"Latest trends in FDI and international investment policies"
Allow me at the outset to emphasize UNCTAD´s great appreciation of the City University of Hong Kong in co-organizing and hosting this Conference.
Increasing and intensifying UNCTAD´s collaboration with academia has been one of the cornerstones of my second tenure, and our meeting today is witness to this effort. This holds particularly true for the area of international investment law. In 2010, we launched the G-15 of Law Schools at our World Investment Forum in Xiamen. The G-15, of which the City University of Hong Kong is a founding member, specifically deals with the issue at hand in today´s meeting, namely the question of investment arbitration. As you know, the current system of investor-State dispute settlement has encountered a number of systemic challenges, and many governments and investors are not happy with it in one way or the other. Indeed, the arbitration system needs reform in order to better serve its purpose of supporting investment relationships.
When mentioning collaboration with City University, I should also mention that the UNCTAD and the City University of Hong Kong concluded a Memorandum of Understanding on capacity building in international dispute settlement on 10 March 2008. Our shared aim was to enhance expertise on dispute settlement in international trade, investment and intellectual property, and on international commercial arbitration. The MOU has proved to be a good basis for collaboration. As foreseen, CityU and UNCTAD have undertaken joint activities. For example, in November 2009, UNCTAD and City University organized a Workshop On Arbitration and Mediation of Intellectual Property Disputes in Guangzhou, Guangdong, China. Last year, in December 2010, City University took a group of Judges from China to Geneva and to UNCTAD, as part of a special international training course. Over the next two days, the Dispute Settlement Programme and the Investment division will look at Investment Arbitration: Challenges and opportunities for Asia´s Growth and Development.
Before turning to investment and development, allow me to say a few words on the broader context in which this issue plays itself out. First and foremost, we need to look at the overall economic situation in the world today. We need to review the implications of the crisis and its aftermath and consider the impact on developing countries. Second, we need to examine the ways in which the crisis has affected investment flows to and from developing countries. This, in turn has consequences for the policies that countries apply in order to attract and benefit from foreign investment. Finally, at the international level, there is the question of investment treaties, and the system of investment arbitration that they give rise to.
Turning first to the global picture, the world economy continues to struggle to recover from the worst downturn since the Great Depression. While some developing countries, and particularly in the Asia region, have recovered rapidly from the downturn, many other countries, in particular the poorest among them, are still suffering. Low-income countries have been affected in many ways with declining remittances, shrinking export markets and reduced official development aid all constraining their growth recovery.
The rebound has proved to be short-lived in the advanced countries where high levels of indebtedness and weak labour markets are damaging business confidence and holding back demand. Much of the initial recovery of these countries was based on temporary factors, such as stimulus packages and financial rescue programmes. Since mid-2010, these packages and programmes have either expired or been replaced by a desire to get back to business-as-usual. Many have seen a return to economic policies that no longer aim at stimulating growth but, instead, focus on reducing fiscal deficits and controlling public debt. This reorientation has exposed the fragility of the recovery in these countries, is threatening a return to recession and poses a serious risk of renewed global economic slowdown. Indeed, Christine Lagarde, head of the IMF, is warning of the possibility of a "lost decade" for the advanced economies.
The slow and fragile recovery has, not surprisingly, had an impact on international investment. Whereas trade has by now regained its pre-crisis levels, foreign direct investment (FDI) is still to recover. Global FDI inflows dropped by around 50 per cent during the crisis in 2009, and only rose moderately in 2010 (by 5 per cent), and by 2 per cent in the first half of 2011. Moreover, amidst turmoil in financial markets, preliminary third quarter-data in 2011 on cross-border merger and acquisitions and green-field investment indicates a further FDI growth deceleration.
