Providing an international framework for foreign direct investment

Creating a "free standing" multilateral agreement open to all countries that will establish transparent and predictable rules for international investment and will contribute to the efficient use of economic resources, the creation of employment opportunities and the improvement of living standards.

Bringing into operation a multilateral framework agreement for investment, characterized by full liberalization of all types of investment and parallel provisions to promote competition through anti-monopoly and anti-restrictive business practice measures.

In the early 1990s, as in the 1980s, the main preoccupation of governments, from both developed and developing countries, has been to provide the policy conditions that would attract foreign direct investment (FDI) flows into their countries. With the heightened emphasis on the part of the capital-importing countries on foreign investment as a source of capital flows (including resources, such as technology, management skills, know-how etc.) and with the new policy orientations of developing countries relating to the liberalization of foreign investment regimes and privatization, most intergovernmental efforts have concentrated on the preparation of instruments that complement and support legislative actions at the national level, aimed at establishing a legal framework for foreign direct investment free from many of the previous regulatory conditions and controls.

The main elements of international investment agreements are: the right of entry and establishment of foreign companies in almost all sectors, except security; the right to full equity ownership; national treatment; removal of many regulations and conditions now imposed on foreign companies by the host governments; protection of the rights of foreign investors (including those pertaining to non-discrimination, intellectual property, expropriation, compensation, transfer of funds, and taxation); and the establishment of an international dispute settlement system (under the World Trade Organization), thus making agreements legally binding and enforceable.

Governments have channelled their cooperation activity on FDI through a variety of efforts at all levels (global, multilateral or interregional, regional and bilateral), involving other countries in manners that make it increasingly difficult to define clear cooperation patterns along North, South, East or West division. The legal and institutional approach to this international law- and policy-making activity has also been diverse. At the global level, legally binding commitments have been made on partial aspects of foreign direct investment operations, notably on the protection of the environment. Other multilateral efforts to establish legally binding regimes for key aspects of FDI operations have continued, in the context of the Uruguay Round of trade negotiations. But the elaboration of general principles and standards relating to FDI which can be applied to all countries has proceeded on the basis of recommendations or guidelines of a voluntary nature. One such initiative covering general principles on the treatment of FDI has been brought to a successful conclusion – namely, the World Bank Guidelines for the Treatment of Foreign Direct Investment – whereas the major effort to complete a comprehensive framework covering both standards for the treatment and for the activities of transnational corporations has not been completed.

While the global approach to normative FDI issues continues and, indeed, is necessary in order to match a similar approach in the organizational structures and operations of transnational enterprises, it is at the regional and interregional levels where international activity in recent years has been most intense – and fruitful. The new impetus given to the consolidation of regional integration schemes and free trade areas has acted also as a centrifugal force attracting to the regional centres other countries geographically close and has led to a variety of more or less loose forms of association or cooperation (i.e. within Europe, between Europe and other regions, within Africa, within the Americas, within Asia, between the Americas and Asia). Characteristically, the resulting commitments are legally binding in nature and are part of a package covering a number of interrelated issues, which may include trade, investment, financial and technology transfers, restrictive business practices and intellectual property matters.

The network of bilateral treaties for the promotion and protection of foreign investments has continued to expand, as have also other types of bilateral treaties dealing with issues of immediate concern to foreign investors – namely, the treaties for the avoidance of double taxation of income and capital and bilateral guarantee agreements. Recently, a number of bilateral cooperation agreements have been added to the list of bilateral treaties. The new agreements, however, bear a closer resemblance to the regional integration instruments mentioned above than to the more traditional types of bilateral investment treaties. They are aimed at creating or expanding or paving the way for the establishment of free trade and investment zones. It is interesting to note that, as integration schemes expand their coverage over investment questions, more and more agreements relating to investment are being concluded not by individual countries separately but by groups of countries under the single umbrella of the integration organization to which they belong.

In spite of this variety of forms of cooperation on foreign direct investment, the outline of issues that have been covered under most instruments is quite similar, as is the approach and philosophy which inspire them. As already indicated, liberalization of national barriers to foreign investment has been one of the main themes reflected in most cooperation efforts. Liberalization affects mostly the conditions of entry and establishment but also operational conditions and the free transfer of funds and repatriation of the investment. Liberalization efforts are made either through the granting of an explicit right to entry and establishment or through the adoption of general standards of treatment, such as national and most-favoured-nation treatment and non-discrimination (qualified sometimes by reciprocity requirements). Increasingly also, international arrangements address the question of performance requirements directly in order to prevent or discourage them. To minimize the potential negative effects on developing national economies of the unqualified application of these principles and standards, almost invariably the instruments contain derogations or exceptions to the general principles. In most instances this is done by way of adding a list of excepted activities and industries.

Monitoring mechanisms are usually prescribed. These tend to rely on notification procedures and transparency requirements. In addition to the liberalization aspects, most instruments guarantee a certain level of protection to the foreign investments, both in general terms and in specific areas, notably, expropriation and nationalization, and state contracts. In all of these aspects, the instruments tend to stipulate substantive standards, and to provide for various alternatives regarding the settlement of disputes, including arbitration.

