Foreign Direct Investment Disputes - Essay Example

Foreign Direct Investment Table of Contents Introduction 3 Foreign Direct Investment (FDI) 4 Critical Analysis of the ment 5 Controversial Issues Associated With Legal Relevance Along with Suggestion for Improvement 9 Conclusion 12 References 14 Introduction It is believed that the world of business is changing rapidly owing to the development in numerous domains relevant to the business. The advancement can be seen in the various domains such as technology, business conducting approaches, global expansion and innovation among others which directly impacts the business sector up to a major extent. Owing to this considerable change in the business sector, companies find the need to expand and grow their business operations across national and international boundaries to ensure the presence of the business in a wider scale in the global market. In the era of globalisation, the aspect of expansion of business is deemed have eased up to a larger extent as various national and international trade barriers has been minimised. However, one of the most vital components for the growth and expansion of business is associated with funding activities which is mainly acquired from the investors. Though there are financial institutions which assist business with funding but the role of individual investors is deemed to be one of the prime in business domain. Among the investors, the influence of foreign direct investment (FDI) on business is quite considerable and up to a higher level altogether. With the advent of globalisation the flow of FDI has increased in almost every nation of the world. Like in any other advancement, there are also certain issues associated with the aspect of FDI. In this regard, one of the most prominent issues lies in the areas of legal protection of the interest and benefits of the foreign investors1. In this context several legal norms has been enacted to safeguard the rights and liabilities of the investors under the FDI concept. This particular paper will aim at analysing a particular statement where the present issues relevant to international investment laws are briefly depicted. The paper will ensure an elaborative discussion with regard to the aspect, clarifying under which conditions investor’s expectations can be relevant in investment arbitration. Foreign Direct Investment (FDI) In the domain of business, investment is one of the most vital components that decide on the aspect of growth and expansion of the business. Contextually, the concept of foreign direct investment (FDI) comes into existence. It is known that FDI is a particular concept where a person or a company belonging from another country invest directly into the business or production of other country. In most of the occasion, FDI takes the form of acquiring a particular company in other country, expanding business operations to other country or investing in stock and bonds of other nations. It will be vital to mention that FDI are among the major sources of funds in the present day context where companies need bulk of amounts in order to establish business on a larger scale altogether2. However, there are certain laws and regulations associated with the FDI concept which would intend to assure utmost stability to the implications associated with investors and their approach of investment. There exist an international governing body that deals with the issues or matters associated with FDI. In this particular regard, the international investment instruments will be vital to consider. The instruments are a compendium of laws and regulations relevant to the domain of foreign direct investment along with the transitional business units. The collection of the FDI laws is segregated in fourteen different volumes. All the volumes of the law were published in between 2001 to 2003. It will be crucial to mention that the need for such instruments has increased considerably in the recent owing to the establishment of FDI as an important source of business funding in almost all the nations of the world3. Critical Analysis of the Statement In a simplified manner, investors have certain liability as per the internal investment protection instruments to claim against the nation or the state in which the investment is made. However, it is known that the approach of the legal authorities with regard to the breach of expectations of the investors and consequently the liability of the state in the same is still quite a controversial aspect as it lacks a fair and equitable standard that can used as a tool for general application. It can be depicted from the statement that the international instruments with regard to FDI, though provides clamming liability for the investors for their dissatisfaction from the state, but the grounds on which the liability of the state or the aspect of dissatisfaction of the investors is still less equitable and generally acceptable. It is believed that ensuring legal protection for the investment in other nation or the host state is one of the major concerns for the investors in the present day scenario. Investors are quite concern of the scenarios where they invest a bulk amount in a particular state and just because of changes in policies of government, the whole attempt become worthless. In similar regard, the host state is also not willing to demotivate FDI in their business domain as it will hinder development up to a considerable extent. Hence, state provides certain mechanisms in order to safeguard the interest and expectations of the investors from their investment. The mechanisms include the national and international investment legislations, investment contracts and investment treaties among others. The investment legislations ensure the smooth or tax reduced operations of the foreign companies in the state or provides a specific financial assistance for them in any particular sector. There are also contracts that are prepared amid investors and state which includes the expectations of each of the party. These contracts also includes clauses including ‘freezing clauses’, ‘economic equilibrium’ and ‘intangibility clauses’ which are used to safeguard the interests of the investors. There are also treaties that are entered amid the state and investors which also protect the investments of the investors. Some of the protection provided by state treaties includes ‘full protection and security of the investment’, ‘fair and equitable treatment’ for the investors and ‘protection from expropriation’ among others. Under all such circumstances the investors or the claimant has the legal liability to get the upper hand over the state in case of any thwarted expectations as per the contracts or the treaties signed4. This approach directly ensures protection of the investors with regard to their investment made. However, it is often believed that the grounds on the basis of the thwarted expectations of the investors are considered are yet to attain a state of generalizability where universally accepted norms could be formed. It will be vital to depict that there are certain specific standards that are applicable with regard to the concept of FDI for the investors and the state. The standards mainly provides protection for both the parties (state and investors). The protections are provided mainly in the domain of protection and security for the investment made, protection for arbitrary, protection against any discriminatory treatment among