Luận văn thạc sĩ tiếng anh

Least Developed Country Landlocked Developing Country Mergers And Acquisitions Most Favoured Nation Multinational Enterprise North American Free Trade Agreement Regional Comprehensive Ec

TABLE OF CONTENTS

ACKNOWLEDGEMENTS i

ABBREVIATIONS ii

FIGURE, TABLE AND BOX iii

ABSTRACT iv

Chapter 1 INTRODUCTION 1

Chapter 2 OVERVIEW OF FDI INCENTIVES AND PROTECTIONS IN INTERNATIONAL INVESTMENT AGREEMENTS 5

2.1 Overview of International Investment Agreements 5

2.1.1 The role of FDI and FDI attraction determinants 5

2.1.1.1 FDI and world economy development 5

2.1.1.2 FDI determinants 9

2.1.2 The proliferation of IIAs as a key FDI determinant 12

2.1.2.1 Bilateral investment agreements 14

2.1.2.2 Regional and interregional investment agreements 15

2.1.2.3 Multilateral agreement on investment 16

2.2 MIAs as a fundamental basis for investment incentive and protection 17

2.3 FDI incentives and protections commitments in MIAs 23

2.3.1 The role of investment incentives and protections 24

2.3.2 FDI incentives in MIAs 27

2.3.3 FDI protections in MIAs 30

Chapter 3 COMMITMENTS RELATING FDI INCENTIVES AND PROTECTIONS IN TPP 34

3.1 Overview of TPP and the Investment Chapter 34

3.1.1 Summary of the Trans-Pacific Partnership Agreement 34

3.1.2 Key content of the Investment chapter 36

3.2 FDI incentives and protections commitments in TPP 38

3.2.1 Providing non-discrimination treatment 38

3.2.2 Providing fair and equitable treatment (minimum standard of treatment) 44

3.2.3 Ensuring expropriation for a public purpose with fully compensation 47

3.2.4 Allowing for transfer of funds 51

3.2.5 Providing Investor - State dispute settlement mechanism 53

3.2.6 FDI incentives commitments in TPP 57

3.3 TPP investment commitments in comparison with MIAs 58

Chapter 4 VIETNAM’S INVESTMENT LEGISLATION AND COMMITMENTS UNDER TPP INVESTMENT CHAPTER 61

4.1 Overview of Vietnam's investment legal framework 61

4.1.1 FDI entry 62

4.1.2 FDI establishment 65

4.1.3 FDI treatments 67

4.1.3.1 FDI protections 67

4.1.3.2 FDI incentives 68

4.2 The compatibility between Vietnam's legal framework and TPP investment commitments 69

4.2.1 TPP investment commitments that Vietnam's legal framework have been compatible with 70

4.2.2 TPP investment commitments that Vietnam's legal framework have partly or not compatible with 73

4.3 Effects of TPP investment incentives and protections commitments on Vietnam legislation 76

Chapter 5 INTERNATIONAL EXPERIENCES AND IMPLICATIONS FOR VIETNAM INVESTMENT LEGAL FRAMEWORK 80

5.1 International experiences in implementing TPP 81

5.1.1 Preparation of TPP member countries for implementing the agreement 81

5.1.1.1 Malaysia 81

5.1.1.2 Singapore 82

5.1.1.3 United States 83

5.1.2 Options for harmonizing TPP and national legal framework 85

5.1.2.1 Keeping default condition 85

5.1.2.2 Reform the domestic legal system 85

5.1.2.3 No International Investment Agreement 86

5.2 Implications for Vietnam's investment legal framework 87

5.2.1 Promoting the coherence between TPP’s investment chapter and domestic investment legal framework 87

5.2.2 Balancing private and public interests within investment commitments 90

5.2.3 Effects of the TPP – the case of Vietnam’s Pharmaceutical Industry, a further implication 92

CONCLUSIONS 95

REFERENCES 97

ANNEX i

I would like to assure that the research of “Commitments related to Foreign Direct Investment Incentives and Protections under the Trans-Pacific Partnership and Implications for Vietnam” was carried out by me All contents, tables, figures and boxes illustrated in this study are honest, accurate and quoted from a reliable source

Hanoi City,

December, 2016

Least Developed Country Landlocked Developing Country Mergers And Acquisitions Most Favoured Nation Multinational Enterprise North American Free Trade Agreement Regional Comprehensive Economic Partnership Trans-National Company

Transatlantic Trade And Investment Partnership Treaty With Investment Provision

Trans-Pacifc Partnership Agreement United Nations Commission On International Trade Law United States Trade Representative

World Trade Organization

FIGURE, TABLE AND BOX

Page

Table 3: Summarizing the coherence of Vietnam investment legislation

Box 5: ISDS cases show conflict between public interest and investors’

ABSTRACT

Apart from the economic determinants, macroeconomic and policy stability have been found to be one of the most important foreign direct investment (FDI) determinants It is necessary to carefully analyzing the relation between the Trans- Pacific Partnership (TPP) as a multi-regional free trade agreement with investment provisions and Vietnam domestic investment legislation and environment My dissertation addresses the main questions of what is the nature and effect of commitments related to FDI incentives and protections under the TPP in comparison with Vietnam legal framework and how the Vietnamese goverment can act affirmatively to improve investment legislation of Vietnam thereby take advantage and limit the disadvantage of those commitments Some recently researches discussed about the general benefits of TPP on Vietnamese economy and particularly on several sectors such as livestock farming, textile and garment or automobile industry This dissertation goes deep into the study of the interrelation between the TPP’s investment chapter and the investment climate in Vietnam It also reveals the burden of risk in investor – state dispute settlement, which actually could reverse the fundamental

“polluter pays” principle The dissertation conclude with a discussion of how the Vietnamese government can do to make domestic invesment legislation compatible with commitments in TPP while still balancing private-public interest

Chapter 1 INTRODUCTION 1.1 Background and rational

On October 5th 2015, the Trans-Pacific Partnership agreement was signed in principle It’s a new generation trade agreement, including twelve countries from two side of the great Pacific Ocean (Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, US and Vietnam) According to a number of researches on the impacts of TPP on its members, Vietnam seems to be the country that gain most economic benefit It is estimated that in one decade, Vietnam’s GDP will increase by 11% and exports will rise by 28% with a 50% increase in apparel and textile Vietnam will have opportunities to access new markets to which it does not yet have access to However, many obstacles will also arise

After years of global integration, it is shown that Vietnam depends much on low-value added products export and foreign direct investment As the country continues its strategy to deeper international integration, Vietnam really need to make fundamental changes in economic institution, mechanism and management policies, especially in investment policy When Vietnam joined the WTO, many experts expected an “economic explosion” would occur With high incentives for foreign investors, exports and foreign investment increased But enormous foreign capital flowing into Vietnam caused inflationary while many Vietnamese enterprises still not able to adapt with major changes in terms of trade and business competitiveness This opened an era called “after-WTO” and warned us of how we should deal with these free trade agreements

It is necessary to overcome obstacles that come from those ambitious investment-trade agreements by promoting the attractiveness of country while avoiding negative effect of investment commitments The attractiveness of the host country would be greatly enhanced by a combination of three sets of FDI determinants: (i) economic determinants; (ii) the policy framework for FDI; and (iii)

business facilitation (UNCTAD 1998, p 91) As the world economy becomes more

open to international business transactions, countries compete increasingly for FDI not only by implementing business facilitation measures, but also by improving their policy and economic determinants Regarding the policy framework determinants, policy makers have considered various incentive and protection policies to attract FDI, and to ensure its consistency with the domestic economic development objectives Apart from the other determinants, policy framework for investment may be the most important FDI determinants It is necessary to carefully exploring the relation between free trade agreement with investment provisions and the domestic investment legislation and environment As Vietnam laws and regulations become more enabling for foreign investors and converge in key aspects, foreign investors increasingly put a

premium on such features as policy coherence, transparency, predictability and stability

Besides, the Investor-State Dispute Settlement (ISDS) process, by which private companies can sue foreign governments over loss of opportunity to make money, is the major concern that should be brought up first The reasons lead to dispute are often government policy that base on public interest - such as environmental protection, health and food regulations, and policy that supports local economies, workers, and domestic financial institutions

Though it is undeniable to say that ISDS increases the level of stability of the host country’s business environment and depoliticises disputes by making sure they are decided on legal basis, this TPP deal will punish our government with lawsuits for implementing measures to address climate change, for maintaining and expanding our national healthcare system, for standing strong in regulations for food and products, for explicitly supporting local business and workers, and for protecting our financial system so that it is stable against global shocks This research explain that the threat of being sued over these things will keep the government from being able to make good policy, resulting in a public interest policy chill

1.2 Literature review and objectives of the research

Recently researches mention about the impact of TPP on Vietnamese economy

or mention the change of Vietnam investment legislation, but in general For example:

