The Growth of Foreign Direct Investment - Essay Example

In 2011, FDI outflows from emerging markets increased by 25%. A majority of these states have implemented reforms liberalizing capital markets to increase capital inflows from FDIs and to appeal to foreign investors.

However, there is a developing trend indicating some degree of institutional weakness in terms of political and legal risks and concerns about market efficiency4. The trend indicates an increase in FDI outflows from emerging markets. During the 1980s, FDI outflows from emerging markets were approximately US$50 billion annually. Since that time the FDI outflows have increased exponentially. For example in 2007 the FDI outflow from emerging markets was US$2.1 trillion and despite the economic downturn in 2008, the FDI outflow from emerging markets was US$1.9 trillion.

This trend is also indicative of the fact that emerging markets are becoming pivotal players in the global economy.6 It has been argued that the best method for improving FDI inflows to emerging markets is for both realistic and credible commitments to both domestic and international reforms toward liberalizing capital markets.7 This is particularly important because states wishing to attract FDI inflows are responsible for regulating their domestic investment laws. How national laws and national market reforms are made are marginally influenced by “international legal obligations or by economic necessity.

”8 International legal obligations are directed by treaty obligations which are usually in the form of Bilateral International Treaties (BITs).9 Multinational trade agreements such as the World Trade Organization (WTO) and Preferential Trade Agreements (PTAs) also regulate how member states must treat foreign investors, thus enabling greater mobility of capital across borders.10 Since the 1990s, BITs between emerging markets and between emerging markets and developed states have increased exponentially.

11 The main difficulty is that there is no “single model” setting forth what should encompass international investment law relative to FDIs.