The global FDI figure does, however, mask mixed trends among regions and sectors. Against the backdrop of stagnant global flows, 2010 was notable in that FDI to developing economies actually rose to absorb more than half of all global FDI inflows for the first time. Transnational corporations (TNCs) are increasingly reorienting investment to developing and transition economies as these represent a growing share of international production and, recently, global demand. Companies are seeking access to these growing markets and to benefit from the cheaper costs of production. Looking at these flows more closely, however, it is of great concern that FDI to the poorest regions continues to fall. Least developed countries, landlocked developing countries and small island developing states all experienced a decline in 2010.
In South, East and South- East Asia, FDI inflows rose by 24 per cent, to $300 billion in 2010. However, the performance of major economies within the region varied significantly. FDI to ASEAN surged to $79 billion, surpassing 2007´s previous record of $76 billion. The increase was driven by sharp rises in inflows to Malaysia (537 per cent), Indonesia (173 per cent) and Singapore (153 per cent). In Singapore, which accounted for half of ASEAN´s FDI, inflows amounted to a historic level of $39 billion in 2010. As a global financial centre and a regional hub of TNC headquarters, the island State has benefited considerably from increasing investment in developing Asia as well as from the rising capital flows to the emerging economies in general in the post-crisis era.
Due to rising production costs in China, some ASEAN countries, such as Indonesia and Viet Nam, have increased in significance as low-cost production locations, especially for low-end manufacturing. ASEAN developing countries have also received increasing inflows, particularly from neighbouring countries like China and Thailand. For instance, the Lao People´s Democratic Republic has recently been successful in attracting foreign investment in infrastructure and FDI to the country is likely to boom in the coming years as a result of Chinese investment in an international high-speed rail network. FDI to East Asia rose to $188 billion in 2010, thanks to an increase in inflows to Hong Kong (China) (32 per cent) and China (11 per cent). Hong Kong (China) quickly recovered from the shock of the global financial crisis, and FDI inflows recorded a historic high of $69 billion in 2010 - due in large part to its close economic relationship with mainland China, Inflows to China have almost recovered their pre-crisis levels and its ongoing structural transformation is shifting FDI inflows towards high technology sectors and services. However, inflows to the other two newly industrialized economies, namely the Republic of Korea and Taiwan Province of China, declined by 8 per cent and 11 per cent, respectively in 2010.
Turning to FDI outflows, outward foreign investment flows from developing countries have increased due to their growing economic strength, the dynamism of their TNCs and their growing aspirations to compete in new markets.
In 2010, the share of developing economies in global outflows reached almost 30 per cent, up from 15 per cent in 2007. Moreover, the lion´s share - about 70 per cent - of FDI from the South is directed to the South. Many TNCs in developing and transition economies are investing in other emerging markets where recovery is strong and the economic outlook better than in advanced economies.
However, given the persistent imbalances and uncertainty in the global economy, TNCs all over the world are becoming cautious, and that at a time when the global economy urgently needs a boost from private investment to generate growth and jobs. Moreover, in this environment there is a danger that the attention of policymakers will be diverted away from the necessities of long-term productive investment by the urgencies of short-term crisis management.
The situation is not helped by the failure to establish a long-term reform agenda that could help bring about greater stability and balance to the global economy after the crisis. A more fundamental reorientation of policies and institutions particularly with regard to the financial system remains outstanding. For our preparations for UNCTAD XIII, I have chosen development-led globalization to describe the principles, priorities and policies that need to be pursued to turn tentative recovery into an inclusive and sustainable future.
One of the cornerstones of moving from a sustained recovery to a more inclusive growth model is regulation of the financial sector. However, even if the financial sector were to be better regulated, it would not automatically lead to an increase in growth and employment or make credit accessible to small and medium-sized firms. In addition to better regulation, the financial sector needs to be restructured in order to reduce the risk of systemic crises and to improve economic and social outcomes. Financial restructuring should aim to create more diverse national financial systems, with a bigger role for public and cooperative institutions, a downsizing of giant financial institutions, a clear separation between the activities of investment and commercial banking, and a re-orientation of lending towards investment in fixed capital.
