Bilateral investment agreements play only a minor role in attracting FDI

GENEVA: The presence or absence of an investment agreement was a very insignificant factor determining investment decisions of foreign investors, and the country advocating a multilateral agreement with pre-investment national treatment to foreigners, does not itself appear to practice it.

This came out in discussions at an UNCTAD inter- governmental expert group meeting (28-30 May) on existing agreements (bilateral, regional and plurilateral) on foreign investments and their development dimensions.

Generally, experts from developing countries stressed that their national policies and development needs should be taken into account in bilateral agreements, whilst most experts from developed countries emphasised the protection of foreign investors' rights.

Some developing country representatives also brought up the inequities and inadequacies of existing bilateral agreements, that are due to the unequal bargaining power between developed and developing countries.

There was also widespread agreement that, whether a country concluded BITs or not was an insignificant factor to the inflow of foreign investment, as other factors were much more important for attracting FDI.

The meeting, on "existing agreements on investment and their development dimensions", which focused on bilateral investment treaties (BITs), is part of the implementation of the mandate given to UNCTAD by the UNCTAD-IX to analyze implications for development of issues relevant to a possible multilateral framework on investment.

A French academic, Professor Jean-Luc Le Bideau, who as a resource person presented a review of existing BITs, while noting that most of them covered issues like protection of the foreign investments, and national treatment to the foreign investor, in effect, advocated liberalisation of investments through a multilateral treatment since in his view, several of the BITs had defects or inadequacies.

But Le Bideau did not answer specific questions posed to him as to whether any of the BITs in fact, provided for national treatment of a foreign investor even before he invested, that is, the foreigner was given the same right to invest in a country as a national. Le Bideau was also asked, but did not reply, as to developing countries who had much less bargaining power, could deal with a situation as happened in Belgium when Renault suddenly decided to fold up its production unit? How could developing countries exercise some leverage and create obligations on the investor to deal with environmental or social problems that might be created?

Emergence of two models

However, in a later session, another resource person, Professor M. Sornarajah of the National University, Singapore, commented that two models or approaches seemed to emerge during the meeting's discussions.

The first was the model of advocates of liberalisation and globalization, who assumed liberalisation was a good thing and advocated maximum protection for foreign investors. From this view, the function of BITs was to have watertight provisions of protection for foreign investors, including pre-entry and post-entry national treatment.

The US was the best practitioner of this approach.

However, the US itself does not subscribe to pre-entry national treatment, as it provides for exemptions for many of its own sectors in these treaties, Sornarajah noted. Reading out a long list of the exempted sectors in one of the BITs agreements concluded by the US, Sornarajah said it was difficult to make out what exactly was the sector allowed. It would thus appear that the foremost advocate of a high quality multilateral agreement on investment does not itself fully subscribe to full rights for foreign investors.

Professor Sornarajah said that advocates of the second model on the other hand, place emphasis on the need to meet the development goals of each country. This approach had also been articulated during the meeting.

For example, several countries had said the treaties had to reflect national policies; one country provided protection only for investments of more than a year (so that investors out to make quick profits were not given protection); and other countries had mentioned their concerns that foreign investors adhere to national laws on environment, labour, consumer protection and restrictive business practices.

The chairman of the meeting, Patrick Robinson, Deputy Attorney-General of Jamaica, said that host developed states like the US might have an extensive list of exceptions. But host developing countries tended to have a shorter exception list as they were worried that a long list may discourage foreign investors.

A number of experts from developing countries brought out inequities and inadequacies in the BITs and the environment in which they were concluded.

A representative from Nigeria said that his country now gives one of the best incentives for FDI, as the policy was totally liberal and foreign firms could invest in all sectors.

However, although the aim of BITs was to promote and protect FDI, it had to be accepted that BITs play a "minimal role" in attracting FDI. Many African countries sign investment treaties but do not get any foreign investments. Investment flows are determined by access to markets, social and political conditions.

He also commented that many BITs do not take into account the host country's needs. "Many countries sign 'blank checks', called treaties, which are defective from the point of international law," he added.

He concluded that BITs and foreign investors should take account of national laws and meet social obligations such as employment generation and technology transfer; BITs and the issue of a multilateral investment agreement must be treated separately; and measures should be taken to deal with defective treaties and, in particular, developing countries should be assisted to prevent them from entering into defective treaties whose implications they had not considered before signing.

View of China's expert

The expert from China, Li Ling (Deputy Director-General, Treaty and Law Department, Ministry of Foreign Trade and Economic Cooperation), who was a lead speaker on the opening day, stressed that the importance of either BITs or a multilateral framework on investment should not be overestimated for attracting foreign investments.