Lê Hồng Hiệp, “The TPP’s Impact on Vietnam: A Preliminary Assessment” (2015) provides a preliminary assessment of the impact of economic, political, and strategic potential of the TPP for Vietnam It argues that Vietnam may gain significantly in terms of GDP growth, export performance and FDI inflow In the long term, the economy will also benefit if further legal, institutional and administrative reforms are undertaken along with improvements in the state-owned and private sectors Politically, immediate impacts will be limited, but the country may become more open and conducive to further liberalization in the long run In strategic terms, the agreement will help the country improve its strategic position, especially vis-à-vis China in the South China Sea, although such an impact is not imminent and should not

be exaggerated Doãn Thị Phương Anh (2016) indicates some prospects of economic benefit for TPP’s members and implications for Vietnamese government and enterprises to take advantage; Trần Việt Dũng, Recent development of the Vietnamese investment framework – a preparation for AEC and future integration (2016) only indicates key issues of the current Vietnamese investment legal framework (such as new definitions of foreign investor, economic organization with foreign investment capital – FIE, incorporation of FIE, acquisition of capital/shares, etc) in the context of doing business, the background of the AEC and AEC’s investment in Vietnam

TPP related to foreign direct investment incentives and protections, which can help Vietnam promote itself as an attractive FDI destination and also will create a number

of challenges in the implementation of the chapter in terms of legal framework, transparency and protectionist measures

The main purposes of this research is assessing potential impact of the Investment Chapter on the business environment in Vietnam and point out fundamental changes in legal framework that Vietnamese government has to implement to comply with the commitments it has made It is sure that TPP (if ratified

by all member countries) will improve national investment policy and help attracting more FDI to developing countries It may contribute to the coherence, transparency, predictability and stability of the investment frameworks of host countries The problem is, there is no detailed document analyzes the level of compatibility of Vietnam investment framework and the investment provisions under TPP investment chapter, neither negative impact on the legislation of the country and also which investment regulation Vietnam has to amend to comply with TPP Thus, it is necessary

to analysis and review Vietnam's investment legislations against TPP commitments to clarify differences and make amendments of Vietnam's legal From this, recommendations are made to guarantee the conformity to the TPP in the most beneficial ways for parties

- How can Vietnamese government make changes to domestic investment legal framework to take advantage and limit the disadvantage of those commitments?

1.4 Methodology

The research approach of this study is qualitative research to make a primarily theoretical dissertation The methodology including selection and discussion of theoretical material and descriptive material, publication research, law research and case review, include both present and historical information, and detailed comparison

of regulations, theories in terms of their applicability The study attempting to uncover

the deeper meaning and effect of TPP investment incentives and protections commitments and experiences in implementing international investment treatments

1.5 Structure of the dissertation

The research questions systematize thesis into 5 chapters: Chapter 1

“Introduction”; Chapter 2 “Overview of FDI incentives and protection in International Investment Agreements” introduces the background of FDI and FDI incentives and protections in international investment agreement Chapter 3 “Commitments relating FDI incentives and protection in TPP” will give details about content of FDI incentives and protections commitments and comparing with standard multilateral investment agreement; Chapter 4 “Vietnam’s investment legislation and TPP” analyzes the compatibility between Vietnam investment incentive and protection provisions and TPP Investment chapter and the effect of those commitments on country’s investment environment and legal framework Lastly, Chapter 5

“Recommendation on Vietnam's investment law and policy” review the international experiences in implementing the TPP and point out recommendations for Vietnam to fully complying with TPP Investment chapter and avoiding negative impact of it on the country

Chapter 2 OVERVIEW OF FDI INCENTIVES AND PROTECTIONS IN

INTERNATIONAL INVESTMENT AGREEMENTS 2.1 Overview of International Investment Agreements

2.1.1 The role of FDI and FDI attraction determinants

2.1.1.1 FDI and world economy development

Foreign direct investment (FDI) is defined as an investment involving a term relationship and reflecting a lasting interest and control by a resident entity in one economy (foreign direct investor or parent enterprise) in an enterprise resident in an economy other than that of the foreign direct investor (FDI enterprise or affiliate

long-enterprise or foreign affiliate) (UNCTAD, 2007) FDI implies that the investor exerts a

significant degree of influence on the management of the enterprise resident in the other economy FDI may be undertaken by individuals as well as business entities In other words, FDI is an investment made by a company (especially MNEs or TNCs) or individual in one country in business interests in another country, in the form of either establishing business operations or acquiring business assets in the other country, such

as ownership or controlling interest in a foreign company The key feature of foreign direct investment is that it is an investment made that establishes either effective control of, or at least substantial influence over, the decision making of a foreign business In the world of globalization, the important role of FDI in economic development is proved It has a major role to play in the economic development of the host country Over the years, FDI has helped the economies of the host countries to obtain a launching pad from where they can make further improvements Any form of FDI brings in a lot of capital knowledge and technological resources into the economy

of a country

FDI is an important factor which drives economic growth around the world, particularly in the last twenty years FDI is being utilized by most, if not all, developing countries as a means of complementing the level of domestic investment,

as well as securing economy-wide efficiency gains through the transfer of appropriate technology, management knowledge, and business culture, access to foreign markets, increasing employment opportunities, and improving living standards The overall benefits of international investment - more specifically, FDI for developing countries are well approved Many studies showed that FDI triggers technology spillovers, assists human capital formation, contributes to international trade integration, helps create a more competitive business environment and enhances enterprise development

(OECD, 2002) All of these contribute to higher economic growth, which is the most

potent tool for alleviating poverty in developing countries Moreover, beyond the strictly economic benefits, FDI may help improve environmental and social conditions

in the host country by, for example, transferring “cleaner” technologies and leading to more socially responsible corporate policies

From the perspective of companies which investment abroad, investing overseas can generate many benefits, including: reducing transport costs by locating manufacturing plant within a consuming country; gaining easier access to a country’s markets, especially where the product can be made with local ingredients (in addition, investing firms gain access to a range of resources, including cheap or skilled labour and local knowledge and expertise); exploiting of economies of scope, such as spreading fixed management costs between territories; and avoiding barriers to trade such as tariffs and quotas, as in the case of Japanese car producers, such as Toyota and Nissan, locating in the EU

Regarding those roles and benefits, the world observed global FDI inflows rose year by year It has grown by 38 per cent overall in 2015 to $1,762 billion, up from

$1,277 billion in 2014, with considerable variance between country groups and regions (table 1) FDI flows to developed economies increased by 84 per cent to reach their second highest level, at $962 billion Strong growth in flows was reported in Europe (up 65 per cent to $504 billion) In the United States FDI flows almost quadrupled, although from a historically low level in 2014 Developing economies saw inward FDI reach a new high of $765 billion, 9 per cent above the level in 2014 Developing Asia, with inward FDI surpassing half a trillion dollars, remained the largest FDI recipient in the world FDI flows to Latin America and the Caribbean – excluding Caribbean

offshore fnancial centres – remained flat at $168 billion (UNCTAD, 2016)

FDI has effects on growth, environmental and society:

a) FDI and growth

FDI influences growth by raising total factor productivity and, more generally, the efficiency of resource use in the recipient economy This works through three

Table 1 World FDI flows, 2013-2015, billions of dollars

Source: UNCTAD World Investment Report 2016

channels: the linkages between FDI and foreign trade flows, the spillovers and other externalities vis-à-vis the host country business sector, and the direct impact on

structural factors in the host economy (UNCTAD, 2003)

While the evidence of FDI’s effects on host-country foreign trade differs significantly across countries and economic sectors, a consensus is nevertheless emerging that the FDI-trade linkage must be seen in a broader context than the direct impact of investment on imports and exports The main trade-related benefit of FDI for developing countries lies in its long-term contribution to integrating the host economy more closely into the world economy in a process likely to include higher imports as well as exports Host countries’ ability to use FDI as a means to increase exports in the short and medium term depends on the context The clearest examples of FDI boosting exports are found where inward investment helps host countries that had been financially constrained make use either of their resource endowment (e.g foreign investment in mineral extraction) or their geographical location (e.g investment in some transition economies) Targeted measures to harness the benefits of FDI for integrating host economies more closely into international trade flows, notably by establishing export-processing zones (EPZs), have attracted increasing attention In many cases they have contributed to a raising of imports as well as exports of developing countries However, it is not clear whether the benefits to the domestic economy justify drawbacks such as the cost to the public purse of maintaining EPZs or the risks of creating an uneven playing field between domestic and foreign enterprises and of triggering international bidding wars

