International investment agreements (IIAs) generally promote foreign investment only indirectly through the granting of investment protection. Very few contain explicit provisions on investment promotion. More emphasis on direct investment promotion in these treaties could help developing countries increase the likelihood of attracting new investments, a new UNCTAD report says.
The report Investment Promotion Provisions in IIAs(1), released today, recommends that these agreements pay more attention to stimulating future foreign direct investment (FDI) because such inflows are vital for spurring economic growth. A recent review of approximately 500 bilateral investment treaties (BITs) found that 81% have no specific provisions on investment promotion at all, the report notes.
A different category of IIAs -- bilateral or regional free-trade agreements (FTAs) and other economic integration agreements (EIAs) -- was also surveyed. Of 200 FTAs and EIAs some 70% mention investment promotion, the report says. But even then, the treaty language tends to be general rather than specific, and the provisions rarely have a binding character.
IIAs have proliferated and have grown more complex in recent years -- more than 2,800 BITs and FTAs/EIAs with investment provisions had been concluded by the end of 2007. And the provisions of IIAs have expanded to include a broader range of topics and issues, such as trade in goods and services and more precise regulations for dispute settlement. The trend towards innovative features in IIAs might be an indication that countries are ready considering new approaches also in respect of investment promotion provisions in these treaties.
Giving more prominence to investment promotion could create a better balance, if both the exporting and the recipient countries benefit from promotion efforts to expand flows of FDI. Such an approach could also contribute to more stable and harmonious relations between contracting parties, the report suggests.
Varying approaches may be taken to enhance the goal of investment promotion in IIAs. Treaty provisions may call for improvements to overall policy frameworks for foreign investment, including transparency and the removal of informal investment obstacles. They may cover all economic sectors or focus on specific economic activities. They may call for setting up new investment-promotion instruments. They may stipulate joint activities or different promotional steps to be undertaken by the capital-exporting country and the recipient country. Or they may grant financial or fiscal incentives to individual investors in line with the contracting parties´ industrial and competition policies. Investment promotion provisions may also include follow-up mechanisms to monitor how such efforts work in practice. And investment promotion provisions may be voluntary or legally binding.
The study refers to numerous examples of specific investment promotion provisions in existing IIAs. For instance, some treaties oblige contracting parties to ensure that their investment-related laws and regulations are publicly available. Others contain a commitment to exchange information on investment opportunities. Sometimes, the developed country treaty partner promises financial and technical assistance to the developing country treaty partner in respect of creating favourable investment conditions. Another example is that the IIA provides for cooperation between the investment promotion agencies of contracting parties.
The UNCTAD report presents the options available. Countries that basically pursue a laisser faire policy with regard to foreign investment might favour promotion strategies aimed at improving the general policy and institutional framework. By contrast, governments applying strategic investment policies might prefer sector-specific or activity-specific promotion measures. They may also decide to foster linkages between foreign investors and domestic companies. Financial considerations may play an important role, since many developing countries may not have the means to agree upon expensive promotion programmes, in particular if they involve investment incentives.
The report concludes that strengthening the promotional character of IIAs might boost their contribution towards increasing the likelihood of host countries receiving more foreign investment.