"There is no evidence to show that the investors would deem the host country unsafe if that country did not conclude a BIT with their home country and would therefore refrain from investing in that country," Ms Li said. "In the case of China, the US is the biggest investor behind Hong Kong, Macao and Taiwan, although a Sino-US BIT has not been concluded yet."

"Therefore, for developing countries, economic growth and development should be put at first place according to their own needs and strategy."

Ms Li said, several economic, institutional and political factors affect investment decisions, the most important being development and growth of the host country market.

She concluded that in order to attract more investment, there is no need for a host country to conclude a BIT or a multilateral framework on investment (MFI), if doing so would mean conceding so much of the country's economic autonomy. Therefore, "at present, it is very necessary and important to give a comprehensive and correct assessment of BIT and MFI."

Ms Li said that compared to possible regional or multilateral investment agreements, BITs had the advantage that it could be tailored to the specific situations of the two countries.

On the other hand, with a multilateral investment framework, developing countries would be under high pressure to open their markets to developed countries.

"Whilst foreign investments have positive economic effects, experience shows that negative effects should not be neglected," she added. "To fulfil economic development goals, the host country has to retain sovereign rights to decide when and which sectors are to be opened to foreign investments and the conditions for access to the domestic market, according to its own development strategy."

"Otherwise, foreign investments may be detrimental to economic and social development. In the framework of GATS, developing countries have borne the pressure for opening up their domestic service markets to foreign investments, and the TRIMS agreement has deprived developing countries of some policy instruments useful for effective administration of foreign investments."

"The multilateral agreement on investment under preparation by OECD even asks for national and MFN treatment in respect of pre- establishment phase of investment, which means that the developing countries have to unconditionally open all economic sectors to foreign investments. Furthermore, its disciplines on performance requirements would deprive the host country of the right to determine the condition for admission of foreign investments."

Ms Li said, whilst BITs may have many common clauses for protecting investors' interests, it cannot be deemed that those clauses can be incorporated into a multilateral investment framework as such. In a multilateral forum, ideological and strategic considerations will take the place of practical and short-term considerations.

She added that the existing BITs were being formed out of the situation of the old international economic order. The concepts contained in many BITs provisions, such as commitment not to nationalise foreign investments, adequate, prompt and effective compensation in case of nationalisation, and unconditional consent to submit investor-State disputes to international arbitration, are not generally recognised as the principles to deal with international investment issues.

She said some of these even contradicted with the results of the efforts to establish a new international economic order (NIEO) and embodied in UN documents such as the UN Charter of Economic Rights and Duties of States, and Declaration for the establishment of the NIEO.

"Considering the great difference of specific situations and needs of one country to another, it would be very difficult to have strict binding rules and principles on international investments."

Only minor role in attracting FDI

Commenting on the Chinese statement, several countries agreed that BITs played no role or only a minor role in attracting investments. The Brazilian expert said that BITs was not important as an investment incentive and that market size was more important. "I don't think we can do more in defence of BITs than to say it is a confidence building measure."

The Kenyan expert said, Africa had attracted little FDI despite liberalisation by many countries. Nigeria attracted 60% of Africa's FDI inflows because of its large market and oil resources. "In Zaire, even before the new government took power, investors were rushing there to sign agreements because of its resources," he said. He concluded that FDI is attracted to countries that have markets and resources, and not because of BITs.

The expert from Indonesia said that three of the largest five countries from where foreign investments came to Indonesia did not have BITs with Indonesia. BITs was only a tool to assure the home country of their investors' security. What is provided for in BITs is in accordance with Indonesian law, and there was no additional item.

The delegate from Japan agreed that BITs have a "very limited role" in promoting FDI to developing countries. Japan had concluded BITs with only four countries. The major recipients of Japanese FDI were the Southeast Asia region and China. Japan had no BIT with Southeast Asian countries, only with China. A stable political and social condition was the most important investment factor.

The US delegate said that the US entered into BITs to protect US interests abroad and to have its investors treated fairly. For the US, at the heart of BITS are three elements: non-discrimination to FDI, protection of investor rights, and enforcement mechanisms for the first two elements.

These three elements were also in NAFTA and APEC and the US hoped to find them also in the MAI. The important question was not whether BITs or other agreements were better tools, but the underlying principles. Do they lead to efficient use of investment resources? Do they encourage countries to be passed over?

He agreed that investment rules were only one element in investment decisions and that market size, infrastructure, economic stability and regulatory costs are often more important. However, BITs contributes by removing unnecessary barriers.

A representative from the European employers' federation, UNICE, said that BITs were not a pre-condition for investment but only one factor. However, absence of global investment rules means there are no binding rules in countries. Whilst investment decisions are based on market factors, the issue of security is also important. (TWE No. 162, 1-15 June 1997)

Chakravarthi Raghavan is the Chief Editor of the South-North Development Monitor (SUNS)from which the above article first appeared.