Global regulation of foreign direct investment

GLOBAL REGULATION OF FOREIGN DIRECT INVESTMENT To Hirut, Hayat and Iman Global Regulation of Foreign Direct Investment SHERIF H SEID LLB (AAU, DISTINCTION); LLM, PHD (ANU) First published 2002 by Ashgate Publishing Reissued 2018 by Routledge Park Square, Milton Park, Abingdon, Oxon OX14 4RN 711 Third Avenue, New York, NY 10017, USA Routledge is an imprint of the Taylor & Francis Group, an informa business Copyright © Sherif H Seid 2002 The author has asserted his moral right under the Copyright, Designs and Patents Act, 1988, to be identified as the author of this work All rights reserved No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers Notice: Product or corporate names may be trademarks or registered trademarks, and are used only for identification and explanation without intent to infringe Publisher’s Note The publisher has gone to great lengths to ensure the quality of this reprint but points out that some imperfections in the original copies may be apparent Disclaimer The publisher has made every effort to trace copyright holders and welcomes correspondence from those they have been unable to contact A Library of Congress record exists under LC control number: 2002100900 ISBN 13: 978-1-138-73867-6 (hbk) ISBN 13: 978-1-315-18463-0 (ebk) Contents List of Figures List of Tables Preface Acknowledgments List of Laws, Agreements and Conventions Acronyms PART I:  THE THEORY OF FOREIGN DIRECT INVESTMENT: THE LAW OF FDI 1  Introduction 2  FDI Theories and the Role of the State 3  The Current Regulatory Framework for FDI 4  Methodology PART II:  STRATEGIES FOR A GLOBAL INVESTMENT AGREEMENT: THE KEY PLAYERS 5  The OECD Countries and the OECD Agenda 6  Developing Countries 7  Consumer, Labour, Environmental and Business Groups 8  International Organisations PART III:  EVALUATION: TOWARDS REGULATED OPENNESS 9  Evaluation of the Strategies 10  Regulated Openness 11  Conclusion Bibliography Index List of Figures Figure 2:1  Nationalisation by Year Figure 5:1  Japanese Investment in the US, 1980-90 (in billions of US dollars) List of Tables Table 2:1   Countries that Conducted Mass Nationalisation Table 3:1   Changes to National Regulatory Regimes on FDI, 1991-98 Table 4:1   Interviews Conducted in 1996 and 1997 Table 5:1   Rows of Direct Investment out of and into the US, 1970-90 (in billions of US dollars) Table 5:2   High Technology Acquisitions in the US by country (October 1988-April 1992) Table 5:3   Japan’s High Technology Acquisition in the US (October 1988-April 1992, by industry) Table 6:1   Percentage Share of FDI in Gross Fixed Capital Formation (1971-93) Table 8:1   Positions taken by Some Countries/Groups at the WTO Seattle Ministerial Conference Table 10:1  Issues to be Addressed in a Global Investment Agreement and the Representative Positions of the Key Players Table 10:2  Comparison of the MAI and Regulated Openness Preface Foreign direct investment (FDI) can contribute positively to the economic development of the host country Foreign investors usually bring capital into the host country, thereby influencing the quality and quantity of capital formation in the host country The inflow of capital and reinvestment of profits increases the total savings of the country and the tax revenue of the Government FDI can also increase the level of economic activity and social wellbeing in the host country It can replace inferior production functions in developing countries with superior ones through the transfer of technology, managerial and marketing skills, market information, organisational experience, innovation in products and production techniques, and the training of workers Moreover, FDI can increase competition in an industry with a likely improvement in productivity FDI can also widen the market for host country producers by linking the host country industry more closely to world markets, leading to even greater competition and opportunities to technology However, if prudent regulatory mechanisms are not in place, FDI may not always be beneficial to the host country It can, for example, cause considerable environmental damage In some cases such environmental destruction has led to major social unrest, including