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03 September 2003

Recent decades have seen a proliferation of international agreements affecting foreign direct investment (FDI). As a result, the parameters for national policy-making in the area of investment are increasingly set by such agreements. In order to safeguard the ability of developing countries both to pursue development policies and to reap greater benefits from FDI, the proper balance must be struck between the benefits from entering into international agreements and the need to secure sufficient policy space, says the World Investment Report(1), released today by UNCTAD.

Complementing the national trend of increasingly liberal policies towards FDI, more and more countries are entering into international investment agreements (IIAs), particularly at the bilateral and regional levels. And many more are in the pipeline. They not only reflect and complement national policies, but also set parameters for national policies, putting investment at the interface of national and international policies in the globalizing world economy.

Issues revolving around the impact of IIAs on the ability of developing countries to attract and benefit from FDI are thus moving to the forefront of the international economic agenda, as can be seen in the investment discussions under way at the WTO. These issues will remain prominent regardless of the outcome of these discussions, simply because of what is already happening now at the bilateral and regional levels. But whether governments negotiate international investment agreements, and at what level and for what purpose they do so, is their own sovereign decision.

Striking a balance

The new UNCTAD report says that the most important challenge for developing countries in any future IIA negotiations - be they at the bilateral, regional or multilateral levels - is to strike a balance between the potential for such agreements to increase FDI flows and the ability of countries to pursue development-oriented FDI policies. This means maintaining sufficient policy space to give governments the flexibility to use such policies within the framework of the obligations established by the IIAs to which they are parties. The tension is obvious: Too much policy space reduces the value of international obligations; too stringent obligations place excessive constraints on the national policy space. Finding the right balance is the challenge.

This challenge is addressed when negotiating the objectives of IIAs, their structure, content and implementation. Their content is central, as the quest for a development- friendly balance plays itself out in the resolution of key issues. These are issues that are particularly important for the ability of countries to pursue development-oriented national FDI policies and that are particularly sensitive in international investment negotiations.

The report analyses some of these key issues:

  • The definition of "investment", because it determines the scope of the substantive provisions of an agreement;
  • National treatment (especially as it relates to the right of establishment), because it determines how much and in which ways preference can be given to domestic enterprises;
  • The circumstances under which government policies should be regarded as regulatory takings, because this involves testing the boundary between the legitimate right to regulate and the rights of private property owners;
  • The scope of dispute settlement, because this affects the involvement of non-State actors and the extent to which the settlement of investment disputes is self-contained; and
  • The use of performance requirements, incentives, transfer-of-technology policies and competition policy, because they can advance development objectives.

For each of these issues, more development-friendly and less development-friendly solutions exist. UNCTAD notes that, from the perspective of many developing countries, the preferable way is a broad GATS-type positive list approach, rather than the negative list approach. The reason is that this allows each country to determine to which of these issues it should commit itself in IIAs, under what conditions, and at what pace, commensurate with its own needs and circumstances.

Home country role should be stressed

The World Investment Report 2003 also suggests that future agreements, at whatever level, should pay more attention to the role of home countries. Developing countries would benefit if home country measures - aimed at promoting more and better FDI to developing countries - were made more transparent, stable and predictable. It also argues that transnational corporations themselves should be encouraged to increase the development impact of their investment in developing countries, as part of good corporate citizenship responsibilities. This could be done through voluntary action or more legally based processes.

In short, the overall message of this year´s report is that the development dimension has to be an integral part of international investment agreements, in support of national policies to attract more FDI and to benefit more from it.


1. The World Investment Report 2003. FDI Policies for Development: National and International Perspectives (Sales No. E.03.II.D.8, ISBN 92-1-112580-4) is available for US$ 49, and at a special price of US$ 19 in developing countries and economies in transition, from United Nations Publications, Two UN Plaza, Room DC2-853, Dept. PRES, New York, NY 10017, USA, T: +1 800 253 9646 or +1 212 963 8302, F: +1 212 963 3489, E: publications@un.org, or Section des Ventes et Commercialisation, Bureau E-4, Palais des Nations, CH-1211 Geneva 10, Switzerland, T: +41 22 917 2614, fax: +41 22 917 0027, E: unpubli@unog.ch; Internet: www.un.org/publications.

For more information, please contact:
Press Office
T: +41 22 907 5828
E: press@unctad.org
Karl Sauvant
T: +41 22 907 5707
E: karl.sauvant@unctad.org
Ludger Odenthal
T: +41 22 907 6325
E: ludger.odenthal@unctad.org
Zbigniew Zimny
T: +41 22 907 4643
E: zbigniew.zimny@unctad.org.


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