This book has examined the issues surrounding the regulation of FDI. The theories that have had major influence in past decades on the formulation of investment rules and their shortcomings and strengths were found to be neo-classical economics, dependency theory and theories of State intervention in economic development (Chapter Two). The weaknesses of the current national and international rules on FDI have been described both in terms of these theories and in terms of the limitations of their coverage analysed (Chapter Two). The strategies of the key international players for global investment rules, their contradictions, and the main issues surrounding the debate have been scrutinised (Chapters Five to Nine). And finally, an alternative model for global regulation of FDI has been proposed (Chapter Ten).
By its nature, foreign investment falls within the jurisdiction of more than one country. More importantly, modern communications and financial integration have encouraged firms to operate on a regional or even global basis. Cross-border mergers and acquisitions (M&A) and other forms of strategic alliances have become widespread. In 1998, the absolute value of all cross-border M&A (sales and purchases) amounted to $544 billion, representing an increase of about 60 per cent over that of 1997 (UNCTAD, 1999: 18). This has enormous implications for national regulatory regimes.
The global expansion of FDI inevitably necessitates the transfer of tangible and intangible assets between parent companies and their foreign affiliates. How to establish prices for such cross-border transfers is a thorny issue for policy makers and regulators. The issue is even more pressing for developing countries, given the more limited resource and expertise of such countries in the field of transfer pricing. The problem is also aggravated by the absence of an international agreement on transfer pricing.
Globalisation of the world economy is said to have brought closer economic activities, such as trade and investment which, in the past, were treated as discrete (Fatouros, 1996: 59). Trade and investment increasingly intertwine to use inputs efficiently and sell outputs across borders. The successful conclusion of successive trade negotiations within the GATT/WTO framework also reduced trade barriers and stimulated global FDI flows. Such frameworks, however, do not address FDI in a satisfactory manner. Although BITs regulate FDI, they are limited in scope and geography and grapple with power imbalances between weak and strong states less adequately than the regulated openness proposed here.
The current regulatory framework for FDI is unsatisfactory on a number of grounds. Firstly, although BITs have so far played an important role in the expansion of the acceptance and application of certain standards, it is however doubtful if they are suitable for the increasingly globalised economy. BITs have limitations in scope. Besides, there is a risk that continued reliance on BITs would produce a wide range of non-uniform and inconsistent arrangements that could become increasingly inefficient, complex and non-transparent. Secondly, the few multilateral or sectoral or regional agreements we have (such as the EU, TRIMs, NAFTA, APEC) also have limitation either in scope or geographical coverage. Thirdly, national laws, too, although broader in scope, have geographical limitations in their applicability. Fourthly, the diversity of national and international legal regimes governing FDI introduces excessive distortions as between countries and sectors (Fatouros, 1996: 59). The emergence of global investment rules would, among other things, give coherence to the regulatory environment facing foreign investment.
The overall strategy of the OECD and its members on global investment rules has been greater liberalisation of investment rules and higher security for foreign investment around the world (Chapter Five). This was the project of the MAI, in which of the OECD and its members were enthusiastically supported by the business community (Chapter Seven). The majority of developing countries and key international public interest groups - notably the consumer, environment, development and labour movements opposed this strategy on the grounds that liberalisation may not necessarily be beneficial for the world community and the environment (Chapters Five, Six and Seven). Moreover, they believed that developed countries’ preoccupation with liberalisation and protection of investor rights would mean that other issues of importance in FDI regulation would be ignored.
Although developing countries did not have a common strategy, issues of sovereignty and development have been central for most of them (Chapter Six). A liberal multilateral framework that would seriously limit the sovereign right of host countries’ regulatory power was fiercely resisted. So also liberal multilateral rules that leave little room for host countries to manoeuvre their investment policies according to their development and social objectives and priorities (Chapter Six). Moreover, a global investment framework that would allow foreign investors to take the host country to an international tribunal without the latter’s consent is seen as something that would seriously erode the sovereignty of a nation (Chapter Six). All of these positions are also held strongly by the public interest groups examined in the book (Chapter Seven). Where the public interest groups differ from the developing countries was on issues of environmental and core labour standards, as well as the protection of human rights. Developing countries oppose the inclusion of these in a global investment agreement.