calls for secession and civil war (e.g Bougainville) Some foreign investors may even seek investment in a developing country to escape the burden and costs of stringent environmental regulations in their home countries Multinational corporations (MNCs) may also involve themselves in transfer pricing, thereby negatively affecting the host government’s tax revenue Moreover, there have been instances where foreign MNCs were involved in internal political affairs of host countries, causing civil unrest and political instability in the host country (e.g Chile) After the failure of the Multilateral Agreement on Investment (MAI), the world does not have a global investment agreement that would regulate FDI A global investment agreement dealing with FDI would clearly fill a large gap in the network of regulatory measures governing the world economy Other attempts had been made prior to the MAI to address this problem, but all have failed so far The main reason for such failures has always been the lack of compromise in the positions held by the major stakeholders This book analyses the pros and cons of these opposing positions and uses them as a basis for forging a hybrid model called “Regulated Openness” This hybridity is thus grounded in compromise and pragmatism But it is a principled pragmatism in two ways First, the book analyses the weaknesses and strengths of the positions of all the key players in the FDI debate in search of a marriage of these positions where the strengths of one might cover the weaknesses of the other Second, the book defends a method motivated by the question: What is the best kind of FDI agreement from the starting point of the reality of the key players’ present positions? This is seen as more productive method than crafting a model from purely analytic foundations that would not apply to any existing world because it would abstract from real positions of real players In the method applied here, the role of analytic economics, for example, is still important, yet mostly limited to uncovering the weaknesses and strengths of extant economic postures in global politics The key players whose positions are described and diagnosed in this book are the OECD and its members, developing countries, public interest groups and representatives of the business community, and international organisations The method used to collect these data were interviews, cyber observation, attendance of conferences, observation of negotiations and literature review Regulated openness is a compromise where the concerns of each major stakeholder would be addressed adequately It has procedural and substantive dimensions Procedurally, it is a process where all major stakeholders would have an input and role in the preparation and implementation of FDI laws A binding international framework agreement on principles is a more pragmatic solution than comprehensive rules Once the framework agreement of core principles has been formed, each country would have its own detailed rules consistent with the internationally agreed principles and the priorities of individual countries Substantively, regulated openness means an investment regime where both regulation and openness co-exist in a balanced and pragmatic manner This balance and co-existence could be achieved within a framework of internationally agreed core principles rather than detailed comprehensive rules The core principles will be those principles which major stakeholders would regard as paramount, namely sustainable development, enhanced openness of markets, investment security, core labour standards, consumer protection and business ethics, good governance and effective dispute settlement Moreover, host countries would commit themselves to continuously improve their openness policies as their domestic capability improves and as the guarantees they can secure under the other core principles strengthens Regulated openness aims at bringing development with justice Development with justice requires both procedural justice and credible commitment to continuous improvement of the openness of investment policy, investment security, sustainable development, core labour standards, consumer protection, business ethics and good governance A