In addition investment policies need to play a key role in attracting foreign investment to productive sectors. At the moment, many governments are sending mixed signals to investors. On the one hand, there are moves to liberalize investment regimes and promote foreign investment in response to intensified competition for FDI. On the other, governments are increasingly regulating and restricting FDI in the context of industrial policies or through less well-defined notions of national economic security. The two policy directions can even be witnessed simultaneously in the same country. UNCTAD´s data shows that the share of total annual investment policy measures that are unfavourable to FDI has increased from a mere 2 per cent in 2000 to 32 per cent in 2010; this underscores the importance of our monitoring efforts and hints that better coordination at the international level on investment issues is needed to avoid investment protectionism. These trends need not be opposed to each other. However, they must be grounded in a clear and consistent development strategy which seeks to strengthen productive capacities, increase employment and push towards economic diversification and upgrading in to higher productivity sectors.
Such a strategy will, necessarily, have a focus on the creation of local enterprises with a high propensity to invest as a necessary prelude to a closer integration with the global economy. The aim should be to encourage the development of a local business class that will be able to maintain the dynamic of industrial change and technological upgrading on its own. Attracting TNCs that can establish mutually beneficial partnerships with local firms is an essential part of that strategy. In the process, however, policy makers will face trade-offs over the use of resources they command, for example in the use of fiscal incentives, as well as potential conflicts of interest between TNCs and host countries, for example, over access to knowledge and technologies. Effective mechanisms for resolving disputes in a swift and transparent manner are therefore an essential part of the regulatory environment.
At the international level, international investment agreements (IIAs) can complement investment promotion and facilitation policies, by ensuring an open, transparent and predictable investment climate. Yet the international investment regime is confusing. There are more than 6,000 IIAs today at the bilateral, sub-regional, regional, inter-regional and sectoral levels. The international investment regime is multi-layered, multi-faceted and highly atomized. On average, three investment treaties were signed per week over the past few years. With thousands of treaties, numerous ongoing negotiations and multiple dispute-settlement mechanisms, the regime has become too large for States to handle, too complicated for firms to take advantage of, and too complex for stakeholders at large to monitor. At the same time, the regime is still too limited to cover the whole investment universe. In fact, according to UNCTAD estimates, some 80 per cent of bilateral investment relationships - accounting for 30 per cent of global FDI flows - are not covered by any form of post-establishment protection.
In addition, today´s IIA regime raises a number of systemic related concerns. For example, there are hardly any mechanisms for coordination between the IIA regime and other parts of the global economic system (e.g. trade, finance, competition or climate change policies) or other bodies of international law (e.g. international environmental or human rights law). Moreover, a growing number of countries have found that IIAs have started to "bite" and that they now need to manage complex, lengthy and costly investor-State dispute settlement procedures. Some of these disputes have arisen because investors have challenged regulations that were established as a result of public policy concerns related to the environment and public health. It is the crossing of this threshold - the interaction between national public policy and investment agreements - which makes a closer look at the various fora where international investment issues are discussed, and the way in which they function, a mandatory exercise in today´s pursuit of development, and indeed development-led globalization.
As a result of these developments, Governments are now paying greater attention to the formulation of agreements in order to reaffirm and strengthen the right of the State to regulate in the public interest. IIA obligations in recent treaties - revised model BITs as well as new and renegotiated treaties - are becoming increasingly sophisticated and more precisely formulated. This also includes more specific guidance regarding the procedures applicable in the case of international arbitration. Furthermore, discussions are underway in a number of fora as to how to improve on the established systems available for settling disputes between investors and States, including at UNCTAD. All of this points toward the acceptance within the investment community and, indeed, the wider development community, that the current arbitration system needs reform in order to better serve its purpose of supporting effective investment partnerships, particularly where developing countries are involved.
I am grateful that today adds another opportunity for the community to share its views on this matter and formulate a way forward. With this in mind, I wish you fruitful deliberations.
Thank you for your attention.