Economic literature identifies technology transfers as perhaps the most important channel through which foreign corporate presence may produce positive externalities in the host developing economy MNEs are the developed world’s most important source of corporate research and development (R&D) activity, and they generally possess a higher level of technology than is available in developing countries, so they have the potential to generate considerable technological spillovers Technology transfer and diffusion work via four interrelated channels: vertical linkages with suppliers or purchasers in the host countries; horizontal linkages with competing or complementary companies in the same industry; migration of skilled labour; and the internationalisation of R&D The evidence of positive spillovers is strongest and most consistent in the case of vertical linkages, in particular, the

“backward” linkages with local suppliers in developing countries MNEs generally are found to provide technical assistance, training and other information to raise the quality of the suppliers’ products Many MNEs assist local suppliers in purchasing raw materials and intermediate goods and in modernising or upgrading production facilities

The major impact of FDI on human capital in developing countries appears to

be indirect, occurring not principally through the efforts of MNEs, but rather from government policies seeking to attract FDI via enhanced human capital Once individuals are employed by MNE subsidiaries, their human capital may be enhanced further through training and on-the-job learning Empirical and anecdotal evidence indicates that, while considerable national and sectoral discrepancies persist, MNEs tend to provide more training and other upgrading of human capital than do domestic enterprises However, evidence that the human capital thus created spills over to the rest of the host economy is much weaker Policies to enhance labour-market flexibility and encourage entrepreneurship, among other strategies, could help buttress such spillovers.Those subsidiaries may also have a positive influence on human capital enhancement in other enterprises with which they develop links, including suppliers Such enhancement can have further effects as that labour moves to other firms and as some employees become entrepreneurs Thus, the issue of human capital development

is intimately related with other, broader development issues

FDI has the potential significantly to urge enterprise development in host countries The direct impact on the targeted enterprise includes efforts to raise efficiency and reduce costs in the targeted enterprise, and the development of new activities In addition, efficiency gains may occur in unrelated enterprises through demonstration effects and other spillovers akin to those that lead to technology and human capital spillovers Available evidence points to a significant improvement in economic efficiency in enterprises acquired by MNEs, albeit to degrees that vary by country and sector The strongest evidence of improvement is found in industries with economies of scale Here, the submersion of an individual enterprise into a larger corporate entity generally gives rise to important efficiency gains Overall, the picture

Foreign invested companies continue to play an important role in the economy According to the Vietnam General Statistics Office (GSO) the FDI sector contributed 70 percent of total exports in 2015 (up from 47 percent in 2000) and foreign invested enterprises’ contribution to GDP increased to 18 percent from 13 percent over the same period Vietnam has maintained registered FDI levels of around $18.5 billion per year over the last five years Concluding the four FTA’s in 2015-2016 has already increased FDI in Vietnam

In 2015, according to Vietnam’s Foreign Investment Agency (FIA), the United States was the 16th largest FDI source with a total investment of $224 million, down from 11th in 2014 Malaysia beat out Japan as the second largest FDI source in 2015 due to a large investment in the Duyen Hai 2 thermal power plant south of Ho Chi Minh City The top three FDI sources in 2015 were South Korea, with newly registered capital of $2.7 billion in 702 projects, Malaysia with $2.4 billion in 27 projects, and Japan with $1.3 billion in 299 projects, according to the FIA China FDI excluding Hong Kong increased to

$744 million (10th largest source) in 2015 from $427 million in 2014

Box 1: FDI in Vietnam economy

of the effects of FDI on enterprise restructuring that we can derive from recent experience may be too positive, because investors will have picked their targets among enterprises with a potential for achieving efficiency gains However, from a policy perspective, this makes little difference, as long as foreign investors differ from domestic investors in their ability or willingness to improve efficiency or realise new business opportunities Authorities aiming to improve the economic efficiency of their domestic business sectors have incentives to encourage FDI as a vehicle for enterprise restructuring

b) FDI and environmental and social concerns

FDI has the potential to bring social and environmental benefits to host economies through the dissemination of good practices and technologies within

MNEs, and through their subsequent spillovers to domestic enterprises (UNCTAD, 2003)

The direct environmental impact of FDI is generally positive, at least where host-country environmental policies are adequate Most importantly, to reap the full environmental benefits of inward FDI, adequate local capacities are needed, as regards environmental practices and the broader technological capabilities of host-country enterprises The technologies that are transferred to developing countries in connection with foreign direct investment tend to be more modern, and environmentally

“cleaner”, than what is locally available Moreover, positive externalities have been observed where local imitation, employment turnover and supply-chain requirements led to more general environmental improvements in the host economy Empirical evidence of the social consequences of FDI is far from abundant Overall, however, it supports the notion that foreign investment may help reduce poverty and improve social conditions The general effects of FDI on growth are essential Studies have found that higher incomes in developing countries generally benefit the poorest segments of the population proportionately The beneficial effects of FDI on poverty reduction are potentially stronger when FDI is employed as a tool to develop labour- intensive industries – and where it is anchored in the adherence of MNEs to national labour law and internationally accepted labour standards

In sum up, the economic benefits of FDI are real, but they do not accrue automatically To reap the maximum benefits from foreign corporate presence a healthy enabling environment for business is paramount, which encourages domestic

as well as foreign investment, provides incentives for innovation and improvements of skills and contributes to a competitive corporate climate

2.1.1.2 FDI determinants

From the perspective of foreign investors, the attractiveness of the host country would be greatly enhanced by a combination of three sets of FDI determinants: (i)

economic determinants; (ii) the policy framework for FDI; and (iii) business

facilitation (UNCTAD 1998, p 91) Economic determinants include traditional factors

such as the availability of low-cost raw materials, skilled labour, and adequate physical infrastructure The policy framework for FDI includes factors such as economic, political and social stability, rules and standards regarding entry, treatment and operations of foreign firms, and policies on the functioning and structure of the domestic market such as trade policy, privatization policy, and tax policy As the world economy becomes more open to international business transactions, countries compete increasingly for FDI not only by improving their policy and economic determinants, but also by implementing business facilitation measures

Regarding the policy framework determinants, policy makers have considered various incentive and protection policies to attract FDI, and to ensure its consistency with the domestic economic development objectives The competition for the world’s FDI flows is fierce Evidence indicates that countries which offer safe and profitable investment opportunities win in the global competition for this floating capital (Nabil

Md Dabour, 2000) Foreign private investors look for certain important pointers such

as freedom to control investments, convertible currencies, greater privatization, stock market reforms, greater political stability, and a legal framework for doing business Beyond these general characteristics of well-functioning market economy, investments

in infrastructure, particularly transport and telecommunications, are also important Thus, FDI flows where opportunities abound and where returns are safely realized

International investment needs are immense This requires that the international investment regime constitutes a framework for increased flows of sustainable foreign direct investment for sustainable development The international investment regime covers what has become the single most important form of international economic transactions and the most powerful vector of integration among economies: foreign direct investment and non-equity forms of control by multinational enterprises over foreign production facilities Among the most striking features of the global investment landscape over the past decade has been the rise of capital-export countries They have a need to protect their investors and capital flows Because of the economic importance of international investment, there is no doubt that it is necessary

to make set of rules governing investment protections

As an important FDI attraction determinant, international investment agreements (IIAs) provide an additional layer of security to covered foreign investors and can offer recourse to international investment arbitration to resolve investor - state disputes Investment protections have been a principal vehicle to guard against bad

policies in the undeveloped are and elsewhere in world economy (UNCTAD, 2003)

Investors need some assurance that any dispute with the government will be dealt with

reliability and independence of domestic courts Such agreements may also help countries to improve their own domestic legislation covering investment These considerations have led to the negotiation and signature of many investment treaties, particularly in the 1990s Over the last 50 years, 180 countries have negotiated over

3,200 agreements with investor and investment protections mechanism (USTR, 2014)

These provide assurance of basic rule of law protections and recourse to neutral, international arbitration in the event of an investment dispute

Developing countries recognized the importance of FDI and FDI determinants Consequently, old restrictive and controlling policies and institutions were replaced by new ones aimed at attracting FDI Thus developing countries and countries in transition, have lifted bans and restrictions on FDI entry (including in such sensitive industries as mining, infrastructure and financial services), improved the standards of treatment and protection of foreign investors and eased restrictions on their operations

In the competition with other countries for attracting FDI, especially better types of FDI (such as export-oriented manufacturing projects or projects with high technological content or simply greenfield investments creating jobs) they started offering TNCs incentives, sometimes very generous Generally reluctant to bind their FDI policies in multilateral agreements, developing countries have, however, submitted some aspects of their investment frameworks, especially those concerning protection and treatment of FDI (much less so FDI liberalization), to international

treaties (Zbigniew Zimny, 2008)