commitment to continuously improve these concerns is a path for development with justice As such, it is a path to politically sustainable liberalisation, as distinct from the politically disastrous trajectory of the MAI Through seeing why the MAI failed, as an exclusionary agreement that cloaked discrimination against domestic investors as nondiscrimination against FDI, we might grasp how regulated openness could succeed We also grasp how the seeds of the unsettling of the Millennium Round of the World Trade Organisation (WTO) were sown by the NGO and developing country campaign against the MAI What they ushered in was perhaps a new era when the powerless have some capacity to scuttle the plans of the powerful for the commanding heights of the world economy Sherif H Seid March 2002 UNCTAD 1996 World Investment Report New York; 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New York: Oxford University Press Index ACA, and MAI 121 Amco v Indonesia 12 Amin, Samir 19 APEC FDI agreements 56 and foreign investment 166-7 origins 166 Asia East economic growth 11 and FDI 11-12 life expectancy 11 poverty 11 economic development 106-10 FDI 109-10 and MAI 73 Asia-Invest program 73 Australia EPZ 41 and FDI 36, 39 and MAI 92-3, 119-20 Baran, Paul on British India 19-20 on the Japanese economy 19-20 Bhopal disaster 14 ICSIR 132 IMCB 132-3 UCC 14, 132 BIAC and labour standards 186, 198 and MAI 138-9, 140-141 BITs and compensation 54 disputes settlement 54 and FDI 51-5, 224 increase 58 Latin America 100 and MFN 53 and protection 53-4 structure 52-3 and transfer of funds 53 Brazil 24 bureaucracy, autonomy 24 business community, and MAI 138-41, 198 Calvo Clause 50-51 capital, and FDI 36 Cardoso, Fernando Henriques 18 cartels, international, regulation 124 CEO, and MAI 91 Chile, foreign investment 112 China, and FDI 39, 174-5 CI and competition 122-5 consumer protection 125-6 and FDI 120, 121-2, 189 and MAI 121 Model Law 126 see also consumer protection compensation and BITs 54 expropriation 47-51 and MNCs 149-50 competition and CI 122-5 and FDI 11 consumer protection and foreign investment 199, 204-6, 225 and MNCs 149 see also CI copper mining, Papua New Guinea 13, 133-5 corporate responsibility, and environmental standards 137 corruption and foreign investment 207 and state intervention 26-7 democracy, and foreign investment 207 dependency theory criticism of 22-3 features 18-19, 20 and foreign investment 21 and Latin America 17-18, 100 neo-classical economics, compared 20 origins 17-18 developing countries and FDI 5, 10, 99-118, 178-84, 224 and labour standards 185-7 and MAI 110-111 and technology transfer 10-11 and the WTO 159 development see economic development disclosure, and MNCs 149 disputes settlement BITs 54 codes of conduct 213 direct regulation 216-17 foreign investment 199-200, 209-17 and the ICSID 54-5, 85, 164-5 and MAI 85-6, 209 self-regulation 213-16 and UNCITRAL 85, 164 East Asia see Asia, East EC, and MAI 71-4 economic development Asia 106-10 and FDI 3, 104-10, 182-4 Malaysia 107-8 South Korea 108-9 and state intervention 23-4, 26, 106-7 economics neo-classical definition 9-10 dependency theory, compared 20 and EDA 12 and FDI 10-17, 29 ECOSOC, and MNCs 147-8 EDA, and neo-classical economic theory 12 Elf Aquitaine company 177-8, 225 employment, and FDI 11 environment damage and FDI 13-14 Papua New Guinea 13 US-Mexico border 13 see also Bhopal disaster: Ok-Tedi disaster environmental groups, and MAI 130-138 environmental protection and foreign investment 131-6 and Friends of the Earth 137 and the WWF 131-2, 137 environmental standards corporate responsibility 137 and EPZ 136 and FDI 136-7, 187-9, 225 regulation 137 EPZ Australia 41 and environmental standards 136 Korea 41 and workers’ rights 127, 143 Ethyl Corporation 178 European Community Investment Partners 73 European Investment Bank 73 Exon-Florio Amendment 34-5 purpose 71-2 expropriation compensation 47-51 and MNCs 149 state intervention 46-7 FDI APEC agreements 56 Asia 109-10 and Australia 36, 39 benefits 10, 11-12, 29, 101-2, 175, 226-7 and BITs 51-5, 224 capitalisation requirements 36 and China 39, 174-5 and CI 120, 121-2, 189 and competition 11 and Consumers International 120, 121-2 and developing countries 5, 10, 