of FDI both nationally and internationally and the problems associated with it. It also proposes a pragmatic global regulatory framework that would solve the current stalemate on a multilateral investment agreement. The book is divided into three major parts.

Part One

The first part consists of three further chapters. Chapter Two discusses the theories that have had major influence in the past decades on national and international investment regulation. These theories are neo-classical economic theory, dependency theory and the theories of state intervention in economic activity. As the discussion in Part II will show, these theories, particularly neo-classical economics and theories of state intervention in economic development seem to have a major influence in the positions and strategies of the key international players. Therefore, each of these theories will be examined briefly in Chapter Two, and their impact on national and international rule making on FDI will be assessed. The benefits FDI brings to the host economy and its possible negativities will also be examined in light of these theories. The role of the State in addressing market failures and the pros and cons of state intervention will be analysed.

Chapter Three analyses the scope of coverage and weaknesses/strengths of the current rules on FDI. The current rules on FDI can be broadly categorised as national, bilateral and multilateral. The multilateral rules can be further classified as regional/sectoral and global. National laws set the rules for the establishment, operation and liquidation of business enterprises. Although broader in scope, national laws have geographical limits in their applicability. Whatever international arrangements we have at the moment, their scope is limited either geographically or in scope. Moreover, the diversity of national and international legal regimes governing FDI would introduce excessive distortions as between countries and sectors (Fatouros, 1996: 59). Chapter Two examines all of these issues in detail and puts a case for global investment rules/principles.

Chapter Four discusses the methodology used in this research. Multiple methods have been developed, and Chapter Four explains them all.

Part Two

The second part of the book consists of four chapters that examine the strategies of the key international players for global FDI regulation. The influence of the theories discussed in Chapter One will become more apparent throughout Part Ii. Chapter Five discusses the strategies of the Organisation for Economic Cooperation and Development (OECD) and OECD countries. Key players among the OECD countries are the US, the EC and Japan. The Chapter also examines the Multilateral Agreement on Investment (MAI) in detail, from its inception to its eventual burial.¹ The MAI was negotiated exclusively by OECD countries, and largely in secrecy. The intention was to invite other countries to sign once an Agreement has been reached among OECD states. Although OECD countries as a group hoped that the MAI would remove barriers to market access and enhance the liberalisation of investment rules, each of the three main players within the group had their own distinct priorities when they first decided to start negotiating the Agreement. This Chapter, therefore, examines the policies and strategies of the three major players. The contents of the MAI will be analysed in detail. The reasons for and the forces behind the MAI’s failure to materialise will also be discussed.

Chapter Six discusses the strategies of developing countries for a global investment regime. The key players in developing countries do not have a common strategy for a global investment regime at this point in time. Their views are divided on whether to have such a regime in the first place, secondly on the appropriate forum for the negotiation and implementation of such a regime, and thirdly on the nature and emphasis of the regime, should a decision be made to have one. Their views were also divided on the extension of the MAI to nonOECD countries. Most developing countries generally accept that FDI could make big contributions to their development efforts. There is however concern that, when the major interests of MNCs and host States are in conflict, MNCs may use their muscle as well as the influence of their home countries to interfere in the domestic affairs of weaker host countries. Moreover, a global framework that would allow foreign investors to take the host country to international tribunals without the latter’s consent is seen as a measure that would severely erode the sovereignty of host nations. It is therefore argued that FDI could only be beneficial to host economies if host countries can regulate and direct it according to their development objectives. The model of agreement proposed by the proponents of the MAI was opposed by many developing countries partly because it required host countries to give up their right to adopt a selective approach to foreign investment to promote their chosen development strategy. Moreover, any proposal that would give rights and protection to foreign investors, but not corresponding obligations would not be acceptable to these countries. The question of venue has also been as controversial as the substantive content of the future agreement itself. While there are some developing countries that want to negotiate the global agreement within the framework of the World Trade Organisation (WTO), others reject this and propose that the UNCTAD would be the appropriate forum. Chapter Six examines all of these issues in detail.

Chapter Seven discusses the strategies and positions of social movements (such as consumer, environmental and labour movements) and key international business associations (such as the International Chamber of Commerce and the Business and Industry Advisory Council of the OECD for global investment rules. International non-governmental organisations (NGOs) play key roles in shaping international rules and institutions (Braithwaite and Drahos, 2000). If the strategies they followed and the positions they took during the MAI debate are of any indication, consumer advocates, environmentalists and labour unions have commonality on most of the issues regarding FDI regulation, while business representatives stand on the opposite side. The first three groups formed a broad coalition in their stand against the MAI and unleashed a rigorous campaign to kill it. Business representatives largely gave strong backing to the MAI, to the extent of being accused of initiating and driving the negotiation process.