The importance of IIAs becomes clear when host countries seeking for a protection for their FDI capital in other country In the pre-IIAs era, before IIAs were concluded, foreign investors who sought the protection of international investment law for their investment encountered short-lived structure consisting largely of spread treaty provisions, a few questionable customs, and contested general principles of law Consequently, international law failed to address important issues of concern to foreign investors For example, international law did not deal with the right of foreign investors to transfer funds from host countries Principles of customary international law were often vague and subject to conflicting interpretations, for instance with regard to the calculation of compensation in case of expropriation There was also no effective mechanism to pursue investors claims against host countries that had harmed investments or did not honor contractual obligations Foreign investors, who failed to settle their claims in the domestic courts of the host country, had no other option than

to act through their governments in a lengthy and more political than legal process

The general purpose of international investment agreements is the promotion and protection of investments from one contracting party in the territory of the other contracting party They provide, with variations in scope and content, for standards of treatment of investors and their investments, including:

- National treatment;

- Guarantees against expropriation without compensation;

- Guarantees of fair and equitable treatment or the international minimum standard of treatment;

- Full protection and security;

- Investor-state dispute settlement, allowing covered foreign investors to bring arbitration claims against host governments where they consider that treaty guarantees have been breached

2.1.2 The proliferation of IIAs as a key FDI determinant

International investment agreements initially took the form of “Bilateral Investment Treaties” or BITs These treaties only cover investment protection, meaning that only investment that has already been established in the host country (so- called “post-establishment” phase) will be covered under the agreement However, they do not deal with investment liberalization (the so-called “pre-establishment” phase) concerning the admission of foreign investments into the host country

With the advent of Free Trade Agreements (FTAs), most prominently the North American Free Trade Agreement (NAFTA), investment chapters have become an integral part of FTAs In the spirit of deepening economic integration, liberalizing trade in goods and services would need to be complemented with investment as well This is why FTAs usually include investment liberalization and protection This article will only focus on issues concerning investment protection

On a multilateral level, however, a single investment agreement remains elusive Currently, there are multilateral agreements in the trade in goods and services—the General Agreement on Trade in Goods (GATT) (1947) and the General Agreement on Trade in Services (GATS) (1995), both under the aegis of the World Trade Organization There were attempts to create a multilateral investment treaty for members of the Organization for Economic Cooperation and Development (OECD) in the late 1990s under the “Multilateral Investment Agreement” (MAI) However, the MAI failed to materialize as countries pulled out when civil society groups raised concerns that the MAI would threaten national sovereignty especially by limiting labor and environmental standards

Hoping to attract more FDI, developed and developing countries are increasingly entering investment agreement As a key factor to attract FDI and gain more benefits from FDI, the year 2015 saw the conclusion of 31 new IIAs – 20 bilateral investment treaties (BITs) and 11 treaties with investment provisions (TIPs), bringing the IIA universe to 3,304 agreements (2,946 BITs and 358 TIPs) by year-end

Japan and the Republic of Korea with four each, and China with three Brazil is taking

a new approach to BITs, focusing on investment promotion and facilitation, dispute prevention and alternatives to arbitration instead of traditional investment protection

and investor-State dispute settlement (UNCTAD, 2016)

The frst four months of 2016 saw the conclusion of nine new IIAs (seven BITs and two TIPs), including the Trans-Pacifc Partnership Agreement, which involves 12 countries By the end of May 2016, close to 150 economies were engaged in negotiating at least 57 IIAs (including megaregional treaties such as the Transatlantic Trade and Investment Partnership (TTIP) and the Regional Comprehensive Economic Partnership (RCEP)) (WIR14) Although the numbers of new IIAs and of countries concluding them are continuing to go down, some IIAs involve a large number of

parties and carry signifcant economic and political weight (UNCTAD, 2016)

Previously, the country pairs were mostly between developing and developed countries, but over the past two decades, the picture has changed, with developing and developed countries signing agreements with their own peers As mentioned, investment chapters are also now part of all FTAs, except for a few exceptions

A prominent example of a region that has actively engaged in investment making is the Association of Southeast Asian Nations or ASEAN Each of the ten member countries have signed over 286 BITs and over 92 FTAs with investment chapters Among these are FTAs that are signed among the ten members or with other dialogue partners (such as Australia and New Zealand) These FTAs contain investment chapters which include investment protection provisions similar to those found in BITs

rule-Figure 1 Trends in IIAs signed, 1980 – 2015

Source: UNCTAD World Investment Report 2016

The obligations set out in IIAs differ in geographical scope and coverage Some

of them address only certain aspects of FDI policies Others address investment policies in general, including policies that affect both domestic and foreign investors (competition rules or anticorruption measures) Still others cover most or all important elements of an FDI framework, ranging from admission and establishment, to standards of treatment to dispute settlement mechanisms The most important effort to create international rules for investment in the early years after World War II was multilateral - in the framework of the Havana Charter It failed The bilateral level proved to be most productive in terms of producing investment rules It focused first

on protection and then on liberalization The first instruments of choice were treaties for the protection and incentive of foreign investment-bilateral investment treaties (BITs) Later, free trade agreements took up the matter as well

2.1.2.1 Bilateral investment agreements

BITs are spinoffs from general treaties dealing with economic relations between countries The year 2015 saw the conclusion of 31 new IIAs – 20 bilateral investment

treaties (BITs), bringing 3304 BITs (UNCTAD, 2016)

Among the world of IIAs, the bilateral approaches, mainly BITs and free trade agreements with an investment component, have the advantage of allowing countries the freedom of choosing the partners to enter into an agreement and how to tailor the agreement to their specific situations They offer countries flexibility in designing their networks of IIAs, concluding them with countries that are key investors, avoiding countries that are less interesting or that may insist on unwanted provisions Allowing each treaty to be negotiated separately gives developing countries more flexibility than under a multilateral approach In addition, BITs can be negotiated quickly Important

is also that the overwhelming number of BITs cover only the post-establishment stage

of investment, leaving admission and establishment-which have the greatest development implications-to be determined autonomously by host countries

The number of bilateral free trade agreements covering investment issues is rising as well, with most early ones involving neighbouring countries and newer ones tending to be concluded between distant countries in different regions and having investment commitments in a separate chapter Among the main issues addressed: preestablishment and post-establishment national treatment; most-favoured-nation (MFN) treatment; prohibitions of performance requirements (often going beyond that contained in the Trade-related Investment Measures (TRIMs) Agreement); incentive and protection, including that for expropriation and compensation; dispute settlement, both State-State and investor-State and transfer clauses guaranteeing the free transfer

of payments, including capital, income, profits and royalties

2.1.2.2 Regional and interregional investment agreements

Regional and interregional approaches typically deal with a range of issues, so there is more room for bargaining With the overall purpose of expanding the regional market, they often include the liberalization of foreign entry and establishment-and reduce operational restrictions They offer-indeed require-more flexibility in how treaty provisions are applied to the different countries Where regional agreements include rules of origin, insiders may benefit in attracting FDI The downside is that they are discriminatory Countries outside the integrating region may be hurt by the diversion of investment Investment by third countries in such a region may also divert trade

The universe of regional and interregional agreements dealing directly with investment matters is growing as well Unlike BITs and bilateral free trade agreements, not all regional instruments are binding An example of a non-binding nature relating to foreign investment in the Asia - Pacific Economic Cooperation (APEC) have been adopted in the 1994 APEC Non-Binding Investment Principles The trend is towards comprehensive regional agreements that include both trade- related and investment-related provisions, even extending to services, intellectual property rights and competition Indeed, most regional free trade agreements today are also free investment agreements, at least in principle The general aim is to create a more favourable trade and investment framework-through the liberalization not only of regional trade but also of restrictions to FDI and through a reduction of operational restrictions, all to increase the flow of trade and investment within regions Generally addressing a broader spectrum of issues than bilateral agreements, regional agreements allow tradeoffs across issue areas Developed and developing countries typically use the traditional international law tools-such as exceptions, reservations and transition

Vietnam has 63 BITs with the following countries and territories: Algeria; Argentina; Armenia; Australia; Austria; Bangladesh; Belarus; BLEU (Belgium-Luxembourg Economic Union); Bulgaria; Cambodia; Chile; China; Cuba; Czech Republic; Denmark; Egypt; Estonia; Finland; Finland; France; Germany; Greece; Hungary; Iceland; India; Indonesia; Iran, Islamic Republic of; Italy; Japan; Kazakhstan; Korea, Dem People's Rep Of; Korea, Republic of; Lao People's Democratic Republic; Latvia; Lithuania; Malaysia; Mongolia; Morocco; Mozambique; Myanmar; Namibia; Netherlands; Oman; Philippines; Poland; Romania; Russian Federation; Singapore; Slovakia; Spain; Sri Lanka; Sweden; Switzerland; Taiwan Province of China; Tajikistan; Thailand; Turkey; Ukraine; United Arab Emirates; United Kingdom; Uruguay; Uzbekistan; Venezuela, Bolivarian Republic of