99-118, 178-84, 224 disbenefits 12-14, 21, 29-30, 105, 117, 175-6 and East Asia 11-12 and economic development 3, 104-10, 182-4 and employment 11 and environmental damage 13-14 and environmental standards 136-7, 187-9, 225 exclusions 36-7 and FIAS 219 and foreign exchange 11, 226 and foreign investment 36 and ICFTU 127 and IFC 163, 219 impact 105-6 incentives 39-44 and infrastructure 11, 13 and joint ventures 37 key players, positions 197 and Latin America 99-100 Lee Kwan Yew on 11-12 and liberalisation 19, 174-6, 196 Malaysia 37, 39, 109, 110, 175 and MIGA 163, 219 and MNCs 14, 20, 99, 104, 116-17, 120, 142 NAFTA agreement 57-8 and nationalisation 14-16 and neo-classical economic theory 10-17, 29 and OECD agreements 55-6 performance requirements 37-9 principles 194-6, 227-8 regulation of 16-17, 110-13, 178-90, 224 screening procedures 35-9 South Korea 109, 110 and sovereignty 21, 102-4, 116, 179-82 and Thailand 175 trade, role 3, 174 and transfer pricing 38 and UNCTAD 151-3, 218, 227 US 34-5, 36 World Bank guidelines 165, 219 see also foreign investment; MAI FIAS, and FDI 219 Fisher, Stanley 26 foreign exchange, and FDI 11, 226 foreign investment advantages and APEC 166-7 Chile 112 and consumer protection 199, 204-6, 225 and corruption 207 definitions 81 and democracy 207 and dependency theory 21 disputes settlement 199-200, 209-17 and environmental protection 131-6 and FDI 36 and GATS 58 globalisation 59-60, 223 and good governance 206-8 and human rights 208 India 112 and international agreements 51-8 location 41 and MNEs 42 and national laws 33-46, 58, 59 Nepal 21 and regional/sectoral agreements 55-8 regulation of 21-2 security 44-6, 202-3 and social policy 206-7 and sustainable development 135-6, 200-202 tax incentives 41-3 Thailand 112 transfer of funds 47-51 and TRIMs 58, 74, 114, 126, 154-5 and the UN 147-53 and UNCTAD agreements 115-16, 143 US by Japan 75-7 statistics 70 and WTO agreements 58, 113-16, 229 Zimbabwe 21-2 see also FDI; MAI France, and MAI 91-2 Friends of the Earth, and environmental protection 137 GATS, and foreign investment 58 globalisation foreign investment 59-60, 223 and sovereignty 181 and workers’ rights 126-7 governance, good, and foreign investment 206-8 Helms-Burton Law objections to 73 purpose 72-3 Hull Formula 54 human rights and foreign investment 208 and MNCs 208 ICC and MAI 138, 140-141 and the WTO 159 ICFTU and core labour standards 128, 130 and FDI 127 ICSID and disputes settlement 54-5, 85, 164-5 establishment 12 ICSIR, Bhopal disaster 132 IFC, and FDI 163, 219 ILO Conventions, workers’ rights 128, 143 IMCB, Bhopal disaster 132-3 IMF, and MAI 88 incentives, FDI 39-44 India British, Paul Baran on 19-20 foreign investment 112 and MAI 100 industrialisation, and state intervention 25 infrastructure, and FDI 11, 13 international agreements, and foreign investment 51-8 interviewing, creative 65 investment see foreign investment Japan economy, Paul Baran on 19-20 US, investment 75-7 and the WTO 158 joint ventures, and FDI 37 Korea, South economic development 108-9 EPZ 41 FDI 109, 110 labour child 129, 186, 198 core standards 127-9, 142-3, 185, 203-4 and ICFTU 128, 130 standards and BIAC 186, 198 and developing countries 185-7 see also workers’ rights Latin America BITs 100 and dependency theory 17-18, 100 and FDI 99-100 law suits Amco v Indonesia 12 Oscar Chin Case, and discrimination 45 Revere Jamaica Aluminium Ltd (RJA) v Jamaica 12 Lee Kwan Yew, on FDI 11-12 liberalisation and FDI 174-6, 196 and MAI 173 LIBERTAD see Helms-Burton Law life expectancy, East Asia 11 MAI and ACA 121 and Asia 73 and Australia 92-3, 119-20 and BIAC 138-9, 140-141 and the business community 138-41, 198 and CEO 91 and CI 121 country specific exceptions 87-8 data analysis 66 and developing countries 110-111 and disputes settlement 85-6, 209 draft agreement on 80-88 and environmental groups 130-138 and the European Commission 71-4 and financial services 86-7 and France 91-2 and the ICC 138, 140-141 and the IMF 88 and India 100 and international agreements 88 interviews about 63-4 and investment protection 84-5 and investors 82-4 and liberalisation 173 negotiations, failure 88-94, 95-6, 176, 178, 210-212, 217, 225, 229 and NGOs 89, 95, 119-20, 218 observation 65-6 and