Foreign Direct Investment Governance Research Articles

T Kondo (Ed) Law and Investment in Africa: The Governance of Foreign Direct Investment In Zimbabwe

Tinashe Kondo's book, Law and investment in Africa, narrates the efforts of a country to regain the trust [and the love] of foreign investors after several decades of argument and hostility. Encapsulated in the "Zimbabwe is open for business" slogan, these efforts show "how a country can move to regain credibility and commit to global rules despite its recent history".2 This review of Kondo's book concerns the manner in which readers can take advantage of this immensely useful publication. Particularly, this review looks into the book in order to advise law academics on possible strategies to integrate the book into their curricula in Zimbabwe and elsewhere on the continent.

The global governance of FDI and the non-market strategies of TNCs: explaining the “backlash” against bilateral investment treaties

This article seeks to explain recent decisions by countries to terminate their existing bilateral investment treaties (BITs) and revisit their commitment to future international investment agreements (IIAs). It argues that BITs, transnational corporations (TNCs), host States and international arbitration institutions form a decentralized system of global governance of foreign direct investment (FDI), based on insights from the fields of international political economy and international law, and that the nonmarket strategies of these TNCs have not only shaped the contours of this system but have also prompted host States to reform this system, from the perspective of a “political bargaining model”. The article illustrates this argument through the case of South Africa, which terminated its BITs with several European countries as a response to cases of investor–State dispute settlement (ISDS) and has sought to redefine its engagement with this system of global governance as a result.

IN THIS ISSUE

In presenting the results of the 'Brand South Africa' project as a special focus, this issue of the Strategic Review for Southern Africa has even more to offer than normal. The work of the guest editors is gratefully acknowledged and they will introduce the contributions to the project in more detail in the pages that follow. The journal is proud to have such a wealth of insights to share.The other articles in this volume provide additional perspectives to this special thematic focus: Albert Edgar Manyuchi looks at selected countries on the continent and critically assesses their governance of foreign direct investment. This stocktake highlights the need for careful assessments, if and when governance matters when attracting external economic interests to establish businesses and generate profit, and how best to reconcile potentially adverse interests.

AFRICAN STRUCTURES FOR GOVERNING FOREIGN DIRECT INVESTMENT: A CRITIQUE

African countries have warmed up to foreign direct investment (FDI) in the past two decades. In an attempt to attract more FDI, most countries have reformed their FDI policies and institutions. However, the national structures governing FDI have not been studied in-depth. This policyscience research uses a unique conceptual framework and an institutionalist approach to expose and critique national policies and institutions for FDI in Africa. The current African structures governing FDI reflect a messy web, difficult to decipher and inadequate to form a foundation for a continental regime. Policy learning and structural convergence may be essential for better FDI governance.

Gobernanza regional de la inversión extranjera directa en Canadá, España y Reino Unido

El artículo examina cómo los actores de gobernanza de sistemas regionales de negocio interactúan con las corporaciones multinacionales extranjeras presentes en su territorio para intentar retener inversiones y conectar dichos territorios a redes de producción globales, mediante un análisis cualitativo de políticas y prácticas relacionadas en seis regiones de tres economías industriales avanzadas (Canadá, España y Reino Unido). El estudio revela que, aun existiendo amplias similitudes en los tipos de gobernanza (de mercado, de Estado y asociativa) de la inversión extranjera directa, la extensión e intensidad de uso de cada uno varía notablemente entre regiones y Estados, lo que se explica con referencia a las más amplias diferencias institucionales entre los sistemas empresariales y en la construcción sociopolítica del espacio para la gobernanza subnacional.