Box 2: Vietnam’s BITs signed, 1996-2016

Source: InvestmentPolicyHub, 2016

periods-to ensure flexibility in catering to the different needs, capacities and policy objectives of countries As with BITs, it is difficult to identify the impact on FDI of regional or interregional agreements dealing only with the harmonization of investment frameworks of member countries They improve the enabling framework And where they reduce obstacles to FDI (as most regional agreements do), they can increase investment flows-again, if the economic determinants are favourable

(UNCTAD, 2003) The main economic determinant that influences FDI flows in

regional agreements is market size But that is the result of reducing barriers to not of FDI

trade-2.1.2.3 Multilateral agreement on investment

A truly multilateral investment agreement hasn’t existed yet Many efforts to create comprehensive multilateral rules for FDI have shared the fate of the first effort and failed Most prominent among them were the United Nations Code of Conduct on Transnational Corporations (in the late 1970s and 1980s) and a Multilateral Agreement

on Investment by the OECD (in the late 1990s) But the World Bank Guidelines on the Treatment of Foreign Direct Investment, a nonbinding instrument, set down (in 1992) some certain standards of treatment for investors on which a level of international

consensus could be said to exist (UNCTAD, 2003)

Some efforts dealing with specific investment aspects bore fruit as well The Convention on the Settlement of Investment Disputes between States and the Nationals of other States provides a framework for the settlement of investment disputes The ILO Tripartite Declaration of Principles Concerning Multinational Enterprises and Social Policy deals with a range of labourrelated issues The Convention Establishing the Multilateral Investment Guarantee Agency (MIGA) enhances the legal security of FDI by supplementing national and regional investment guarantee schemes with a multilateral one The WTO Agreement on TRIMs prohibits certain trade-related investment measures (adopted as part of the Uruguay Round) And the General Agreement on Trade in Services (GATS), also concluded as part of the Uruguay Round, offers a comprehensive set of rules covering all types of international services delivery, including “commercial presence”, akin to FDI The GATS leaves member countries considerable flexibility on the scope and speed of liberalizing services activities It allows them to inscribe, within their schedules of commitments, activities that they wish to open and the conditions and limitations for doing this - the positive list approach

In their Declaration at the Fourth Session of the WTO Ministerial Conference in Doha in November 2001, members of the WTO agreed on a work programme on the relationship between trade and investment In doing so, they recognized the need for strengthened technical assistance in the pursuance of that mandate, explicitly referring

Trade and Investment (set up at the WTO’s 1996 Ministerial Conference in Singapore) has been deliberating on the seven issues listed in paragraph 22 of the Declaration as well as technology transfer In its meeting on 1 December 2002, the Group discussed its annual report and an intervention by a group of developing countries dealing with home country measures and investor obligations The discussions of the Working Group are reported to the WTO General Council Recognized at Doha was “the case for a multilateral framework to secure transparent, stable and predictable conditions for long-term cross-border investment, particularly foreign direct investment, that will contribute to the expansion of trade” It was also agreed “that negotiations will take place after the Fifth Session of the Ministerial Conference on the basis of a decision to

be taken,by explicit consensus, at that Session on modalities of negotiations”

2.2 MIAs as a fundamental basis for investment incentive and protection

The need for a Multilateral Investment Agreement

It is sure that a MIA can help reduce the complexity associated with the patchwork of bilateral and regional investment agreements As mentioned above, investment treatment are dealt with in a overload of international instruments including an estimated 3.300 bilateral investment treaties, OECD Codes of Liberalization and the Declaration, WTO Agreements, and regional trade agreements, such as the NAFTA and the EU treaty These competing and conflicting rules can create uncertainty for MNEs, TNCs in the treatment of FDI A single overarching investment treaty would not only reduce the complexity of the investment environment but would also extend the coverage and provide a stronger mechanism for investment liberalization

A multilateral framework for investment would facilitate further expansion of FDI It was argued that legally binding multilateral disciplines in investment would improve the enabling environment-by contributing to greater transparency, stability, predictability and security for investment in sectors not yet covered by multilateral rules International obligations would also help reduce investor risk perceptions and narrow the gap between the actual risk of policy instability that may be suggested by a host country’s domestic legislation, and the risk as perceived by foreign investors If multilateral disciplines further reduced obstacles to FDI beyond what other IIAs do, this (plus the right economic determinants) would presumably lead to higher

investment flows (Peterson Institute for International Economics, 2013)

Some countries see multilateral disciplines as an important complement to the bilateral and regional IIAs, to create a common legal basis Indeed, a multilateral agreement could create the “floor” of standards applicable to IIAs in general (though this would not necessarily be uniform if a GATS-type positive list approach were used) Some fear that the floor would be too low, providing lower standards of

protection and market access than BITs and regional agreements Others fear that the floor could be too high (even when exceptions, derogations and the like are allowed), constraining national policy space too much Whether the floor is low or high, a multilateral framework would lock in whatever would be agreed But it would not constitute a ceiling of rules in the investment area Because countries would still be free to go beyond multilateral standards when they negotiate bilaterally or regionally

In other words, a multilateral framework would most likely not replace the large and rapidly growing number of IIAs And it could well be that a multilateral instrument would serve as a starting point for more far-reaching bilateral and regional negotiations in the future

The world currently observe a debate about a multilateral agreement on investment The last attempts to establish MIA failed in 1998 at the Organization for Economic Co-operation and Development (OECD) and in 2003, as part of the Doha Development Agenda of the World Trade Organization (WTO) The reasons for these failures are both the resistance of emerging countries and developing countries to one- sided policies mainly aimed at protecting international investors, and divergences among industrialized countries, particularly regarding the liberalization of market access regulations Global investment flows are protected by a fragmented system of more than 3300 bilateral investment agreements and 300 free trade agreements with investment chapters Most of these agreements establish far-reaching and binding standards of protection for international investors, such as national treatment, fair and equitable treatment, and liberal financial transfer clauses Among the essential features

of IIAs is that investors can assert their rights against host counties directly before transnational arbitration tribunals

The increasing regionalization of investment rule-making is advanced as an argument which can facilitate the leap to the next-higher, multilateral level As a result

of so-called "Mega-Regionals" - like the TPP between the U.S.A and 10 other countries in the Pacific Region, the Regional Comprehensive Economic Partnership (RCEP) between the Association of Southeast Asian Nations (ASEAN) and six other countries, including China or the planned TTIP - it is possible that an integration of investment rules will arise which would simplify the negotiations about an MIA

It is more promising to deal with these challenges in the context of regional operation, since this permits better accommodation of the treaty contents to the specific needs of the countries involved Negotiations at the regional level should be supplemented by co-ordination efforts on the global level The G-20 is the appropriate orchestrator for talks about these systemic questions, talks which in turn should be carried on with the inclusion of the OECD, WTO, and the UNCTAD and other stakeholders

co-The coherency of rules of investment will be improved in the context of MIA

On the one hand, the issue here is to take into account previously neglected issues such

as the negative effects of host countries' investment incentives or investments of owned companies On the other, the aim would be to reduce the potentially negative impact of investment rules on other policy areas such as international financial and trade policies, or health and environmental policies It appears doubtful that a standalone MIA which only addresses investment rules would improve the coherency

state-of the current investment regime

There are two kinds of multilateral investment agreement The first is the MAI which started by the OECD and was expected to be a comprehensive multilateral investment agreement for the world The other can be considered as multilateral investment agreement is the set of investment provisions included in (regional) free trade agreements, such as in NAFTA, TTIP1, RCEP2 or TPP The fact is, the lack of the current multilateral investment regime can be better dealt with in the context of regional negotiations The regionalization of investment rule-making is already in full swing and has reached a new level with the negotiations of "Mega-Regionals" such as the TPP, RCEP or TTIP These regionalization processes are significant not only because of the high volume of trade and investment flows which are affected Also important is the impact of these integration processes on the framework of future international investment policies One benefit of these regionalization processes is the integration of rules of investment into the context of a free trade agreement These so- called WTO-plus treaties encompass not only trade in goods but also such areas as services, the rights to intellectual property, competition, investments, and sustainability These accords either go beyond the level of regulations agreed on in the WTO or open up fully new fields of regulation Below we will take an overview about investment commitments in MAI and NAFTA as biggest MIAs until now

Main content of Multilateral Agreement on Investment

Multilateral Agreement on Investment (MAI) is name of a MIA Negotiations

on a MAI were launched at the May 1995 Council meeting at Ministerial level of the OECD upon receipt of a report by two OECD committees The Committee on International Investment and Multinational Enterprise (CIME) and the Committee on Capital Movements and Invisible Transactions (CMIT) had been conducting

1 The Transatlantic Trade and Investment Partnership (TTIP) is a proposed trade agreement between the European Union and the United States, with the aim of promoting trade and multilateral economic growth The American government considers the TTIP a companion agreement to the TPP The agreement is under ongoing negotiations and its main three broad areas are: market access; specific regulation; and broader rules and principles and modes of co-operation The negotiations were planned to be finalized by the end of 2014, but will not be finished until 2019 or 2020