Consumer advocates want competition policy (particularly rules on cross-border restrictive practices and M&A) and consumer protection to be part of a global investment framework (Chapter Seven). Environmental NGOs want environmental standards to be included, while labour unions want core labour standards to be part of any global investment agreement (Chapter Seven). There is opposition from developing countries and business on all these fronts (Chapters Five, Six and Seven). Developed countries are divided on labour and environmental standards, while uniformly oppose the inclusion of competition policy and consumer protection on the ground that consumer protection and competition policy should be the domain of national law (Chapters Seven and Ten).
Developing countries and the public interest groups consistently argued that any investment framework that would give rights and protection to foreign investors without corresponding obligation is, not only unacceptable, but also unjust and unbalanced (Chapters Six and Seven). This has been vehemently opposed by developed countries and the business community (Chapters Six and Seven). On the other hand, MNCs do not always behave in line with the host countries’ wishes. In Chapter Nine, we used the example of the behaviour of Elf Aquitaine, a French MNC, in Congo and other countries where it has been accused of corrupting politicians in developed and developing countries, interfering in the internal politics of host countries, serving France to perpetuate its influence on its former colonies in Africa, and in other respects undermining the French Government’s activities.
Where to negotiate a possible investment agreement, and who to mandate for its implementation has been discussed in Chapters Five, Six, Seven, Nine and Ten. This issue has become even more important after the MAI. While developed countries and the business community preferred the OECD or WTO (depending on who you ask and when) (Chapter Five), several developing countries and the public interest groups want neither of these organisations (Chapters Six and Seven).
The MAI was negotiated exclusively by OECD countries and largely in secrecy (Chapter Five). This was a fatal mistake. The longer the majority of developing countries and public interest groups were barred from participating in the negotiation, the stronger became their suspicion and opposition to it (Chapter Five). The exclusive nature of the negotiations meant that the Agreement was “being negotiated by the wrong group of nations” (Chapter Five). More importantly, however, the successful concerted opposition against it by developing countries and a global network of NGOs may have created a new chapter in the way multilateral treaties would be negotiated in the future. James Wolfensohn, President of the World Bank, realised this phenomenon a decade earlier and allowed more than 70 NGO specialists to work in the Bank’s field operations. More than half of World Bank projects in 1998 involved NGOs (The Economist, 1999: 19). The fact that the WTO allowed some NGOs to participate in the Seattle Ministerial Conference was also a confirmation of the Bank’s recognition of a new geo-political reality. This is one where developing countries can again flex some collective muscle to resist the West’s plans for them. Prior to 1989, it was the support of the Soviet bloc that enabled them to do this at times. Post-MAI, developing countries can now see that they can foment a veto coalition with Western NGOs, even if they do not share most of their aspirations.
The discussion throughout the book demonstrates that the positions of each of the key international players have their own limitations. Much of the world wants a global investment agreement, but this can only be achieved if a balance can be struck between the positions of each key player. Drawing on the perspectives of all the key players studied, the book forged a balance described as “regulated openness” (Chapter Ten).
A liberal investment agreement could be a significant step for economic development in rich and poor countries alike. But this development may not necessarily be one with balance, sustainability and justice. FDI that replaces domestic capabilities, rather than complementing them, may not necessarily be a good thing for the host country. To address such problems, the host country may, for example, need to impose performance requirements on investors, or select the type of FDI it would allow into its territories in any particular time. For example, a developing country following Soskice’s Liberal Market Economy model may want to seek a British or US partner in its telecommunications section while nations aspiring more in the direction a Business-Coordinated Market Economy may prefer a German or Japanese partner. An official of the South Centre told me:
The cost of FDI could be very high. The foreign investor expects a very high return, and the money or profit has to be repatriated. That is why it is essential for a country to have the power to choose the kind of project it needs. FDI is productive if it contributes and links to the country’s development. A hamburger shop or a supermarket may not be a productive foreign investment from the point of view of developing countries.
