UNCTAD COURSE FOR GENEVA UNCTAD COURSE FOR GENEVA DELEGATESDELEGATES

ATTRACTING FDI THROUGH INTERNATIONAL ATTRACTING FDI THROUGH INTERNATIONAL INVESTMENT AGREEMENTSINVESTMENT AGREEMENTS

25 June 200725 June 2007

Mr. Joachim Karl and Mr. Hamed El-KadyMr. Joachim Karl and Mr. Hamed El-Kady

International Arrangements, DITEInternational Arrangements, DITE

United Nations Conference on Trade and Development

22

I. Recent FDI trends I. Recent FDI trends

33

FDI Flows 1980 - 2006FDI Flows 1980 - 2006

(Billions of dollars)

0

200

400

600

800

1 000

1 200

1 400

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2005

World total

Developing economies

Developed economies

South-East Europe and CIS

WORLD INVESTMENT REPORT 2006WORLD INVESTMENT REPORT 2006 44

Top 10 recipients of FDI inflowsTop 10 recipients of FDI inflows

-20 0 20 40 60 80 100

Spain

Belgium

Germany

Canada

Hong Kong, China

Netherlands

France

China

United States

United Kingdom

2005

2004

165

WORLD INVESTMENT REPORT 2006WORLD INVESTMENT REPORT 2006 55

Largest 10 sources of FDI outflowsLargest 10 sources of FDI outflows

… but developing economies are becoming emerging sources … Hong Kong (China) 10th and China 17th

-20 0 20 40 60 80 100

Hong Kong, China

Canada

Spain

Italy

Switzerland

Germany

Japan

United Kingdom

France

Netherlands

2005

2004

119

116

101

66

FDI constitutes the largest component of FDI constitutes the largest component of

resource flows to developing countriesresource flows to developing countries

Billions of dollars

Total Resource f low s

FDI inf low s

Portfolio f low sCommercial banks loans

Official f low s

-50

0

50

100

150

200

250

300

350

400

450

500

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

77

National policy changesNational policy changes

Countries continue to adopt liberalization measures.

Item 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

Number of countries that introduced changes in their investment regimes 43 57 49 64 65 76 60 63 69 71 70 82 102 93

Number of regulatory changes 77 100 110 112 114 150 145 139 150 207 246 242 270 205

More favourable to FDI 77 99 108 106 98 134 136 130 147 193 234 218 234 164

Less favourable to FDI - 1 2 6 16 16 9 9 3 14 12 24 36 41

WORLD INVESTMENT REPORT 2006WORLD INVESTMENT REPORT 2006 88

New regional and global TNCs are New regional and global TNCs are emergingemerging

Emerging economies account for about 25% of all TNCsEmerging economies account for about 25% of all TNCs In 1990, there were 19 such companies among the In 1990, there were 19 such companies among the Fortune 500Fortune 500; by ; by

2005, the number had risen to 47.2005, the number had risen to 47. Most global players based in AsiaMost global players based in Asia State ownership relatively common compared with developed-country State ownership relatively common compared with developed-country

counterpartscounterparts

99

II. Recent trends in II. Recent trends in international international

investment rulemakinginvestment rulemaking

1010

Changes in policy environmentChanges in policy environment

The IIA network evolves within a changing The IIA network evolves within a changing policy environment. Examples are:policy environment. Examples are:

Signs of a possible FDI backlash in some Signs of a possible FDI backlash in some countries;countries;

More developing countries are becoming More developing countries are becoming capital exporters. capital exporters.

1111

Bilateral investment treaties (BITs)Bilateral investment treaties (BITs)

Free trade agreements with investment Free trade agreements with investment provisions (FTAs)provisions (FTAs)

Multilateral agreements dealing with Multilateral agreements dealing with investment (GATS, TRIMs, TRIPs, MIGA) investment (GATS, TRIMs, TRIPs, MIGA)

Regional integration agreements Regional integration agreements (EU, CARICOM, MERCOSUR, ASEAN) (EU, CARICOM, MERCOSUR, ASEAN)

The network of international The network of international investment agreements investment agreements

1212

Bilateral investment treaties Bilateral investment treaties (BITs)(BITs)

What are BITs?What are BITs?