2 Regional Comprehensive Economic Partnership (RCEP) is a proposed free trade agreement between the ten member states

of the Association of Southeast Asian Nations (ASEAN) and the six states with which ASEAN has existing FTAs (Australia, China, India, Japan, South Korea and New Zealand) RCEP negotiations were formally launched in November 2012 at the ASEAN Summit in Cambodia RCEP is viewed as an alternative to the TPP trade agreement, which excludes China and

preparatory work on the MAI since 1991 Their report to the OECD Council stated

"[T]he time is ripe to negotiate a multilateral agreement on investment (MAI) in the OECD." The OECD Council set the goal of concluding the MAI by the time of the May 1997 Ministerial Subsequently, the deadline for completing the Agreement was extended to May 1998 Since the MAI negotiations were launched, considerable progress has been achieved on the elements of the Agreement In the spring of 1997, several drafts of the Agreement - the latest dated May 1997 - were circulated to the public, raising considerable controversy about the extent to which the MAI would bind the hands of governments with respect to policy-making

* Scope of the agreement

The scope of the MAI would be very broad Initially, some thought that the MAI would cover only foreign direct investment undertaken by enterprises However, the MAI draft defines "investor" as either (a) a natural person (whether a national or a permanent resident) or (b) an enterprise (legal person or any other entity organized under the applicable law of a Contracting Party) "Investment" includes every kind of asset controlled, directly or indirectly by an investor, (i.e a direct investment, portfolio investment (whether debt or equity), real estate, intellectual property rights, rights under contract, and rights conferred by authorizations or permits.)

The MAI draft covers both the entry of the investment (or pre-establishment phase) and the investment once in place "This is a major element of value-added compared with most bilateral investment treaties which are limited to the protection of investment after they are made." The MAI draft covers investment made "cross- border" and by foreign investors resident in the country The MAI is expected to encompass all economic sectors, including agriculture, natural resources, manufacturing, and services The Agreement may cover all government measures (laws, regulations, and administrative practices) by all levels of government (central, federal, state, provincial, and local) It would be retroactive in the sense that it would apply to investments made prior to its entry into force

The MAI takes a top down, rather than a bottom up, approach to liberalization

In other words, a sector is covered by the Agreement unless it is specifically excluded

* Main obligations of the MAI

In the MAI, non-discrimination is central obligations, would be established by provisions of the principles of national treatment and most favoured nation treatment National treatment means that foreign investors of another Contracting Party may not

be treated less favourably than national investors with respect to the entry of foreign investment as well as to the operation, management and sale of the investment once it

is established Most favoured nation treatment means that a Contracting Party may not

treat investors and investments of another Contracting Party less favourably than investors from any other country

Transparency would require Contracting Parties to publish promptly and make available its laws, regulations, procedures, rulings, and international agreements that might affect the operation of the MAI

Senior Management and Boards of Directors - Contracting Parties could not require foreign investors from another Contracting Party to appoint nationals to senior management positions or to Boards of Directors

Employment Requirements - A Contracting Party could not require investors or enterprises from another Contracting Party to employ nationals

Performance Requirements - A Contracting Party could not require certain performance requirements from investors or enterprises from another Contracting Party

Incentives - the national treatment and MFN treatment principles would apply

to the granting of investment incentives Consultations could be initiated where a Contracting Party considered that its investors had been adversely affected by an incentive Further negotiations would be held within three years "in order to further avoid and minimize distorting effects and to avoid undue competition between Contracting Parties in order to attract or retain investments."

Expropriation and Compensation - A Contracting Party could not expropriate or nationalize an investment of another Contracting Party’s investor except: (a) for a purpose in the public interest; (b) on a non-discriminatory basis; (c) with due process

of law; and (d) with prompt, adequate, and effective compensation

Protection from Strife - In the event of war or civil disturbance, investors from another Contracting Party would have to be granted restitution on a national treatment and MFN treatment basis

Transfers - A Contracting Party would have to ensure that all payments relating

to an investment were freely transferable in and out of its territory

Dispute Settlement: Under the MAI, Contracting Parties would have two ways

to address an alleged breach of the Agreement: (1) state-state arbitration and; (2) investor-state arbitration

North American Free Trade Agreement (NAFTA)

On January 1, 1994, the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico entered force to create a trilateral trading bloc in North America The agreement superseded the original Canada-United States Free Trade Agreement between the U.S and Canada NAFTA seeks to

liberalize restrictions on trade among the three countries Since its entry into force, NAFTA has eliminated most tariff and non-tariff barriers for trade and investment between its three member countries NAFTA aims to promote the conditions of free competition in order to increase market access and investment opportunities within the free trade area Until now, NAFTA is international agreement most similar to TPP regarding the investment chapter

The agreement includes 2,000 pages It has eight sections and 22 chapters Section 5, chapter 11 deals with investment treatment Chapter 11 affords various protections to investors of one signatory nation having investments in the territory of another Such foreign-investor protections exist in the large majority of modern bilateral investment treaties, but NAFTA is different NAFTA is apparently the only instance where such protections, including a mechanism for resolving investor-state disputes by binding arbitration, have been made available for use against the United States by countries (Mexico and Canada) that invest heavily in the U.S NAFTA, that

is, has created not only the legal possibility of investor claims against the United States, but the actual occurrence of them as well

Article 1102: National Treatment Each NAFTA party must “accord to investors of another party treatment no less favorable than that it accords, in like circumstances, to its own investors ”

Article 1103: Most-Favored-Nation Treatment Each party must afford investors of another party, and their investments, “treatment no less favorable than that

it accords, in like circumstances” to investors and investments of investors of any other party, or of a non-party

Article 1104: Standard of Treatment Each party must afford investors of another Party, and their investments, “the better of the treatment required by Articles

1102 and 1103.”

Article 1105: Minimum Standard of Treatment “Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.”

Article 1106: Performance Requirements No party may impose specified requirements on the investments of investors of a party or non¬party, including “to export a given level or percentage of goods or services” or “to achieve a given level or percentage of domestic content.”

Article 1110: Expropriation and Compensation “No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment , except (a) for a public purpose; (b) on a non-discriminatory basis; (c) in

accordance with due process of law and Article 1105(1); and (d) on payment of compensation”

NAFTA grants the Most Favored Nation status to all members That means countries must give all parties equal treatment That includes foreign direct investment A country cannot treat its domestic investors more favorably than foreign ones It also can't offer a non-NAFTA foreign investor a better deal Governments must offer NAFTA investors the best deals it provides anyone else Protection for Foreign Investment in NAFTA can be summarized by 3 factors: Commitment to treat each others’ investors and their investments in the territory of the host NAFTA country no less favorably than their own domestic investors Commitment to provide NAFTA investors with the best treatment given to foreign investors from beyond North America A transparent and binding dispute resolution mechanism specially designed to deal with investment

With the advent of FTAs, most prominently the NAFTA, investment chapters have become an important integral part of FTAs In the spirit of deepening economic integration, liberalizing trade in goods and services would need to be complemented with investment as well This is why FTAs usually include investment liberalization and protection This article will only focus on issues concerning investment protection

(Pariwat Kanithasen, 2015)

In addition, current research findings show that free trade agreements with investment chapters, in comparison to stand-alone bilateral IIAs, stimulate more FDI flows In addition, one may expect it to be easier within the framework of regional negotiations to arrive at a consensus regarding the above-described contents of regulations than in multilateral negotiations Until now, NAFTA is world’s largest free trade agreement and also biggest investment agreement as measured by GDP Either the TTP or the TTIP will replace it

2.3 FDI incentives and protections commitments in MIAs

One of the features of globalization is the worldwide competition for FDI Over the past two decades, most countries have liberalized their investment regimes and opened most sectors of their economies to foreign investors During 1991-2002, 95%

of 1,641 FDI policy changes created a more welcoming environment for FDI

(UNCTAD, 2003a, p xvii) In 2002 alone, 248 changes in FDI laws were made, of which 236 (96%) created a more favourable investment climate (UNCTAD, 2003a, p 21) Incentives are one of the policy tools used for this purpose Furthermore, they are

used to increase benefits from FDI for host countries They can involve financial aid, fiscal benefits or other incentives (including the relaxation of regulatory standards that foreign investors would otherwise have to respect)

Surveys indicate that the number of countries granting investment incentives

and the range of possible incentive measures is on the rise (UNCTAD, 1996a, pp 3-4; UNCTAD, 2003a, p 124) This reflects the growing number of countries that

proactively pursue investment promotion efforts The result is a highly competitive world market for FDI which, in light of the recent downturn in global FDI flows

(UNCTAD, 2003a), is likely to become even more competitive Against this

background, the purpose of this paper is to describe and analyse how incentives are dealt with in the context of IIAs