Spanning the Institutional Abyss: The Intergovernmental Network and the Governance of Foreign Direct Investment

Global economic transactions such as foreign direct investment (FDI) must extend over an institutional abyss between the jurisdiction, and therefore protection, of the states involved. Intergovernmental organizations (IGOs) represent an important attempt to span this abyss. The authors use a network approach to demonstrate that the connections between two countries, through joint membership in the same IGOs, are associated with a large positive influence on the FDI that flows between them. Moreover, they show that this effect occurs not only in the case of connections through economic IGOs but also through those with social and cultural mandates. This demonstrates that relational governance is important and feasible in the global context, even for the most risky transactions. The authors also examine the interdependence between the IGO network and the domestic institutions of states. Social and cultural IGO connections do more and economic IGO connections less to increase FDI when the target country is more democratic.

Global Adversarial Legalism: Global Private Governance of FDI as a Species of Global Administrative Law

This paper argues that the fractured nature of the governance of foreign direct investment ('FDI') has given rise to a two-faceted 'global adversarial legalism.' One facet of this global adversarial legalism, already much debated, is the concern that investment arbitration tribunals exercise an overly broad and perhaps illegitimate form of 'global administrative review' of State measures. This paper focuses on the other side of this global adversarial legalism that has not received sufficient scholarly attention: the advent of FDI-impacted individuals and communities alleging violations of voluntary transnational norms espoused by corporate actors involved in regimes of global private regulation. The primary example of this more recent phenomenon is the emergence of the Equator Principles, a regime of private global governance created by investment banks. The EPs standardize the banks’ environmental and social risk management of their investments in large infrastructure projects developed in host states whose weak regulatory capacities fail to prevent or mitigate project impacts.Just as arbitral clauses in public contracts can internationalize a dispute for resolution by a transnational arbitral tribunal, the EPs’ application to a project loan expands the substantive criteria applicable to project review and creates additional layers of review of corporate compliance with national and international norms. This interaction also creates a complicated dynamic with regard to State sovereignty and decision making related to national development agendas. By creating a global standard, the private regime empowers civil society actors and others not party to the underlying contracts to intervene in national debates and inter-governmental branch dialogue concerning project review and approval, thereby instantiating a quasi-administrative review that has powerful effects in the court of public opinion, even though - unlike traditional treaty-based transnational legal processes - the States have not themselves consented either to the substantive norms nor to the ‘jurisdiction’ of these processes. The paper also addresses the challenging normative implications of such adversarial legalism: how the protection of marginalized communities and ecosystems can impose broader societal transaction costs on national economic development.

China and the Global Governance of Foreign Direct Investment – The Emerging Liberal Bilateral Investment Treaty Approach

The economic and political rise of China has led to considerable controversy regarding potential repercussions for the current global governance architecture. At least two opposing scenarios are conceivable: China’s adaptation to the rules and norms system shaped by developed countries or the pursuit of a distinctive policy approach, a possibility that involves the danger of clashing regulatory policies. A recent and increasingly dynamic trend giving substance to the phenomenon of China’s rising importance is the growth of outward foreign direct investments (OFDI) by Chinese enterprises. Against this background, the present paper investigates the evolution and change of Chinese international investment policy-making, with a particular focus on bilateral investment treaties (BITs) as the most important legal instrument for the governance of global foreign direct investment (FDI) flows. China has been a committed signatory of BITs since the early 1980s (120 treaties up to 2007). It is thus the second most active contracting party to BITs worldwide, surpassed only by Germany. The traditional Chinese BIT approach, however, has only cautiously supported the legal protection of FDI. As a mere capital-importer, China concluded BITs that contained serious reservations and safeguards intended to preserve policy spaces for the regulation of incoming investments. Starting at the end of the 1990s the Chinese government initiated a decisive policy shift towards a liberal BIT approach characterized by high levels of substantive and procedural investment protection. Upon examining a representative sample of Sino-foreign BITs, this study concludes that the policy shift was a pro-active decision of the Chinese government intended to introduce liberal treaty provisions first and foremost with developing countries which are the main destination of Chinese OFDI. A further explanation for this development may be found in the great importance attached to the promotion of OFDI through the “Going Global” strategy announced by the Chinese government at the end of the 1990s. In sum, this paper concludes that China has adopted a complementary rather than a competitive approach in the field of global FDI governance. China has fully agreed to standards of the current international liberal regime for FDI protection and has become an important global player in this context. This policy shift will yield consequences for China itself by levelling the playing field for international investors. Furthermore, developing countries that have concluded BITs with China will face a further reduction of their legal and regulatory autonomy, which is already limited by treaties with developed countries. China’s BIT policy, therefore, contradicts the widespread rhetoric of a mutual beneficial South-South cooperation. Lastly, the emerging complementarity of investment policies between China and developed countries at the bilateral level gives rise to the possibility of enhanced cooperation between both at higher levels, for instance as part of the Heiligendamm Process between G8 countries and emerging countries.