FDI could make significant additions to the foreign exchange supply of the host country in the initial phase of its entry. What happens after that largely depends on the type of investment products involved (Graham and Krugman, 1989). If the investment is export-oriented, its effect on balance-of-payments could be positive. If the investment is not export-oriented, its effect on balance-of-payments in the medium and longer term could be negative, particularly if it is a mere acquisition of a non-export oriented domestic company. The financial crisis in Asia and Mexico have demonstrated that indiscriminate inflow of foreign investment may not necessarily have a positive contribution to the balance-of-payments of the host country. Hence, Chile and Malaysia introduced capital control measures during their economic crises, which seem to have produced positive results (Chapter Six).
Through selective intervention by the State, FDI can be utilised to enhance the productive capacity of domestic enterprises and sustain development. This has been proven in South Korea and other South-East Asian countries (Chapter Six). Hence, regulated openness strives to achieve a balance between regulation and liberalisation in major issues of investment regulation (Chapter Ten).
Regulated openness has procedural and substantive dimensions. Procedurally, it is a process where all major stakeholders would have an input and role in the preparation and implementation of FDI laws. The international negotiation would be conducted by governments, but key non-governmental international players should be consulted and given the opportunity to contribute to the formulation of the principles. At the national level, too, a body consisting of representatives from business, public interest groups and government might be formed with a task of evaluating and approving self-regulation rules prepared by firms. Regulated openness proposes to hold the negotiation of the international agreement within the framework of UNCTAD and entrust the implementation of it to the World Bank. UNCTAD has a number of advantages over the WTO and OECD to host such negotiations. Firstly, it is mandated to look into issues of both trade and development. This mandate was renewed by member countries, including the US and other major powers, during UNCTAD IX Conference in 1996. Secondly, over the years, UNCTAD has accumulated enormous expertise on issues of trade and development, and has avoided extreme commitments to either neo-classicalism or dependency theory. By holding the negotiations in UNCTAD, it is possible to make use of this expertise. Thirdly, because UNCTAD is not a rulemaking body, the negotiators would feel relaxed in putting forward their proposals and making deals. However, the fact that UNCTAD is not a rule-making body means that another organisation is needed to monitor the implementation of the Agreement. This organisation could be the World Bank. Although the World Bank, in its original operational form, was not much concerned with FDI, over time FDI has become important to it through the activities of its several organisational components such us the IFC and MIGA. Besides, it already has an investment dispute settlement body (ICSID).
A binding international framework agreement on principles is a more pragmatic solution than comprehensive rules. Once the framework agreement of core principles has been formed, each country would have its own detailed rules consistent with the internationally agreed principles and the priorities of individual countries. The national regulatory framework, consisting of direct regulation and self-regulatory initiatives, would be subject to reporting to ICSID and periodic review by a committee to evaluate compliance with the international principles and continuous improvement in terms of openness. Trade sanctions would not be needed to enforce this. Countries labelled by a respected ICSID Committee of Experts as slipping backwards in terms of openness would pay the penalty of reduced FDI flows.
Substantively, regulated openness means an investment regime where both regulation and openness co-exist in a balanced and pragmatic manner. One of the lessons learnt from past negotiations on comprehensive international investment regimes is that it is practically impossible to reconcile the conflicting interests of the major international players. The most recent example is the collapse of the MAI negotiations (see Chapter Five). Regulated openness would, therefore, be a break from these past experiences. Hence, it proposes an agreement on core principles rather than detailed comprehensive rules. The international core principles will be those principles which each major stakeholder would regard as paramount. However, this research has identified sustainable development, investment security, core labour standards, consumer protection and business ethics, good governance and effective dispute settlement as the issues that would form the international core principles (Chapter Ten). In addition, there would be a commitment for continuous improvement of national rules and self-regulatory outcomes under the agreed principles. Moreover, host countries would commit themselves to continuously improve their openness policies as their domestic capability improves. This would be underwritten by technical help from UNCTAD and the World Bank rather than by sanctions. Such commitments would more likely be honoured if they are forged within a framework of principles, rather than detailed international rules.
