FDI and International Agreements

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FDI and International Agreements

• Simon J. Evenett, www.evenett.com

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Contents of this presentation

• Preliminaries
• Definition and measurement of FDI.
• Relationship between FDI and economic
  performance.
• The International Architecture on Investment
  Agreements.
• Range of policies affected.
• BITs and DTTs.
• Regional Trading Agreements.
• Proposals for a Multilateral Framework on
  Investment.
• Concluding remarks on the future development of
  the International Architecture on Investment
  Agreements.

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Preliminaries

• Simon J. Evenett, www.evenett.com

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Definitions and Types of FDI

• FDI Acquisition of 10 percent of more of the
  control of a commercially valuable assets located
  abroad.
• Types of FDI
• Greenfield FDI.
• Cross-border mergers and acquisitions.
• WARNING Most policymakers (and many economic
  analysts) focus on Greenfield FDI when, in fact,
  cross-border MA is more important for many
  countries.
• Links to trade and competition policy matters
  discussed this morning.

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Measurement of FDI

• Potential for mismeasurement of FDI flows.
• Greenfield FDI.
• Cross-border mergers and acquisitions.
• Data sources UNCTAD, Thomson Financial, Central
  Banks.
• Distinction between FDI flows and stocks.
• Valuation of FDI stocks.

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FDI flows 2005
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FDI stocks 2000 and 2005
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FDI has been a stable source of international
finance in developing countries
Capital flows to developing countries
billion
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Most FDI goes to a few big countriesbut many
small countries do well as a share of GDP
Top 10 receive almost 80 of total FDI
flows (left axis)
Least FDI
Most FDI
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FDI and Economic Performance

• Simon J. Evenett, www.evenett.com

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Mechanisms linking FDI and economic performance

• Accumulation theories require continual increases
  in savings or productivity.
• Role that FDI, in principle, could play here.
• In fact much economic analysis points to the
  non-permanent, sometimes even one-off, effects
  created by Greenfield FDI.
• Emphasis on spillovers.
• Much less attention given to the potential growth
  effects of cross-border mergers and acquisition.
• Facilitate resource allocation across sectors.
• Promoting the market for corporate control.

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Spillovers

• Horizontal
• Learning by observation effects.
• Technology transfer.
• Managerial practices.
• Moving personnel.
• Thick labour pools.
• Clusters.
• Positive and negative effects.

• Vertical (operate within supply chains including
  backward and forward linkages)
• Technology transfer.
• Managerial practices.
• Do all spillovers created non-pecuniary
  externalities?

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Case for national public policy intervention

• Economists point to the need to identify a
  non-pecuniary spillover or other cause of market
  failure.
• UNCTAD monitors the number of regulatory changes
  affecting FDIthe overwhelming majority are
  favourable to FDI.
• Easier to do with horizontal spillovers less
  easy with vertical spillovers.
• What is appropriate policy response?
• Subsidies?
• Tax breaks?
• Other incentives?

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Case for international public policy intervention

• Economists point to the need to identify
  cross-border spillovers (economic or political
  economy).
• Market access.
• Access to goods markets.
• Access to market for corporate control.
• Profit shifting.
• Subsidy wars/ FDI contests.
• What are the appropriate public policy measures
  here?
• Commitments to non-discrimination?
• Bans on trade-related investment measures?
• Commitments to forgo subsidisation?
• Commitments not to expropriate?

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The International Architecture of Investment
Agreements

• Simon J. Evenett, www.evenett.com

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Types of international accord.

• Even though many government policies influence
  FDI, the following accords are typically referred
  to being investment-related.
• Bilateral Investment Treaties (BITs).
• Double Taxation Treaties (DTTs).
• WTO Agreement on Trade-Related Investment
  Measures (TRIMs) and on Services (GATS).
• Investment chapters of Regional Trade Agreements
  (RTAs).
• Note There is plenty of variation within each
  type listed above.
• Proposals for multilateral frameworks on
  investment.

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Bilateral Investment Treaties

• Most prevalent form of investment accord
• Over 2000 signedwith plenty of variation.
• Both N-S and S-S treaties signed in recent years.
• Typically do not regulate the right of admission
  of foreign investors (pre-establishment rules).
• Concern instead
• Post-admission treatment
• Non-discriminatory treatment after establishment.
• Transfer and repatriation of profits.
• Obligations on foreign investors.
• Investment protection including expropriation.
• Dispute settlement including investor-state
  provisions.

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Existing multilateral provisions

• TRIMs
• Required countries to phase out TRIMs
  inconsistent with GATT rules.
• Performance requirements typically illegal.
• Non-exhaustive list of TRIMs including local
  content requirements, trade-balancing
  requirements, and export restrictions.
• DCs can temporarily deviate from accord for BOP
  reasons (according to Article 4).
• GATS
• Mode 3.
• Positive list approach.

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Investment provisions in RTAs

• Huge variation in scope and legal form
• Binding versus non-binding (APEC Investment
  Principles).
• Some very ambitious (Gold standard US FTAs).
• Key dimensions
• Scope of application.
• Investment liberalisation.
• Investment protection.
• Dispute settlement.
• Commentary on provisions.
• Very little attention given to investment
  incentives.

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Proposals for a Multilateral Framework on
Investment

• One of the four Singapore Issues (origin and fate
  known!)
• Scope of Working Group discussions dictated by
  paragraphs 20-22 of the Doha Declaration.
• Major proponents EU and USA.
• Summary of EU proposal.
• Summary of USA proposal.
• Points made by opponents of these proposals.
• Policy Space
• Assessment---see Ferrarini (2003) in particular.

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Concluding remarks what next?

• Current international architecture of investment
  accords only address a subset of potential
  spillovers.
• So what next?
• Near term Regional trade agreements (link to
  service sector negotiations).
• Longer term Rise of BRICs and reappraisal of
  their commercial interests.
• Dubai Ports case and Mittal Steel takeover.
• A growing demand for national treatment in the
  application of all policies affecting foreign
  investors?
• Political economy considerations.