FOREIGN DIRECT INVESTMENT AND ITS LEGALITY
The United States of America has done a wonderful job in expanding free trade and capitalism. The dispute between communism and capitalism came to an end as capitalism was clearly the winner in terms of productivity, technology, growth and development backed by the USA. The concept of the ‘Invisible Hand‘ was fundamental to the rise of capitalism along with technological boom in the 1920s and the introduction of the Assembly Line by Henry Ford. As trade flourished, there came the concept of Foreign Direct Investment (FDI) which was rudimentary in the development of the third-world countries and essential to the concept of globalisation.
This article concentrates on the concept of Foreign Direct Investment, treaties enforcing FDI, and the international institutions, focusing on the International Centre for Settlement of Investment Disputes, that move to protect foreign investors across countries. The article will later take a glance at a dispute between the HOCHTIEF construction company and The Kingdom Of Saudi Arabia that will serve as an example of an investment dispute.
DEFINITION
“Foreign Direct Investment is a category of investment that reflects the objective of establishing a lasting interest by a resident in one economy in an enterprise that is resident in an economy other than that of the direct investor.“
Foreign Direct Investment is usually made in underdeveloped or developing countries. FDI is the investment made by an individual investor in an enterprise which resides in any country other than his own. The definition of country excludes special administrative regions such as Hong Kong and Taiwan which are considered a part a People’s Republic of China. An investor, to qualify his investment as FDI, has to own 10 at least percent of the voting rights of the entire enterprise.
Developing countries allow foreign investment so as to attain long term capital investment benefits to increase production capacity and strengthen ties with more developed nations. These are done through International Investment Agreements(IIA) such as Bilateral Investment Treaties, Preferential Trade Agreements, Regional Trade Agreements, Free Trade Agreements. IIA ensure favorable environment for business. They assure safeguard to the investor from the state and proffer arbitration at a neutral arbitration court whenever there is infringement committed by either the investor or the contracting state.
In 1955, a resolution was adopted on International Investment for Economic Development in which the GATT contracting nations wanted countries to take up bilateral agreements to provide protection to foreign investment.
Bilateral Investment Treaties(BIT) is material in order to achieve successful investments between states. It is a treaty between two states promoting foreign investment by protecting investors in foreign states apart from the International Human Rights Law and the Public International Law which offer protection to aliens. [2].BIT offers special protection to the investors of the country that is a part of the treaty. The basic protection offered by a BIT are-
- Protection from Expropriation
- Free transfer of means
- Allows for an alternative dispute resolution[3]
The countries part of the treaty have to provide the MOST Favored Nation(MFN) protection under the WTO principles which means that a country cannot discriminate between 2 WTO trading partners. If the country grants a cut in the import duties for a product of one WTO member, it is compulsory for the country to either remove the subsidy or provide the subsidy to all the WTO members supplying that commodity.
When there are 2 parties involved in business, there is always a chance of conflict, specially in the international arena. Now, there can be little suspicion when the case is taken up at the court of the host country. Therefore, an international organisation was required to settle the arising investment disputes. Under the on the Settlement on Investment Disputes between States and Nationals in Other States, the International Centre for Settlement of Investment Disputes(ICSID), a World Bank group, was established. The ICSID office sits in the International Bank for Research and Development in Washington DC.
The ICSID provides facilities for conciliation and arbitration of investment disputes. This means that the ICSID itself does not conduct proceedings itself but offers assistance to different tribunals and commissions that preside over these matters such as The Permanent Court of Arbitration, The London Court of International Arbitration, International Chamber of Commerce. India, Brazil and South Africa are some of the nations that are not members of the ICSID. The non-members can still settle their disputes under the ICSID Additional Facility Rules. In the end, it is up to the host state and the investor whether to take up the case in the domestic court or the ICSID.
The ICSID has a full global lawful identity which includes-
- a) The ability to contract
b)To acquire and dispose movable and immovable property
c)To organize legal procedures
The jurisdiction of the court extends to any disputation arising directly out of an investment between contracting state and foreign investors.[5]
A case registered by HOCHTIEF Infrastructure of Germany against the Kingdom of Saudi Arabia over the construction, development and expansion of an airport terminal in Riyadh, Saudi Arabia on May 3, 2018. The case was tried on the basis of the ICSID Convention-Arbitration Rules. The claimant HOCHTIEF Infrastructure invoked the BIT Saudi Arabia-Germany 1996. The Secretary-General registered a request for the institution of Arbitration proceedings as the investor(HOCHTIEF,German) and the host state(Kingdom of Saudi Arabia) are both contracting members of the ICSID. The latest development in this case was that HOCHTIEF won a contract worth 1.3 billion Euros to renovate the airport in Riyadh. This is the latest typical example of the jurisdiction of the ICSID.[6]
Foreign Direct Investment is a boon in this era to all. The WTO is giving importance to the interlinkages between Trade and Foreign Direct Investment. Irrespective of the priorities of the WTO, Foreign Direct Investment is more important for the developing countries so as to eliminate dependence on the developed countries whereas for the developed countries, the countries may or may not prefer trade over Foreign Direct Investment. I think the WTO and the ICSID should consider making separate laws for developing and developed countries given what suits them more. This issue between developing and developed countries has already been taken up on a global scale at the Kyoto Protocol regarding climate change.
References
1)Mamlyuk, Boris. “Bilateral Investment Treaty.” LII / Legal Information Institute. April 04, 2010. Accessed May 13, 2018. https://www.law.cornell.edu/wex/bilateral_investment_treaty.
2)”2017 Handbook of Statistics.” UNCTAD | Press Release. Accessed May 13, 2018. http://unctad.org/en/pages/PublicationWebflyer.aspx?publicationid=1931.
3)”Redirecting…” HeinOnline. Accessed May 13, 2018. http://heinonline.org/HOL/Page?collection=journals&handle=hein.journals/gwilr47&id=600.
4)LawTeacher. November 2013. Standard Of Protection Available To Foreign Investors. [online]. Available from: https://www.lawteacher.net/free-law-essays/commercial-law/standard-of-protection-available-to-foreign-investors-commercial-law-essay.php?vref=1 [Accessed 12 May 2018].
5)”WORLD TRADE ORGANIZATION.” WTO | What Is the WTO? – Who We Are. Accessed May 13, 2018. https://www.wto.org/english/tratop_e/invest_e/invest_info_e.htm.
6)”WORLD TRADE ORGANIZATION.” WTO | What Is the WTO? – Who We Are. Accessed May 13, 2018. https://www.wto.org/english/thewto_e/whatis_e/tif_e/fact2_e.htm.
7)Mamlyuk, Boris. “Bilateral Investment Treaty.” LII / Legal Information Institute. April 04, 2010. Accessed May 13, 2018. https://www.law.cornell.edu/wex/bilateral_investment_treaty.
8)”Case Details //.” Home. Accessed May 13, 2018. https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?caseno=ARB/18/14.