Bilateral reciprocal agreements Bilateral reciprocal agreements aimed at protecting and promoting aimed at protecting and promoting foreign investment through legally-foreign investment through legally-binding rights and obligations.binding rights and obligations.

1313

Universe of BITs continues to grow Universe of BITs continues to grow rapidlyrapidly

Number of BITs concluded, cumulative, 1995-2006Number of BITs concluded, cumulative, 1995-2006Over 2500 BITsOver 2500 BITs

0

50

100

150

200

Years

An

nu

al B

ITs

0

500

1000

1500

2000

2500

3000

Cu

mm

ula

tive

BIT

s

BITs Annual BITs cumulative

1414

Proliferation of FTAs with investment provisionsProliferation of FTAs with investment provisions

International investment rules are increasingly being formulated as part of agreements that encompass a broader range of issues (including trade, services, competition, intellectual property);

Such as free trade agreements, regional integration agreements, partnership agreements, or economic cooperation agreements;

The total number of such economic agreements with investment provisions exceeded 240, as of end 2006.

0

5

10

15

20

25

30

35

Years

Ann

ual

0

50

100

150

200

250

Cum

ulat

ive

PTI

As

Annual PTIAs Cumulative PTIAs

1515

Active participation of developing Active participation of developing countries in IIAscountries in IIAs

Many developing countries are Many developing countries are active participantsactive participants in in the process of concluding IIAs. E.g. DCs involved in the process of concluding IIAs. E.g. DCs involved in 75% of all BITs.75% of all BITs.

The total number of BITs The total number of BITs between developing between developing countriescountries leaped from leaped from 4747 in 1990 to over in 1990 to over 650650 by the by the end of 2006.end of 2006.

By end 2006, over By end 2006, over 90 other 90 other IIAsIIAs among developing among developing countries had been signed.countries had been signed.

1616

South-South cooperation is intensifyingSouth-South cooperation is intensifying in the context of IIAs in the context of IIAs

0

100

200

300

400

500

600

700

Nu

mb

er

of

ag

reem

en

ts

0

100

200

300

400

500

600

700

800

900

1'000

FD

I o

utw

ard

sto

ck

Total BITs Total DTTs FDI outward stock

1717

Total BITs concluded as of end 2006, by Total BITs concluded as of end 2006, by country group country group

27%

40%

10%

7%

13% 3%

Between developing countries Between developed and developing countries

Between developing countries and SEE & CIS Between developed countries

Between developed countries and SEE & CIS Between countries of SEE & CIS

1818

"Top ten" economies signatories of BITs, end "Top ten" economies signatories of BITs, end 2006 2006

0 20 40 60 80 100 120 140 160

Korea, Republic of

Belgium and Luxembourg

Netherlands

France

Italy

Egypt

United Kingdom

Switzerland

China

Germany

1919

Increasingly sophisticated and complexIncreasingly sophisticated and complex

More recent BITs tend to be increasingly More recent BITs tend to be increasingly sophisticated in content, clarifying in greater detail sophisticated in content, clarifying in greater detail the meaning of a number of standard clauses and the meaning of a number of standard clauses and putting more emphasis on putting more emphasis on the protection of national the protection of national security, health, safety, the environment, and labour security, health, safety, the environment, and labour rights.rights.

A growing number of BITs are A growing number of BITs are expanding their scope expanding their scope with a with a broader set of issuesbroader set of issues, including investment in , including investment in financial services. financial services.

2020

Number of investor-State dispute cases Number of investor-State dispute cases (end 2006)(end 2006)

0

10

20

30

40

50

60

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

An

nu

al n

um

ber

of

case

s

0

50

100

150

200

250

300

Cu

mu

lati

ve n

um

ber

of

case

s

ICSID Non-ICSID All cases cumulative

2121

ConclusionsConclusions

• Proliferation of IIAs at all levels; Proliferation of IIAs at all levels; • A system of multi-layered and multi-faceted A system of multi-layered and multi-faceted

investment rules has been emerging;investment rules has been emerging;• Content of IIAs is becoming increasingly Content of IIAs is becoming increasingly

complex;complex;• Increasing participation of developing Increasing participation of developing

countries (including their new role as capital countries (including their new role as capital exporters);exporters);

• More investment disputes. More investment disputes.

