Investor-State Arbitration Distorted

Abstract

Investments from emerging economies have increased since the beginning of the century and notably a large proportion of the flows of foreign direct investment (FDI) coming from emerging economies is executed by State-Owned Enterprises (SOEs) and Sovereign Wealth Funds (SWFs) both typical contemporary forms of State Controlled Entities (SCEs). Such trend that has been further reinforced since 2008/2009 and SCE’s investment activism has reflected into a systemic shift that has transformed State capitalism into a key feature of contemporary global economy. At the time, investment arbitration, which was designed to allow foreign private investors to sue sovereign States, has transformed since host States can now be judged at the initiative of another State owning enterprises making investments. The thesis of this chapter is that the international regime for foreign investment, which includes both substantive rules and arbitration principles, is gradually adjusting to the emergence of SCEs in the investment sphere. This adjustment implicitly means that the rules and practice of international investment are reshaped by actors, which were not initially at the center of the regime. Actually, and it is a great paradox, the regime for foreign investment, as designed in the last three decades, was intended to serve the interest of private investors, seen as the main driver of the global economy. Instead of excluding SCEs from its realm and favoring the emergence of different rules, the international investment regime is gradually absorbing State capitalism and allows foreign SCEs to sue host States before arbitration. This chapter provides a detailed analysis of the forces driving this transformation, of the flexibility of the international norms that apply to SCEs, of the rights that SCEs are acquiring, and, finally of the increased exposure of sovereign States to be judged by international tribunals at the initiative of other States. The chapter initially deals with the relevant norms of international economic law to understand which would best fit the need of SCEs in their transnational activities. Then the following section addresses the critical issue of the legal standing of SCEs under investment treaties since it determines the ability of SCEs to effectively benefit from the investment treaties protections through investor-State arbitration. In addition the chapter reviews a number of cases in which the legal standing of SCEs has been discussed. Finally, the chapter analyses the substantive rights which can benefit SCEs and which will drive the investment strategies of many SCEs in the coming years.