Spanning the Institutional Abyss: The Intergovernmental Network and the Governance of Foreign Direct Investment

Global economic transactions such as foreign direct investment must extend over an institutional abyss between the jurisdiction, and therefore protection, of the states involved. Intergovernmental organizations (IGOs), whose members are states, represent an important attempt to span this abyss. IGOs are mandated variously to smooth economic transactions, facilitate global cooperation, and promote cultural contact and awareness. We use a network approach to demonstrate that the connections between two countries through joint-membership in the same IGOs are associated with a large positive influence on the foreign direct investment that flows between them. Moreover, we show that this effect occurs not only in the case of IGOs that focus on economic issues, but also on those with social and cultural mandates. This demonstrates that relational governance is important and feasible in the global context, and for the most risky transactions. Finally we examine the interdependence between the IGO network and the domestic institutions of states. The interdependence between these global and domestic institutional forms is complex, with target-country democracy being a substitute for economic IGOs, but a complement for social and cultural IGOs.

Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960–2000

Over the past forty-five years, bilateral investment treaties (BITs) have become the most important international legal mechanism for the encouragement and governance of foreign direct investment. The proliferation of BITs during the past two decades in particular has been phenomenal. These intergovernmental treaties typically grant extensive rights to foreign investors, including protection of contractual rights and the right to international arbitration in the event of an investment dispute. How can we explain the widespread adoption of BITs? We argue that the spread of BITs is driven by international competition among potential host countries—typically developing countries—for foreign direct investment. We propose a set of hypotheses that derive from such an explanation and develop a set of empirical tests that rely on network measures of economic competition as well as more indirect evidence of competitive pressures on the host to sign BITs. The evidence suggests that potential hosts are more likely to sign BITs when their competitors have done so. We find some evidence that coercion and learning play a role, but less support for cultural explanations based on emulation. Our main finding is that the diffusion of BITs is associated with competitive economic pressures among developing countries to capture a share of foreign investment. We are agnostic at this point about the benefits of this competition for development.For useful comments on earlier drafts of this article, we thank Bill Bernhard, Bear Braumoeller, Frank Dobbin, Robert Franzese, Jeffry Frieden, Geoffrey Garrett, Tom Ginsburg, Jude Hays, Lisa Martin, Bob Pahre, Mark Ramsayer, Steven Ratner, Susan Rose-Ackerman, and John Sides. For research assistance, we thank Elizabeth Burden, Raechel Groom, and Alexander Noonan.

Comparing the Legal Foundations of Foreign Direct Investment in India and China: Law and the Rule of Law in the Indian Foreign Direct Investment Context