Notably, only relatively few treaties – mostly at the regional or multilateral levels – deal explicitly with incentives However, the lack of express provisions on incentives does not necessarily mean that incentives are not subject to disciplines Indeed, even within the negotiation concerning the MAI by the OECD, several delegations believed that no provision expressly addressing investment incentives was necessary since other draft articles sufficiently covered the issue However, the number of IIAs addressing expressly some types of incentives is gradually increasing, indicating the growing importance that some countries place upon this matter

2.3.1 The role of investment incentives and protections

Nowadays, investment incentives and protections as part of IIAs play a critical role in foreign direct investment location/site selection As globalization makes capital increasingly mobile, managers of low-income economies are increasingly considerable

to believe that generous incentives and comprehensive protections are needed to attract FDI

More recently, studies have started to examine policy and institutional characteristics of host countries as FDI determinants An UNCTAD study has found that institutional characteristic of a host country - combining ratings for the judiciary system, red tape and corruption - together with the host country market size - have a

positive influence on inward FDI into developing countries (UNCTAD, 1998a: 138)

As pointed out by that study, policy and institutional determinants are especially important in developing countries, which are often characterized by weaker institutions and less consistent policies than developed countries The importance of policy and institutional factors for FDI decisions comes out clearly in investor surveys

FDI incentives

From a multi-national company’s perspective, investment incentives are tools that state governments use to make up for the operational difficulties or cost disadvantages existing in a particular location There could be significant confrontation and challenges related to a location’s accessibility, level of development,

or state of security, which would exclude it from consideration under normal

circumstances In such cases, governments often attempt to compensate or reward a company for the additional risk and/or costs associated with operating in that location

From the government’s point of view, investment incentives attract FDI to undeveloped areas where, education levels, job opportunities or standards of living are low Most investment incentives often associated with the financial benefits that are made available to attract attractive investments, incentives can also take the form of non-financial benefits offered to improve a company’s ability to operate For example, governments will offer worker training facilities, customize permit processes or customs clearance procedures, subsidize dedicated infrastructure: electricity, water, telecommunication, transportation/ designated infrastructure at less than commercial price Other benefits may include necessary services, including assistance in identifying sources of finance, implementing and managing projects, carrying out preinvestment studies, information on markets, availability of raw materials and supply of infrastructure, advice on production processes and marketing techniques, assistance with training and retraining, technical facilities for developing know-how or improving quality control

Non-financial incentives are also equally attractive because speed and flexibility are critical in most businesses Companies want to locate where they are free to operate as they see fit and in an environment that will quickly evolve along with their needs Governments’ efforts to develop clear, simple, and flexible operating environments are characterized as non-financial incentives In order to attract investment, a location must either disentangle its challenges or compensate the investor for dealing with them Obviously, there are many elements outside a government’s immediate control, such as higher labor costs or geographic location Incentives can offset these higher costs or operational difficulties and make the total cost picture more competitive In a perfect world, the ideal location would not include incentives, as they would be unnecessary The operating environment and the total cost

of doing business would be competitive enough to enable a company to operate successfully and profitably without extra inducements

It is important to note that incentives to attract FDI are very high in some of the most industrialized countries Moreover, incentives are vulnerable to political concern

of some special interest groups; there is considerable scope for introducing new distortions; and competition among potential host countries in the granting of incentives can drive up the cost of attracting FDI, thereby reducing or even eliminating any benefit for the successful bidder

FDI protection

IIAs with investment protection provisions promote foreign investment by protecting foreign investors against certain political risks in the host country IIAs

impact on FDI inflows through improving individual components of the policy and institutional framework for FDI in the host country, thus contributing to an improvement of the investment climate By guaranteeing foreign investors a certain standard of treatment and establishing a mechanism for international dispute settlement, investment protection provisions contribute to reducing risks associated with investing in developing countries For example, the IIAs of some countries - notably the United States, Canada and Japan granted foreign investors certain rights concerning their establishment in the host country Investment protection provisions in general may also contribute to more transparency, predictability and stability of the investment framework of host countries, and may to some extent serve as a substitute for weak institutional quality in the host country concerning the protection of property rights In the following, each of these three mechanisms is discussed in more detail with a view to assessing their impact on the attraction of FDI IIAs seek to promote FDI by contributing to the creation of stable and favourable legal environment for investment The assumption is that clear and enforceable rules protecting foreign investors reduce political risks and thereby increase the attractiveness of host countries Furthermore, by granting foreign investors access to international arbitration, host country governments make a strong commitment to honor their obligations to comply with their investment protections commitments, which should further enhance investor confidence IIAs might solve in particular the problem of

“outmoded bargaining” Since the nationalizations of the second half of the past century, the risk of expropriation has been widely recognized as a major potential deterrent to new investment in developing countries, especially in natural resources and infrastructure Foreign investors may fear that once the investment is sunk, a host country might act opportunistically and unduly interfere with the profitability of investment

Another reason for concluding investment protections in IIAs is that home countries may have doubts about the institutional quality in the host country; that is, the quality of domestic institutions protecting property rights and resolving disputes IIAs, by placing dispute resolution outside the domestic system of host countries, may thus substitute for poor institutional quality In other words, IIAs can help extent provide a shortcut to policy credibility in the international climate

2.3.2 FDI incentives in MIAs

There is no uniform definition of what constitutes an “investment incentive” The only major international instrument that contains a partial definition is the SCM Agreement Governments use three main categories of investment incentives to attract FDI and to benefit more from it:

- Financial incentives, such as outright grants and loans at concessionary rates;

- Fiscal incentives such as tax holidays and reduced tax rates;

In 2015 Vietnam successfully attracted new and additional investment in the IT sector and energy Investors commonly cite Vietnam’s geographic proximity to global supply chains, political and economic stability, expected benefits from the TPP and other recently signed free trade agreements (FTA’s), and an increasing desire to diversify their manufacturing base in Asia away from China as reasons for investing in Vietnam Vietnam

is one of the few counties in Asia that has been able to sustain manufacturing growth Fueled by a growing economy with a young, increasingly urbanized population and inexpensive labor, Vietnam could become the next manufacturing powerhouse of Asia Last year was an important year for Vietnam as it made great strides in integrating into the global economy In 2016 signed the TPP and in 2015 Vietnam signed the European Union FTA (EV-FTA), the Korea FTA, Eurasian Economic Union (EAEU), is a part of the newly formed ASEAN Economic Community (AEC) Manufacturing dominated FDI inflows last year as investors continue to move large scale operations from other developing countries

to Vietnam In 2015, the investment influx to the textiles and apparel industries continued

in anticipation of the conclusion of the Trans-Pacific Partnership Information technology (IT) also attracted major investments from Samsung ($3 billion), LG ($1.5 billion), and Microsoft ($500 million) The FDI inflows to the IT sector are in line with Vietnam’s strategic efforts to shift FDI from low-end manufacturing to the high tech sector Vietnam also continued to attract investment in infrastructure projects such as power generation, roads, railways and water treatment Vietnam needs an estimated $170 billion in additional infrastructure development in order to meet growing economic demand In energy alone, the Vietnam's General Statistics Office (GSO) estimates that electricity demand will continue to grow at a rate of 10 percent to 12 percent per year, rising from 169.8 terawatt hours in 2015 to 615.2 terawatt hours by 2030

Box 3: Results of Vietnam’s investment attraction policy

Source: USTR, 2015

- Other incentives, including subsidized infrastructure or services, market preferences and regulatory concessions, including exemptions from labour or

environmental standards (UNCTAD, 2004)

Incentives can be used for attracting new FDI to a particular host country (locational incentives) or for making foreign affiliates in a country undertake functions regarded as desirable such as training, local sourcing, research and development or exporting (behavioural incentives) Most incentives do not discriminate between domestic and foreign investors, but they sometimes target one of the two In some countries, such as Ireland, the entire incentive scheme was geared to FDI for a long period Incentives may also favour small firms over large, or vice versa They are offered by national, regional and local governments

Among the broad range of possible incentives, financial and fiscal incentives are the ones most frequently employed Developing countries often prefer fiscal instruments, such as tax holidays, concessionary tax rates, accelerated depreciation allowances, duty drawbacks and exemptions, whereas developed countries mainly use financial incentives, including cash grants (exceeding sometimes 50% of the investment costs) and interest-free or subsidized loans This may be seen as reflecting differences in wealth, as developed countries can afford to use up-front subsidies for inward investment whereas developing countries can, at best, afford to ease the tax burden ex post

- Labour-based: reduction in social security contribution/deductions from taxable earnings based on the number of employees or on other labour related expenditure

- Sales-based: corporate income tax reductions based on total sales

- Import-based: duty exemptions on capital goods, equipment or raw materials, parts and inputs related to the production process; tax credits for duties paid on imported materials or supplies