The main advantage of an international regime of principles rather than detailed rules is that it would give flexibility to individual countries to manage their own affairs based on their priorities and economic and social objectives, while at the same time seeking some form of internationally agreed framework, thereby giving certainty to investors. The certainty arises at two levels – at the level of national rules that are regularly reviewed by a Committee of Experts in terms of how well they deliver certainty, and at the level of certainty that national rules cannot be changed to flout the principles in the international agreement. Moreover, as the global agreement is less detailed, the likelihood of countries agreeing to sign increases, further increasing certainty for investors at the global level.
A global regime of core principles would facilitate the recognition of the need for economic pluralism in international economic agreements. A tolerance for economic pluralism requires the recognition that different goals, conditions and cultures throughout the world require different solutions to problems. One system will not serve the needs of all people in all circumstances. An attempt to impose a uniform economic and social policy worldwide creates impossible positions for people in countries that have vastly different problems and resources, in addition to different values and goals. If, on the other hand, the global agreement is based on principles, and detailed rules are left for each country to make in line with the principles, particular solutions can often be found for the particular regulatory problems of each country. It also leaves space for innovation in regulatory design, for regulatory competition in the crafting of a regulated openness that attracts FDI.
Commercial and technological realities change very rapidly in today’s world, and economic entities have to continually adapt to such changes. In this regard, comprehensive global investment rules could inhibit change, for legal institutions are designed to be stable and predictable. An agreement on principles rather than comprehensive rules would avoid this problem, for it could leave room for flexibility by the regulators and the regulated.
One of the serious deficiencies of the MAI was that it assumed a liberal investment regime is beneficial to all countries, at all times, and at any level of economic development. But a radically liberal model of investment rules is just one model (see Chapter Ten). A global regime of core principles rather than detailed rules can solve the problem of choosing either a more selectively restrictive or a more open investment regime. It gives opportunity for every country to decide for themselves on the extent of restrictiveness or openness of the rules they want to have in their own respective territories.
Regulated openness aims at bringing development with justice. Development with justice requires both procedural justice and credible commitment to continuous improvement of investment policy, investment security, sustainable development, core labour standards, consumer protection, business ethics and good governance. Procedural justice, under regulated openness, can be achieved by making the rule-making process inclusive and transparent. The MAI failed partly because it was exclusive and not-transparent. It is essential for a global agreement such as the MAI to be negotiated by all stakeholders, and in a forum that would be acceptable to all. Liberalisation of investment policy, investment security, sustainable development, core labour standards, consumer protection, business ethics and good governance are the main concerns of the key international players. A commitment to continuously improve all these concerns could bring development with justice while creating a contracting space where all the key players that walked away from the MAI could see themselves on balance as better off.
In an ideal world, each nation would set the terms, conditions and standards for regulating FDI. Unfortunately this is not an ideal world. No country is capable is regulating MNCs on its own, not even powerful nations like the US. A global investment framework is an important way to improve this capability. As the discussion throughout the book showed, this has not been the case so far. On the other hand, the collapse of the MAI may have created the opportunity to approach the issue differently, and regulated openness could be an approach that commends consideration.
The past two WTO Ministerial Conferences have demonstrated that there is a desire by some countries to negotiate global investment rules, while other countries have shown some scepticism. The scepticism could be due to the fact that some countries and NGOs do not support the WTO’s role in investment regulation. Regulated openness has suggested a possible solution for this problem. Future WTO Ministerial Conference could be opportunities for considering what is being proposed under regulated openness.
Yet this may be premature. This research has considerable limitations. I have only been able to consider the views and positions of major international players. There are other international, national and NGO players that have not been covered by the research. Exactly how the very little players on the Internet acted remains mysterious and inadequately analysed. To genuinely assess regulated openness we need rigorous empirical research that evaluates experiments in regulated openness. This book only takes us as far as an argument that regulated openness might be worth experimenting with. And that is not very far at all.