Although China and India share similar economic and demographic characteristics, China has outstripped its neighbor in attracting foreign direct investment (FDI) since their respective “liberalizations” in 1979 and 1991. Scholars have offered a number of superficially convincing explanations for the persistent divide, which tend to focus on China’s excessive use of “round-tripping,” the prevalence of bureaucracy and corruption in India, and China’s decade-long “head start” in reforming. A closer evaluation of these justifications, however, suggests that they are only partial explanations at best. The purpose of this Note is twofold. First, it raises and explores a fundamental issue that has not received adequate attention: whether China’s legal regime is more conducive to attracting, maintaining, and increasing FDI inflows than India’s. This Note compares the legal foundations that support the inward FDI frameworks in these countries to determine whether the differences in their governing laws and procedural mechanisms contribute to the statistical discrepancies in FDI inflows. Second, this Note attempts to identify those elements of the rule of law that are present (and absent) in each country’s FDI regime and how those elements encourage or deter FDI. This Note’s conclusions are revealing but not unexpected. India’s statutory governance of FDI is comparatively more convoluted and more antiquated than China’s, and therefore, it is less conducive to attracting, processing, and retaining FDI inflows. In addition, China uses distinct legal vehicles that prove more transparent and more comprehensible for foreign investors than India’s outdated legislation. Furthermore, India excludes local and state authorities from the federal approval process, ultimately lengthening the FDI implementation process and deterring investment. China, on the other hand, has a vertically integrated FDI approval process, which generates significant tension between state and national authorities but is nevertheless comparatively more facilitative of FDI inflows. This analysis reveals that a country’s (in this case, China’s) disregard of the “rule of law” in political governance may, ironically, allow it more effectively (1) to grant rule of law protections to investors and (2) to implement more efficient approval processes than a country such as India, which preserves rule of law at the highest levels of governance, yet at the expense of streamlined FDI statutory governance and approval procedures. As a result, China can tailor more effectively its FDI governance to foreign direct investors’ interests and assist them in circumventing red tape and procedural delay.

Self-Interest, Foreign Need, and Good Governance: Are Bilateral Investment Treaty Programs Similar to Aid Allocation?

Bilateral investment treaties (BITs) have become the most important legal mechanism for the encouragement and governance of foreign direct investment (FDI) in developing countries. Yet practically no systematic evidence exists on what motivates capital-exporting developed countries to sign BITs earlier with some developing countries than with others, if at all. The theoretical framework from the aid allocation literature suggests that developed countries pursue a mixture of self-interest, foreign need and, possibly, good governance. We find evidence that both economic interests of developed countries' foreign investors and political interests of developed countries determine their scheduling of BITs. However, foreign need as measured by per capita income is also a factor, whereas good governance by and large does not matter. These results suggest that BIT programs can be explained using the same framework successfully applied to the allocation of aid. At the same time, self-interest seems to be substantively more important than developing country need when it comes to BITs.

Self-interest, foreign need and good governance: Are bilateral investment treaty programs similar to aid allocation?

Bilateral investment treaties (BITs) have become the most important legal mechanism for the encouragement and governance of foreign direct investment (FDI) in developing countries. Yet practically no systematic evidence exists on what motivates capital-exporting developed countries to sign BITs earlier with some developing countries than with others, if at all. The theoretical framework from the aid allocation literature suggests that developed countries pursue a mixture of self-interest, foreign need and, possibly, good governance. We find evidence that both economic interests of developed countries' foreign investors and political interests of developed countries determine their scheduling of BITs. However, foreign need as measured by per capita income is also a factor, whereas good governance by and large does not matter. These results suggest that BIT programs can be explained employing the same framework successfully applied to the allocation of aid. At the same time, self-interest seems to be substantively more important than developing country need when it comes to BITs.

Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000

Over the past forty-five years, bilateral investment treaties (BITs) have become the most important international legal mechanism for the encouragement and governance of foreign direct investment. Their proliferation over the past two decades in particular has been phenomenal. These intergovernmental treaties typically grant extensive rights to foreign investors, including protection of contractual rights and the right to international arbitration in the event of an investment dispute. We argue that the spread of BITs is driven by international competition among potential host countries - typically developing countries - for foreign direct investment. We design and test three different measures of competition. The evidence suggests that potential hosts are more likely to sign BITs when their competitors have done so. We also control for diffusion via coercion, social learning, and cultural networks. We find some evidence that coercion plays a role, but less support for learning or cultural explanations. Our main finding is that diffusion in this case is associated with competitive economic pressures among developing countries to capture a share of foreign investment. We are agnostic at this point about the benefits of this competition for development.