This page intentionally left blank THE INTERNATIONAL LAW ON FOREIGN INVESTMENT This new edition of Professor Sornarajah’s book, available for the first time in paperback, surveys the international law developed to protect foreign investment by multinational corporations The area has always been one of controversy due to the different political and economic conflicts that exist in the field The book assesses the role of multinational corporations in making foreign investments, and considers the ways in which misconduct on the part of such corporations in host states could be controlled Sornarajah focuses on the protection of foreign investment and the problems associated with such protection He explores treaty-based methods, and examines several bilateral and regional investment treaties The failure to agree on a multilateral treaty system and the inability to incorporate a discipline on investment within the WTO are also considered He takes account not only of the law in this area, but also of the relevant literature in economics, political science and other associated disciplines M Sornarajah LLM (Yale) PhD LLD (London) was Head of the Law School of the University of Tasmania prior to joining the National University of Singapore Law School, where he is a Professor of Law He was Sterling Fellow at the Yale Law School, and Research Fellow at the Centre for International Law, Cambridge, and at the Max Planck Institut făur Offentliches Auslandisches Recht at Heidelburg, Germany He was International Law Fellow and Visiting Professor at the American University at Washington, DC He is a Professorial Fellow at the Centre for Petroleum and Natural Resources Law at the University of Dundee, Scotland THE INTERNATIONAL LAW ON FOREIGN INVESTMENT Second edition M SORNARAJAH Professor of Law National University of Singapore cambridge university press Cambridge, New York, Melbourne, Madrid, Cape Town, Singapore, São Paulo Cambridge University Press The Edinburgh Building, Cambridge cb2 2ru, UK Published in the United States of America by Cambridge University Press, New York www.cambridge.org Information on this title: www.cambridge.org/9780521837132 © Cambridge University Press 2004 This publication is in copyright Subject to statutory exception and to the provision of relevant collective licensing agreements, no reproduction of any part may take place without the written permission of Cambridge University Press First published in print format 2004 isbn-13 isbn-10 978-0-511-21132-4 eBook (EBL) 0-511-21309-3 eBook (EBL) isbn-13 isbn-10 978-0-521-83713-2 hardback 0-521-83713-8 hardback isbn-13 isbn-10 978-0-521-54556-3 paperback 0-521-54556-0 paperback Cambridge University Press has no responsibility for the persistence or accuracy of urls for external or third-party internet websites referred to in this publication, and does not guarantee that any content on such websites is, or will remain, accurate or appropriate To Ramanan CONTENTS Preface to the second edition page xv Preface to the first edition xvi Table of cases xvii List of abbreviations xxiv Introduction 1 The definition of foreign investment 1.1 The distinction between portfolio investment and foreign direct investment 1.2 Definition of foreign investment in treaties 1.3 The evolution of the meaning of the term ‘investment’ The history of the international law on foreign investment 18 2.1 The colonial period 18 2.2 The post-colonial period 22 An outline of the book 30 The shaping factors 34 37 The historical setting 1.1 State responsibility for injuries to aliens 37 1.1.1 The natural resources sector 40 1.1.2 The plantation sector 44 1.1.3 The manufacturing sector 44 1.1.4 The financial sector 46 1.1.5 Intellectual property 46 Conflicting economic theories on foreign 50 investment 2.1 The classical theory on foreign investment 2.2 The dependency theory 57 2.3 The middle path 59 51 Actors in the field of foreign investment 65 3.1 The multinational corporation vii 66 viii contents 3.2 3.3 3.4 3.5 State corporations 69 International institutions 71 Non-governmental organisations 74 Other actors 75 Risks in foreign investment 75 4.1 Ideological hostility 77 4.2 Nationalism 78 4.3 Ethnicity as a factor 80 4.4 Changes in industry patterns 81 4.5 Contracts made by previous regimes 83 4.6 Onerous contracts 85 4.7 Regulation of the economy 85 4.8 Human rights and environmental concerns 4.9 The law-and-order situation 87 86 The sources of the international law on foreign investment 87 5.1 5.2 5.3 5.4 Treaties 87 Custom 89 General principles of law Judicial decisions 95 93 Controls by the host state 97 Regulation of entry 108 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 1.10 1.11 Guarantees against expropriation 110 Guarantees relating to dispute settlement 114 Tax and non-tax incentives to foreign investors 115 Screening of foreign investment entry 116 Requirements of local collaboration 120 Capitalisation requirements 122 Requirements relating to environmental protection 124 Requirements relating to export targets 126 Requirements relating to local equity 128 Other requirements 131 Regulation and expropriation 131 New forms of foreign investment 132 2.1 The joint venture 133 2.2 The production-sharing agreement 134 Constraints on control: the customary international law 135 3.1 State responsibility for injuries to aliens 138 3.2 The conflict between the United States and Latin American states 142 ... 1.3 The evolution of the meaning of the term investment The history of the international law on foreign investment 18 2.1 The colonial period 18 2.2 The post-colonial period 22 An outline of the. .. 4.6 Onerous contracts 85 4.7 Regulation of the economy 85 4.8 Human rights and environmental concerns 4.9 The law- and-order situation 87 86 The sources of the international law on foreign investment. .. in international law today on which opinion seems to be so divided as the limitation of the state’s power to expropriate the alien’s property.’ the international law on foreign investment The