With respect to standards and principles for the activities and behaviour of transnational enterprises, international activity has concentrated mostly on a number of specific issues, which are high in the international policy agenda (such as environmental protection, banking and financial markets supervision, illicit payments in international business transactions). In these and other areas, particular emphasis has been placed in the development of preventive measures, mostly by way of information disclosure requirements and auditing requirements. On the other hand, major efforts to elaborate comprehensive instruments containing standards for the full range of activities of transnational enterprises have been less successful. Nevertheless, indirect references to the obligations of foreign investors are found in most of the liberalization instruments referred to above. Apart from a general obligation to act in good faith, the overall regulation of foreign investor activities in a host country tend to be considered as a matter to be determined by that country.

In recent years a number of developments concerning the negotiation, conclusion and follow-up of instruments of relevance to the international framework for transnational corporations took place at the multilateral, regional, interregional and bilateral levels. At the multilateral level, the most significant developments were the adoption of Guidelines on the Treatment of Foreign Investment and the continuation of the negotiations of international agreements on international trade in services, trade-related investment measures and trade-related aspects of intellectual property in the context of the Uruguay Round of trade negotiations.

At the regional and interregional levels, the main treaty-making activity occurred in the context of regional integration schemes and the expansion of free trade zones. Of importance for foreign investment operations was also the 1991 review of the OECD Declaration on International Investment and Multinational Enterprises.

A Working Group within the World Trade Organisation (WTO) has the mandate to research the relation between trade and investment: so-called Trade Related Investment Measures (TRIMs). Following the failure of the negotiations on the Multilateral Agreement for Investments (MAI) at the OECD in late 1998, the EU wants this mandate to be expanded to include the ability to negotiate. Both the USA and developing countries are opposed to this proposal. At the bilateral level, the network of bilateral treaties for the promotion and protection of FDI continued to expand, while cooperation agreements were concluded between the USA and a number of developing countries. Various instruments were also successfully concluded on specific aspects relative to the operations of transnational corporations, notably on environmental protection, antitrust, and banking supervision.

In the context of indebted developing countries, FDI can generate inflows of new capital. As distinct from loans, the return on FDI varies with the quality of the investment and the state of the economy; by definition investors share these risks. But potential political unrest and the unfavourable economic climate in most highly indebted countries may lead prospective foreign investors to seek appropriate risk coverage before committing themselves. The Multilateral Investment Guarantee Agency sponsored by the World Bank could play a useful role in this context.

The importance of foreign direct investment and transnational corporations as integrating agents of the world economy, as witnessed by their role in current flows of capital, finance, technology and labour, continues to grow. Investment flows in 1993 reached US$ 185,000 million and world-wide stock of foreign direct investment increased to US$ 2.2 million million. Foreign direct investment to developing countries reached US$ 50,000 million in 1992 and some US$ 80,000 million in 1993. This has meant that developing countries have outpaced developed countries in terms of the rate at which foreign direct investment inflows grew, and that developing countries accounted for an increasing share of world-wide investment flows.

The establishment of a multilateral framework for investment is expected to increase the flow of foreign direct investment (FDI), and related trade, and increase economic growth. The sustainability impact of this growth in global economic activity will be affected by the extent and effectiveness of the regulatory framework which is established at both international and national levels. The distributional impact will vary between countries, depending upon whether they are 'home' or 'host' to FDI, the volume of inward FDI which they attract, and the effectiveness of the domestic regulatory framework. The current locational distribution of foreign investment flows to developing countries is uneven, particularly to the least developed, which receive very limited FDI inflows.

Negotiations on the Multilateral Agreement on Investment (MAI) in the Organisation for Economic Co-operation and Development (OECD) began in 1995. The MAI is not the first agreement on investment, a Code of Investment Practices has existed since the 1960s. In 1976 the OECD founded its Guidelines for Multinational Enterprises (MNEs) which are recommendations by OECD member governments for MNE practices that are in harmony with policies of the countries where they operate. These policies included providing for national treatment for foreign-owned enterprises, governmental co-ordination of investment incentives, and minimising conflicting governmental requirements of MNEs. The Guidelines also included both standards for environmental and labour practices and "national contact points" (usually government offices) where the Guidelines can be promoted and disputes among various parties – including management and labour – can be discussed and mediated.

The case for the MAI was made by the Secretary-General of the OECD at its consultation with NGOs in October 1997. His fundamental premise was that economic growth generated by an "high-performing world economy could begin to eradicate poverty, misery and disease in many parts of the world. "To achieve this, developing countries need the benefits of an open trading and investment system as well as macro-economic stability and reforms." These premises are major features of all industrialised countries advice to developing countries.

The effort to create the MAI ended in failure in 1998 after France left the bargaining table at the Organization for Economic Cooperation and Development, effectively killing the initiative. the concerns of its many critics. There are two hypotheses about why the negotiations failed: 1) that the MAI's failure is best seen as a political victory for "antiglobalist" nongovernmental organizations (and possibly supported by US organized labour); and 2) that the MAI failed because of irreconcilable differences among the negotiating parties over the substance of the issue of foreign direct investment.

Foreign direct investment, venture capital funds and portfolio investments have the potential to be harnessed for developmental and environmental improvements. Yet not every investment is sustainable. A Sustainable Investment Treaty could provide the rules necessary to direct investment towards supporting sustainability.

Foreign investment cannot be presumed beneficial. It can lead to job losses in small and medium enterprises and put downward pressure on environmental and labour standards, while speculative investment can lead to destabilisation of financial markets and systems.