2222

TheThe spaghetti bowl of IIAs spaghetti bowl of IIAs

2323

III.III. Main Features of IIAsMain Features of IIAs

2424

Core Provisions in IIAsCore Provisions in IIAs

Preamble;Preamble; Definitions;Definitions; Admission and establishment;Admission and establishment; Core standards of protection:Core standards of protection:

• Principle of fair and equitable treatment;Principle of fair and equitable treatment;• Principle of non-discrimination (NT/MFN);Principle of non-discrimination (NT/MFN);• Expropriation;Expropriation;• Transfer of funds;Transfer of funds;• Protection from strife;Protection from strife;

Additional protection standards;Additional protection standards; Dispute settlement.Dispute settlement.

2525

DefinitionsDefinitions

Objective: Delimitation of scope of IIAObjective: Delimitation of scope of IIA ““Investment”: Investment”:

• Broad asset-based definition (“every kind of asset”);Broad asset-based definition (“every kind of asset”);• Enterprise-based definition;Enterprise-based definition;• Intermediary approaches (asset-based approach Intermediary approaches (asset-based approach

combine with negative list).combine with negative list). ““Investor”: Investor”:

• Natural persons;Natural persons;• Legal entities.Legal entities.

Investment “owned or controlled” by investor.Investment “owned or controlled” by investor.

2626

Admission and establishmentAdmission and establishment

Objectives: Promote entry of foreign Objectives: Promote entry of foreign investment/Confirm state sovereignty.investment/Confirm state sovereignty.

Three basic approaches:Three basic approaches:• « Investment-control » model;« Investment-control » model;• GATS – « positive list » approach;GATS – « positive list » approach;• NAFTA - « negative list » approach; NAFTA - « negative list » approach;

Additional disciplines on market Additional disciplines on market access (prohibition of quantitative access (prohibition of quantitative restrictions)?restrictions)?

2727

Principle of fair and equitable treatmentPrinciple of fair and equitable treatment

Objective: Provide basic standard of Objective: Provide basic standard of protection (« safety net »)protection (« safety net »)

• Two interpretations:Two interpretations:• International minimum standard;International minimum standard;• Plain meaning approach;Plain meaning approach;

• New tendency of clarifying content of New tendency of clarifying content of provision in the IIA.provision in the IIA.

2828

Principle of Non-discrimination Principle of Non-discrimination

Objective: Establish a level playing field Objective: Establish a level playing field independent of nationalityindependent of nationality

• Two components:Two components:• National treatment: reference point is treatment of National treatment: reference point is treatment of

domestic investors;domestic investors;• MFN treatment: reference point is treatment of MFN treatment: reference point is treatment of

other foreign investors;other foreign investors;• Main issues involved:Main issues involved:

• Application to admission of investment;Application to admission of investment;• Identification of “most-favourable” treatment;Identification of “most-favourable” treatment;• Reservations and exceptions;Reservations and exceptions;

2929

ExpropriationExpropriation

Objective: Protect foreign investors in case of Objective: Protect foreign investors in case of a taking of propertya taking of property

Categories of takings (direct/indirect);Categories of takings (direct/indirect); Requirements for a lawful taking:Requirements for a lawful taking:

• Public purpose;Public purpose;• Non-discrimination;Non-discrimination;• Compensation (« prompt, adequate and Compensation (« prompt, adequate and

effective »);effective »);• Due process.Due process.

The issue of « regulatory takings ».The issue of « regulatory takings ».

3030

Transfer of fundsTransfer of funds

Objective: Allow foreign investors the Objective: Allow foreign investors the transfer of funds related to an transfer of funds related to an investment investment

Types of transfers coveredTypes of transfers covered• Inward transfers;Inward transfers;• Outward transfers;Outward transfers;

Nature of obligations is absolute;Nature of obligations is absolute; Temporary derogations in case of a Temporary derogations in case of a

balance-of-payments crisisbalance-of-payments crisis

3131

Protection from strifeProtection from strife

Objective: Ensure non-discriminatory Objective: Ensure non-discriminatory treatment of foreign investors in war treatment of foreign investors in war and war-like situationsand war-like situations

Content: Application of the principle of Content: Application of the principle of non-discrimination in case that the host non-discrimination in case that the host country decides to compensate its own country decides to compensate its own investors for damage caused by war, investors for damage caused by war, civil unrest and similar events. civil unrest and similar events.

