Toward a General Agreement on the Regulation of Foreign Direct Investment

By Geist, Michael A. | Law and Policy in International Business, Spring 1995 | Go to article overview

Toward a General Agreement on the Regulation of Foreign Direct Investment


Geist, Michael A., Law and Policy in International Business


Considering the important developments of the last half-century, the growth of foreign investments and the expansion of the international activities of corporations . . . and considering the way in which the economic interests of states have proliferated, it may at first sight appear surprising that the evolution of law has not gone further and that no generally accepted rules in the matter have crystallised on the international plane.

The International Court of Justice.(1)

INTRODUCTION

With international trade issues capturing much of the business world's attention, the growth and importance of foreign direct investment (FDI) has gone somewhat unnoticed, despite comments such as those of the International Court of Justice (ICJ).(2) In fact, FDI growth far outpaced trade growth throughout the 1980s, with trade increasing at a compound rate of five percent annually compared to twenty percent annually for FDI.(3) Moreover, as discussed in Part I of this Article, investment is often a key determinant of trade since a large percentage of trade occurs between affiliated companies.(4) Despite its apparent importance, states have thus far been unable, or unwilling, to conclude an international agreement regulating FDI.

The absence of such an agreement is particularly striking in view of the number of trade-related agreements that have been. negotiated in recent years. These include the successful conclusion to the Uruguay round of the General Agreement on Tariffs and Trade (GATT) and subsequent establishment of the World Trade Organization (WHO),(5) the North American Free Trade Agreement (NAFTA),(6) and the adoption of the Treaty on European Union (Maastricht Treaty).(7) Not surprisingly, the need for an international FDI agreement has been noted by numerous international officials,(8) academics,(9) and the ICJ,(10) as all have commented on the lack of international FDI regulation. Furthermore, the absence of an international FDI agreement has been costly, both to states anxious to attract FDI and to multinational corporations eager to enter and compete in new markets, since differing regulatory frameworks discourage potential investment by increasing administrative costs and creating uncertainty.(11)

The inability to conclude an FDI agreement has generally been attributed to two primary factors. First, there has often been significant disagreement among states about the importance and the best method of regulating FDI.(12) Second, it has long been an established principle of international law that states retain the exclusive right to regulate the entry of investment into their own territory, and an agreement regulating the admission of FDI is regarded as an encroachment on that right.(13)

Despite the lack of progress in this area, several recent events have provided some reason for optimism. Developments such as the inclusion of investment as part of the GATT,(14) the increasingly significant role being played by the International Centre for the Settlement of Investment Disputes (ICSID) and the Multilateral Investment Guarantee Agency (MIGA),(15) and the proliferation of bilateral investment treaties (BITs),(16) indicate that many states are anxious to establish international FDI standards and regulations. Moreover, agreements such as the aforementioned NAFTA and the Maastricht Treaty are illustrative of states' increased willingness to surrender economic sovereignty as a precondition for entering into international economic agreements.(17)

With states acknowledging the value of sacrificing some degree of economic sovereignty in return for the benefits of unrestricted trade and investment, the one remaining, albeit most significant, barrier to an international agreement on the regulation of FDI appears to be the lack of consensus on the method in which FDI should be regulated. As Samuel K.B. Asante, the former director of the UNCTC, has noted:

The demonstrated willingness of states from all regional groups

to participate in this process of creating new norms for the

regulation of international business supports the submission

that there are no doctrinal impediments to the elaboration of

international standards as such.

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