Despite the potentially positive contributions of FDI, consumer advocates, environmentalists and labour unions fear that because of their economic power and, in some instances, lack of accountability to host countries, MNCs have the potential to limit competition and force consumers to face less choice and higher prices. They also fear that MNCs could trigger the lowering of environmental, labour and other standards as host countries compete to attract foreign investors to their territories; or they may behave unethically by, for example, artificially avoiding taxes or indulging in corrupt practices. The business community largely supports an international investment regime because they believe that such a regime could be a tool for greater market access and better predictability of rules. Chapter Seven examines all of these issues in detail.

Chapter Eight discusses the roles of the major inter-governmental organisations in the process of making rules for FDI, since international organisations play significant roles in shaping the global regulatory regime. The organisations covered in the discussion are the United Nations, the WTO, the World Bank and the Asia-Pacific Economic Cooperation (APEC). The United Nations has played significant role in the debate about global investment rules. The UN was involved in facilitating the drafting of a Code of Conduct for MNCs until the early 1990s. Since then, it has also been active in the debate through UNCTAD. The WTO too is involved in the debate about global investment rules and, in fact, regulates FDI in a limited way. For examples, the Agreement on Trade-Related Investment Measures (TRIMS) deals with investment measures that have prohibitive effects upon trade in goods. One of the purposes of the World Bank as enshrined in its Article of Agreement is “to promote private foreign investment”. Three other institutions created under the Bank’s auspices complement its operations in support of the promotion of foreign investment. These institutions are the International Finance Corporation (IFC), the International Centre for the Settlement of Investment Disputes (ICSID), the Multilateral Investment Guarantee Agency (MIGA). In addition, in 1992, the World Bank adopted a set of non-binding Guidelines for the treatment of FDI. The regional organisation APEC, too, has adopted non-binding guidelines for the treatment of foreign investment in the Asia-Pacific region. Although some success has been seen at regional levels, none of the global organisations have so far succeeded in developing a comprehensive global investment regime acceptable to all countries. Several attempts to develop such a regime in the past have failed. The issues surrounding all of these activities will be discussed in detail in Chapter Eight.

Part Three

The third part consists of three chapters that evaluate the strategies of the key players and proposes a pragmatic regulatory framework. Developed countries, multilateral financial institutions like the IMF and World Bank, business groups and some developing countries advance the idea of having a more liberal regime at both global and national levels. Other developing countries and various NGOs, such as consumer organisations, environmental activists and the labour movement, on the other hand, see danger in an extensive liberalisation of investment rules and argue that what is needed is regulation. Chapter Nine evaluates these positions. It attempts to highlight the cons and pros of both excessive liberalisation and excessive regulation. Moreover, the implications of the Multilateral Agreement on Investment (MAI) will be discussed.

Chapter Ten explores an alternative approach in the regulation of FDI, called “regulated openness”, which is a pragmatic and hedged model that seeks to preserve the strengths and cover the shortcomings uncovered in the regulatory models of the different players. It starts by asserting that the current approach in attempting to formulate an international regime for FDI has serious flaws, both in the manner negotiations are conducted and the substantive content of the rules. It then proposes a middle-ground position called “regulated openness”, where the interests and concerns of all major international players could be accommodated in a balanced and pragmatic way, both regarding the manner in which the negotiations would be conducted and the substantive content of the rules. The Chapter consists of two major parts. The first discusses the structure of the principles/rules under “regulated openness”, both at the international and national levels, and the content of the principles/rules at the international level. The second part covers the process of negotiating the international agreement, venue, and implementation of the rules.

Chapter Eleven summarises the entire book and draws conclusions about the contribution the ideas in this book could make in the debate on global investment rules.

Notes

1 The MAI is a draft investment agreement that had been negotiated by the OECD countries from April 1995 to May 1998 under the sponsorship of the OECD Secretariat. The negotiation was planned to be completed in April 1997 initially, but later the deadline was extended to April 1998. Because of the enormous controversy it generated both within the OECD grouping and around the world, the negotiation was suspended indefinitely in May 1998 and the Agreement has not been signed as of this date.

Chapter 2
FDI Theories and the Role of the State

Theories, economic or otherwise, play an important role in shaping legal attitudes. With regard to FDI, the theories discussed in this Chapter seem to have played a dominant role in shaping the legal regimes both nationally and internationally. These are neoclassical economic theory, dependency theory, and theories of state intervention in economic development

Neo-classical economic theory is the main driving force behind the global push for the liberalisation of trading and investment regimes. As such, it has played (and is playing) a significant role in the debate about global investment rules. Dependency theory, on the other hand, seems to be losing its influence in global rule making, but it has been a significant force in the rule making process so far, as the anti-book of neo-classical economics. However, the various theories on the benefits of State-intervention in the marketplace seem to be replacing dependency theory in the contempor...

Table of contents

• Cover
• Half Title
• Dedication
• Title Page
• Copyright Page
• Contents
• List of Figures
• List of Tables
• Preface
• Acknowledgments
• List of Laws, Agreements and Conventions
• Acronyms
• Part I The Theory of Foreign Direct Investment: The Law of FDI
• Part II Strategies for a Global Investment Agreement: The Key Players
• Part III Evaluation: Towards Regulated Openness
• Bibliography
• Index