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The Challenges of International Investment Law

January 31, 2019

 

International investment law is multi-faceted and paves the way for important foreign direct investment through bilateral investment treaties. It is a particularly important subject because foreign investment is pertinent to the growth of developing economies. Foreign investment is critical for economic development in developing countries because it helps to reduce poverty and increase national wealth. A study done by the World Bank found that “a one per cent rise in the share of inputs purchased by a foreign firm from local companies is associated with a 58 per cent increase in sales of a typical high-growth company over two years.”

 

These investments can be pivotal for the direction of a country’s economy, especially if that country has suffered from conflict. While foreign direct investment makes up 39 per cent of total incoming finance in developing economies as a group, only 1% of that goes to countries that have suffered from conflict. The World Bank notes that investors from developing countries are more willing to target smaller and often higher-risk regional economies as part of a stepping-stone strategy.

 

International investors are primarily concerned with one thing: return on investment. Average return on FDI is 6.7%, down from 8.1% in 2012. To improve this, the top two factors investors look at when deciding to invest are political stability and a predictable regulatory environment, meaning the laws stay consistent with the status quo of business operations. These factors are crucial as “more than a third of investors reinvest all of their profits into the host country.”


The Promises and Challenges of BITs

Foreign investors often use the vehicle of bilateral investment treaties (BITs). The focus of BITs is securing investments by offering a plethora of incentives. BITs typically have clauses in them that involve public purpose, nondiscrimination, and compensation requirements, whose value can change based on fluctuations in the market.

 

While BITs are seen as an international standard, they present several challenges. For example, while investment law provides safeguards against possible infringement of rights by requiring just compensation, the national laws may not. The African Charter on Human and Peoples Rights, for example, protects the right of property but does not compel states to compensate for the loss of property people may suffer at the hands of the state.

 

Another challenge facing BITs is litigation that arises from discrepancies between BITs and national legislation. For example, political changes in a country often lead to the new government reconsidering existing BITs and potentially overriding or changing their conditions. If the investor feels there was a violation of a contract, he must first fix it under national law before bringing it to an international court. There are four courts that settle disputes between investors and governments: the World Bank, the Stockholm Chamber of Commerce, the International Chamber of Commerce in Paris, and the United Nations Commission on International Trade Law. Most cases are heard by the World Bank and the UN. A study done by Aceris Law LLC, an international arbitration firm, found that international arbitration in relation to unfair and inequitable treatment, where the investor is the petitioner, has about a 25% success rate; however, claims of accusing the state of expropriation have only around a 15% success rate.

 

Even if a case is won by the investor, it may difficult to enforce the outcome. For example, if a foreign government refuses to pay a fee for a breach in contract as mandated by the courts, then the investment company could seize international assets the state owns, though some immunity laws protect against this. International arbitration is not particularly promising for states either. Additionally, the richer the state is the more likely it is to win its case. On average, developed countries win 20% more investment arbitration than under-developed countries.

 

Need for Reforms

There is a lack of uniformity across international law because national law tends to take precedent, and those laws vary by country. Therefore, to protect against possible gaps between national and international law, there must be more substantive rights protections. These protections are necessary since the negative consequences of a bad investment are often felt more by local communities than the investors themselves. This is due to the vulnerable position local people in the recipient state are in: if they lose a single plot of land, for example, it could lead to economic destitution.

 

Increased protections for these local people include giving these people stronger voices in the decision making process, more transparent contracts that have explicitly accountability, and safeguards for local rights. Equal substantive and procedural rights bolster local ability to protect private property and challenge regulatory measures that only benefit economic operations and disregard local public interest. Another remedy is providing greater compensation avenues for the infringement of non-economic rights. Violations of economic rights are often compensated by the local government since they are attached to a concrete monetary cost, whereas non-economic rights are not. Finally, allowing for more opportunity for local capacity to interpret and shape laws regulating these investments can lead to greater cooperation between local communities, national governments, and investors.


 

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center for industrial development