UNCTAD & Multilateral Framework on Investment

by Chakarvarthi Raghavan

GENEVA: WIR-95 broached the idea of a Multilateral Framework on Investment.

The near publication draft spoke of an "Agreement", but it was changed just before publication from "Agreement" into "Framework".

In May 1996, UNCTAD-IX asked the Secretariat to analyse the development implications of a possible MFI.

But through 1996 and 1997, seminars and symposia were being held to promote an MFI -- with OECD negotiators and others brought to address the issues.

In a chapter discussing bilateral investment agreements, and regional integration frameworks, the UNCTAD investment report (WIR-98 Ch IV pp 128-130) discusses the "The potential impact of a possible multilateral framework on investment" and says:

"This section does not deal with the advantages or disadvantages of an MFI, but with a hypothetical question: if there were an MFI, how would it affect the volume and pattern of FDI flows? Since an MFI is only a hypothesis and not a reality - and since there is little information about TNCs would incorporate a variable such an MFI into their locational decisions - answers to this question are unavoidably tentative.

"One conceivable outcome of an MFI is that it would help to increase FDI flows - and perhaps affect other features of such flows as well. Such an outcome is based in part on the assumption that a multilateral agreement would not only consolidate recent changes towards, more liberal policies by many countries, but would incorporate "rollback" provisions - requiring countries to commit themselves to reducing or eliminating existing barriers to FDI and strengthening investment protection and the proper functioning of markets. Even in the absence of further liberalization, a multilateral framework could facilitate investment by providing stronger assurances - as compared with unilateral or even bilateral measures - when it comes to the protection of FDI and the stability of domestic FDI regimes. The presumably greater stability, predictability and transparency resulting from an MFI would create a generally more favourable climate for investors. The impact on inflows might be greatest for those countries that are not already signatories to bilateral, regional, plurilateral or multilateral investment agreements, and countries whose current policies, even if favourable to FDI, are not considered sufficiently predictable by investors. At the same time, whether or not FDI flows would actually increase - and whether there would be a change in the quality and patterns of flows - would depend on the precise content of an agrement, the nature of national commitments and exceptions to the generalized multilateral rules and, of course, the other FDI determinants that would come into play at that point.

"A second conceivable outcome of an MFI is that it could actually reduce the quantity and quality of FDI flows, because the negotiation of an MFI would take several years, creating uncertainties about the investment climate worldwide and thereby discouraging foreign investors. Further, even if negotiations did produce an agreement, the MFI that would result could conveivably enshrine a less liberal multilateral environment than has already evolved unilaterally or regionally. (However, the extent to which a formal binding of the regulatory frameworrk at a less liberal level would affect FDI flows is unclear.) Such an MFI could also alter the patterns of FDI flows across geographic regions and industries. In particular, an MFI might reduce FDI flows to countries that gain from the currently restrictive policies of their competitors for such investment and increase flows to otherwise desirable locations that are receiving little inward FDI because of uncertainties about policies.

"A third conceivable outcome of a possible MFI is that it would have little or no impact on the quantity and quality of FDI flows, as it would not materially alter the policy framework for FDI. One reason why this might be the result is that there has already been significant liberalization in many countries, in particular in many developing countries and countries in transition, during the 1980s and 1990s (chapter III, table III.2); and this liberalization has contributed to a surge of FDI flows that reached a new record in 1997. Therefore, an MFI that contains, for example, standstill provisions - requiring countries to commit themselves not to introduce new barriers to FDI, lower standards of investment treatment or measures likely to impair the proper functioning of markets - would essentially maintain the status quo, as far as the openness of economies to fDI, their treatment of foreign affiliates and the functioning of their markets are concerned. Moreover, the extensive network of bilateral investment treaties, which numbered over 1500 by the end of 1997 (chapter III), would provide protection for investors and could be easily extended to additional countries. Finally, there would be no significant effects on the geographic patterns of FDI flows, as they are largely influenced by other FDI determinants.

"On balance, these considerations suggest that an MFI would improve the enabling environment for FDI, to the extent that it would contribute to greater security for investors and greater stability, predictability and transparency in investment policies and rules. This, in turn could encourage higher FDI flows and potentially some redistribution of those flows, particularly to countries whose investment climate would newly reflect the multilateral framework.  How much different an MFI would make, however, in terms of the quantity, quality and patterns of actual FDI flows is difficult to predict because as in the case of BITs, it is precisely the function of an enabling framework to allow other determinants, and especially economic determinants, to assert their influence.

"Expectations, about the impact of an MFI on FDI flows (if it were indeed to be negotiated) in comparison to the current regulatory framework and the directin in which it is developing should therefore not be exaggerated. There are, of course, other issues that need to be considered in connection with a possible MFI -- especially the possible role of such an agreement in providing a framework for intergovernmental cooperation in the area of investment (UNCTAD, 1996a, 1997a) - but these fall outside the scope of the present analysis which is specifically focused on the determinants of FDI flows."

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