- Export-based: export tax exemptions; duty drawback; preferential tax treatment of income from exports, income-tax reduction for special foreign-exchange- earning activities or for manufactured exports; tax credits on domestic sales in return for export performance; income-tax credits on net local content of exports; deduction

of overseas expenditures and capital allowance for export industries

- Based on other particular expenses: corporate income tax deduction based on, for example, expenditures relating to marketing and promotional activities

- Value-added-based: corporate income tax reductions or credits based on the net local content of outputs; granting income-tax credits based on net value earned

- Reduction of taxes for expatriates

Other incentives

Regulatory incentives

- Lowering of environmental, health, safety or labour standards

- Temporary or permanent exemption from compliance with applicable standards

- Stabilization clauses guaranteeing that existing regulations will not be amended to the detriment of investors

Market privileges

- Preferential government contracts

- Closing the market to further entry or the granting of monopoly rights; protection from import competition

Foreign exchange privileges

- Special treatment with respect to foreign exchange, including special exchange rates, special foreign debt-to-equity conversion rates, elimination of exchange risks on foreign loans, concessions of foreign exchange credits for export earnings, and special concessions on the repatriation of earnings and capital

2.3.3 FDI protections in MIAs

Investment protection provisions in MIAs straightforward intended to assure foreign investors and their investment that they will not be treated unfairly It is a broad economic term referring to any form of guarantee or insurance that investments made will not be lost

equitable treatment

Full protection and security

Transfers Protection

from strife/

Compensation for losses

Expropriation Investor-State

arbitration Direct Indirect

NAFTA and NAFTA-inspired agreements

ASEAN Agreement for

Promotion and Protection of

Investment, 1987 (AAPPI) as

confirmed by ASEA Investment

Framework

Table 2 Key investment protections of Investment treaties

Source: UNCTAD, 2013

IIAs were developed in the last half- 19th century by capital exporting nations in order to clarify that international law protects foreign investment and investors against discriminatory, unfair, arbitrary and expropriatory government action This was and remains vital since many foreign jurisdictions do not provide basic fairness protections for foreigners, let alone their own citizens

Many international investment treaties present broadly comparable terms of investment protections, then the meaning are various, and so too is the protection to which investors are entitled Commonly used standards of investment protection include:

“National Treatment” and “Most-Favoured-Nation” provisions typically require the host state to treat foreign investors or investments no less favourably than investments in similar circumstances by its own nationals (national treatment) or by nationals of other states (most-favourednation treatment)

“Fair and equitable treatment” provisions require the host state to treat foreign investment according to a minimum standard of fairness, irrespective of the rules it applies to domestic investment under its national law

“Full protection and security” provisions are usually interpreted as requiring the host state to take steps to protect foreign investment from harm caused by third parties

Fair and equitable treatment (FET), and full protection and security (FPS) are absolute standards of protection, i.e the required level of treatment is not contingent

on treatment accorded to third parties by the host state and they do not relate to the domestic law of the host state

FET (which include an obligation not to deny practice justice) and FPS (which provides a level of police protection that must be provided to foreign investors and their investments ) are almost always provided in IIAs The fact is debate exists over where the amount/threshold of treatment is set, particularly in relation to the minimum standard of treatment as defined by customary international law According to one the most common interpretation, a violation of the FET obligation requires the host country to commit a gross misconduct, manifest injustice, or a bad faith neglect of duty Some courts and arbitrators however assert the standard on a case-by-case basis, depending on the relevant treaties

“A guarantee that investments will not be nationalised or expropriated”, unless

it is in the circumstance of public interest, in accordance with the appropriate legal procedures, is without discrimination and is for adequate, prompt and effective compensation This is a clauses that limit a government’s ability to expropriate foreign investments often state that any expropriation must be for a public purpose, be non- discriminatory, and that governments must follow due process and pay compensation according to specifed standards

“Free transfer of money/funds” is related to the investments and returns from those investments The ability to transfer an investment and any returns from that investment is important to the level of investment protection This standard also promotes unrestricted capital flows and is therefore broadly liberalizing investment between countries At the same time, transfer of funds provisions can give rise to concerns on the part of developing economies The negative consequences of capital transfer and sudden large inflows can be hard for the economy, at least in the short run However, there is many unanimous agreement amongst countries to accept it as a core element of investment protection as a right to transfer funds relating to an investment

If we take a look at the practice of the APEC economies more closely, a typical approach is to require that all transfers relating to an investment must be permitted freely, but then include an clear, non-exclusive listing of transfers that must be permitted The currency and exchange rate of transfers is also specified This is expressed in the Australia-Singapore BIT

Settlement of disputes between investors and a contracting state and between contracting states:

Dispute settlement provisions are included in almost every IIAs and serve to protect foreign investment It is a mechanism for investors to take up claims directly against the host country Investor-State dispute settlement increases the level of stability of the host country’s business environment and depoliticises disputes by making sure they are decided on legal basis Investor-State dispute settlement mechanisms therefore interact with substantive IIA provisions to liberalize foreign investment flows

The NAFTA model deals with this issue with a set of lengthy and detailed provisions that offer guidance to the disputing parties on procedural issues and aim to strengthen the rules-based nature of these mechanisms Other IIAs, particularly most BITs, only mention the main features and include general guidance on procedures They place greater reliance on existing arbitration rules, often those offered by International Centre for Settlement of Investment Disputes - ICSID or United Nations Commission on International Trade Law - UNCITRAL

An important feature of Investor - State provisions is the range of claims that could be taken to international arbitration This differ from any dispute between an investor and host country, to disputes involving a provision of the treaty or an obligation of contracting parties

Another key factor is the requirement for accessing arbitration First, consultations between parties of the dispute are always almost required, though there

is variant amongst IIAs on whether consultations must take place for three, four or six

“compulsory jurisdiction" provision Last but not least, many IIAs do not require using all of national method before submitting a dispute to an international arbitration This reflects the fact that many countries consider arbitration only an substitute means of resolving a dispute rather than a subsidiary mechanism

National treatment and most-favoured-nation provisions are ‘relative’ standards: they require the state not to discriminate against protected foreign investors and investments For example, most-favoured-nation clauses can allow investors to claim more favourable treatment provided by other treaties - treaties between the host state and states other than the country where investors are based

In contrast to national treatment and most-favoured-nation provisions, the other standards of investment protection are absolute: they establish minimum standards applicable to covered foreign investment irrespective of the treatment applicable to other investments

Because standards of investment protection are often expressed in misty and different terms, a meaning of an IIA may only be fully understood by considering how arbitral tribunals have interpreted and applied similar regulations when settling disputes Arbitral tribunals are not bound to follow earlier awards, but in practice they

do often refer to earlier awards in order to strengthen the authority of their own reasoning

Chapter 3 COMMITMENTS RELATING FDI INCENTIVES AND

PROTECTIONS IN TPP 3.1 Overview of TPP and the Investment Chapter

3.1.1 Summary of the Trans-Pacific Partnership Agreement

The Trans-Pacific Partnership Agreement is more of an investment treaty than a typical trade agreement While it still covers trade-related issues, like reducing tariffs and non-tariff barriers as well as rules of origin and antidumping remedies, it relates directly to investment treatment, such as protection of intellectual property, competition policy, and the increasingly-contentious investor-state dispute settlement

Like the MAI, NAFTA or RCEP, the TPP is a multilateral trade and investment treaty which, if ratified by the signatories, would become the largest free trade association on the planet On an economic scale, the signatories account for approximately 40% of global trade After five and a half years, on October 4, 2015, Ministers of the 12 Trans-Pacific Partnership countries, including Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, United States and Vietnam – announced final conclusion of their continuous negotiations It is a new generation trade agreement, which is the result of a comprehensive and balanced agreement with requirements of high-standard and ambitious actions for each member The TPP is expected that will promote economic growth; support the creation and retention of jobs; enhance innovation, productivity and competitiveness; raise living standards; reduce poverty in our countries; and promote transparency, good governance, and enhanced labor and environmental protections Particularly, TTP is expected to help Vietnam utilize international cooperation opportunities, balance relationships with key markets, approach larger markets including the U.S, Japan, Canada, boost import-export, reduce import deficit, and attract foreign investment In addition, TTP will also help Vietnam’s economy allocate its resources more effectively, enabling active supports to the processes of restructuring, innovation and improving regulations, and improve administrative reforms

There are five key defining features that make the TPP a landmark 21st-century agreement, setting a new standard for global trade while taking up next-generation issues These features are:

Comprehensive market access: The TPP eliminates or reduces tariff and

non-tariff barriers across substantially all trade in goods and services and covers the full spectrum of trade, including goods and services trade and investment, so as to create new opportunities and benefits for our businesses, workers, and consumers

Regional approach to commitments: The TPP facilitates the development of