the OECD 4, 78-80, 88-92, 224 opposition to 119-20 origins n.1, 78-9 research methodology 63-6 and taxation 87 and TUAC 129-30, 185 and UNICE 139 and US 69-71, 77, 78, 94 and WTO 73-4, 78 and the WWF 136 see also FDI; foreign investment Malaysia economic development 107-8 FDI 37, 39, 109, 110, 175 markets role 25 and state intervention 25, 28 Marshall, Alfred Marxism, and underdevelopment 17, 18 mergers and acquisitions regulation 123-4 value 223 MFN, and BITs 53 MIGA and FDI 163, 219 purpose 12 MNCs and compensation 149-50 and consumer protection 149 and disclosure 149 and ECOSOC 147-8 and expropriation 149 and FDI 14, 20, 99, 104, 116-17, 120, 142 and human rights 208 and sovereignty 148 and technology transfer 10-11 and transfer of funds 149 and transfer pricing 14, 148-9 UN Code of Conduct 148-51, 177, 220 and world trade MNEs, and foreign investment 42 NAFTA agreement, FDI 57-8 nationalisation country list 16 and FDI 14-16 statistics 15 Nepal, foreign investment 21 NGOs and MAI 89, 95, 119-20, 218 role 217-18 and World Bank 225 and the WTO 225-6 OECD FDI agreements 55-6 and MAI 4, 78-80, 88-92, 224 Ok-Tedi disaster, Papua New Guinea 13, 133-5 Oscar Chin Case, and discrimination 45 Papua New Guinea, Ok-Tedi disaster 13, 133-5 poverty, East Asia 11 Prebisch, Raul 17-18 protectionism, and state intervention 25-6 Prussia 24 public institutions, and state intervention 28 research methodology, MAI 63-6 Revere Jamaica Aluminium Ltd (RJA) v Jamaica 12 Russia 24 Sabatier, Alan 104 Samsung Industries 108-9 security and BITs 53-4 foreign investment 44-6, 202-3 self-regulation, disputes settlement 213-16 social policy, and foreign investment 206-7 sovereignty and debt 181-2 and FDI 21, 102-4, 116, 179-82 and globalisation 181 meaning 179-80 and MNCs 148 state intervention and corruption 26-7 and economic development 23-4, 26, 106-7 expropriation 46-7 failures 26 and industrialisation 25 and markets 25, 28 and protectionism 25-6 and public institutions 28 successes 27-9 strategic business alliances, regulation 124-5 sustainable development and foreign investment 135-6, 200-202 and UNEP 135-6 tax incentives, foreign investment 41-3 taxation, and MAI 87 technology transfer and developing countries 10-11 and MNCs 10-11 Thailand and FDI 175 foreign investment 112 Timberger, Ellen K 24 trade FDI, role 3, 174 world, and MNCs transfer of funds and BITs 53 foreign investment 47-51 and MNCs 149 transfer pricing and FDI 38 and MNCs 14, 148-9 TRIMs, and foreign investment 58, 74, 114, 126, 154-5 TUAC, and MAI 129-30, 185 UCC, Bhopal disaster 14, 132 UN Code of Conduct for MNCs 148-51, 177, 220 and foreign investment 147-53 UNCITRAL, and disputes settlement 85, 164 UNCTAD and FDI 151-3, 218, 227 and foreign investment agreements 115-16, 143 underdevelopment, and Marxism 17, 18 UNEP, and sustainable development 135-6 UNICE and MAI 139 and the WTO 139 US FDI 34-5, 36 foreign investment by Japan 75-7 policy 71 restrictions 71-2 statistics 70 high technology acquisitions in 76 and MAI 69-71, 77, 78, 94 Mexican border, environmental damage 13 Wallerstein, I M 19 White, Gillian 49 workers’ rights core labour standards 127-9, 142-3 and EPZ 127, 143 and globalisation 126-7 ILO Conventions 128, 143 see also labour World Bank East Asian Miracle 11 FDI guidelines 165, 219 and NGOs 225 role 162 WTO and developing countries 159 and foreign investment agreements 58, 113-16, 229 and the ICC 159 and Japan 158 and MAI 73-4, 78 and NGOs 225-6 origins 153 role 153 Seattle Ministerial Conference 157-62 Singapore Ministerial Conference 155-7 and UNICE 139 working methods 153-4 WWF and environmental protection 131-2, 137 and MAI 136 Zimbabwe, foreign investment 21-2 .. .GLOBAL REGULATION OF FOREIGN DIRECT INVESTMENT To Hirut, Hayat and Iman Global Regulation of Foreign Direct Investment SHERIF H SEID LLB (AAU, DISTINCTION);... (of Namibia) Foreign Investment and Technology Act, 2038 (of Nepal) General Agreement on Trade in Services (GATS) Investment Code, 1991 (of Uganda) Investment Incentives Council of Ministers Regulation. .. Trade and Investment WTO World Trade Organisation WWF World Wide Fund for Nature Part I The Theory of Foreign Direct Investment: The Law of FDI Chapter Introduction Foreign Direct Investment