3232

Additional protection standards Additional protection standards

Prohibition of certain performance Prohibition of certain performance requirements;requirements;

Admission and employment of key Admission and employment of key personnel;personnel;

Transparency;Transparency;

BUT ALSO: BUT ALSO: More emphasis on public concerns related to More emphasis on public concerns related to

FDI (e.g. respect for health, safety, national FDI (e.g. respect for health, safety, national security, environment, core labour rights). security, environment, core labour rights).

3333

Dispute settlement (DS)Dispute settlement (DS)

State-state DSState-state DS• Consultations;Consultations;• Ad-hoc Ad-hoc

arbitration;arbitration;• Award is final and Award is final and

binding. binding.

Investor-state DSInvestor-state DS• Consultations;Consultations;• International International

arbitration (ICSID, arbitration (ICSID, UNCITRAL, ad-UNCITRAL, ad-hoc);hoc);

• Award is final, Award is final, binding and binding and enforceable.enforceable.

3434

IV.IV. Main characteristics of Main characteristics of the existing IIA universethe existing IIA universe

3535

Key characteristics of the existing IIA universe

Universality; Atomisation; Multilayered; Multifaceted; Uniformity at the core, and diversity at the

periphery; Innovative; Other characteristics;

RESULT: An increasingly complex system.

3636

Key characteristics (2) Universality

Nearly every country has signed at least one BIT;

The great majority of countries are party to regional, plurilateral or multilateral agreements relating to investment.

3737

Key characteristics (3) Atomisation

Investment rulemaking consists of more than 5,500 IIAs;

Contrary to trade there is no universally applicable investment treaty;

Likewise, there is no central authority that supervises investment rulemaking.

3838

Key characteristics (4)Multilayered structure

IIAs are concluded at the bilateral, regional, inter-regional and plurilateral level.

Investment rules may be included in agreements on investment, trade, or other kinds of economic cooperation.

3939

Key characteristics (5)Multifaceted content

Besides the traditional focus on investment protection, IIAs may include rules on a variety of issues, such as, e.g.,

Investment liberalisation; Trade; Services, Industrial policies; Intellectual property rights; Movement of personnel.

4040

Key characteristics (6)Uniformity vs. diversity

IIAs reflect considerable consensus on the core issues of investment protection;

By contrast, there is significant diversity on other issues, such as• Investment liberalisation;• Inclusion of additional issues (e.g. PR);

Degree of specificity of individual provisions;• Recourse to exception clauses.

4141

Key characteristics (7)Innovations

Some recent IIAs concluded by a limited number of countries include important innovations relating to

Clarification of individual IIA provisions; Public concerns in connection with FDI; Transparency; Investor-State dispute settlement.

4242

Other Key Characteristics (8)

IIA provisions are: Primarily protective; Negligibly regulatory; Only indirectly promotional; Only slightly transparenting.

4343

V.V. Development Implications Development Implications of international of international

investment rulemaking investment rulemaking and the role of UNCTADand the role of UNCTAD

4444

Implications for investment rulemaking

On the one hand: The consolidation of core investment

protection principles contributes to clarity and stability of the investment climate;

The greater variation of IIAS offers countries a broader range of options to conclude the « right » IIA in order to pursue their development objectives.

4545

Implications for investment rulemaking (2)

On the other hand: The growing number and diversity of IIAs result

in an ever more complex system, which is difficult to manage, in particular for developing countries.

This poses new challenges with regard to maintaining (1) policy coherence, (2) regulatory flexibility and (3) the development dimension of IIAs.

RESULT: More need for capacity building.

4646

The three pillars of UNCTAD’s IIA-The three pillars of UNCTAD’s IIA-related workrelated work

Information provision through IIA Information provision through IIA databases;databases;

Policy research and analysis;Policy research and analysis; Technical assistance.Technical assistance.

4747

Concluding remarksConcluding remarks

Coping with an increasingly complex IIA Coping with an increasingly complex IIA universe represents a major challenge universe represents a major challenge for all countries, in particular developing for all countries, in particular developing countries. countries.

This underlines the importance of This underlines the importance of capacity-building and technical capacity-building and technical assistance as a means to enhance the assistance as a means to enhance the development dimension of IIAs. development dimension of IIAs.

International organization can lend a International organization can lend a helpful hand. helpful hand.

4848

Thank you. Thank you.