others. The first standard that exists as per the standard of protection of FDI includes fair and equitable treatment. It has been seen as one of the most common and significant standards in the domain of investment disputes. This particular standard is not affected by the laws of the state and should be adhered in every possible scenario. The standard of fair and equitable treatment is also deemed as violated in case of state investors do not receive equal treatment in comparison to that of the foreign investors. In this particular standards there include certain principles which state needs to adhere with5. Some of the principles of fair and equitable standards include transparency, stability and consistency as per the legitimate expirations of the investors mentioned in contracts or treaties. Another crucial standard to protect the expectation of the investors include full protection and support for the investor. This particular standard is present in most of the treaties signed amid investors and state. As per this particular standard or clause, state has the legal obligation to protect the investment of the investors from any sort of adverse effects such as expropriation. The aspect of physical protection and security to the investment might also be included in this particular clause. This particular scenario was also visible in the case of Asian Agricultural Products Limited v Democratic Socialist Republic of Sri Lanka. The protection as per this particular clause not only includes the aspect of physical security, but it also includes the protection from any sort of infringement of the investment. This can also be seen in the case of Azurix Corp v Argentina6. Protection against arbitrary or discriminatory measures is another important standard in the domain of investment protection. It is also a particular standard that is being mentioned in various investment treaties. It will be crucial to mention that the investors will be liable to get the benefits of this particular measure only if the violation is arbitrary or discriminatory as per the case of Azurix Corp v Argentina. As per the international investor tribunals, the state will be held liable for arbitrary if it involves damage of the investment in the absence of any legitimate purpose for doing the same. This aspect can be apparent in the case of Lauder v Czech Republic7. Another crucial standards associated with investment protection includes the dimension of national treatment. These sorts of standards are mostly visible in the bilateral investment treaties. As per this particular standard, it is determined that foreign investment or the investors should not get the treatment where they are treated less favourably than that of the investors belong to the host state. This is one of the major determinants that is being continuously associated with various forms of investment disputes. This sort of scenario can be visible in the case of Pope & Talbot Inc v Canada. Hence, it can be depicted that these standards will assure that investors are protected with regard to their investment in case of any investment arbitrary. This are also universally accepted standards as per the international investment instruments irrespective of any demographic barriers8 9. Controversial Issues Associated With Legal Relevance Along with Suggestion for Improvement As per the above discussion, it is quite apparent that there are certain standards needs to be adhered for ensuring utmost protection of the rights and demands of the investors in the domain of foreign direct investment. However, there are certain key issues which impact the investment sector up to a considerable extent. Most of the issues are relevant to the legal complexities and standards of treatment of investment that hinder the aspect of total protection for the investment of the investors. The disputes that takes place in foreign investment not only includes large sum of money but it also includes various legislative obligations as well with regard to rights and legal position of the investors10. Hence, these aspects further develop the issues to be quite controversial in nature. Again the regulatory bodies in the domain of investment has also need with the controversial issue of developing common set of measures or criterion in order to deal with the cases of investment arbitrary. Another controversial issue that is being seen in the field of FDI is the behaviour of the investors in the developing economies. Foreign investors especially in the industry sector of energy are seen to raise major conflicts with regard to the protection of the securities in the developing nations. In certain specific scenarios the multinational units are being pressurised to cut short their local activities or campaigns by the state. In this particular context, the foreign investors may argue with the state government with regard to the aspect that the state is legally liable to provide full protection and the security to the investment of the foreign investors as of against the local campaigners. Failure to meet these particular expectations of the investors also tends to raise legal issues against the state11. This is also quite a controversial aspect of FDI. Furthermore, it has also been noted that the investors are aware of the treaties and legal rights that safeguard their investments in the host state. However, it is also believed that these norms have marginal impact on the investment behaviour of the foreign investors. The only focus of the investors is to determine the return of their investment along with attaining utmost economic liberalization within the host state. However, owing to dispute between the investors and the host state in the later scenario, the aspect of generalizability of the rights of the investors emerges into the scene12. This has also become one of the major controversial issues in the domain of FDI. Additionally, the effect of domestic political structure on FDI is also developed as one of the controversial issues that exist within the investment domain. Experts hold the view that democratic political structure at times provides higher benefits to the inflow of foreign direct investment in comparison to that of autocratic political structure. However, others also hold the viewpoint that democratic structure of politics ensures both positive as well as negative impacts on the FDI inflows in a particular host. This aspect has also give rise to a controversial debate amid the experts. But statistics suggests that democracy will be able to ensure higher protection along with higher return on investment for the foreign investors in comparison to that of the autocratic structure of politics in the host state13. The aspect of expropriation in the context of FDI is also a potential controversial issue. It is believed that expropriation can take two forms which might include compensable and non-compensable expropriation. The approach of a host state with regard to damage a particular investment infrastructure of foreign investors can be both expropriatory measures and normal and unavoidable measure of the host state. It can be depicted that an expropriatory measure will fall the host state under the legal liability to compensate the investors for the damage caused. On the other hand, when the state adopt any normal measure with regard to any damage of the invested infrastructure of the foreign investors, the state will not be legally liable to compensate the same for the damage caused. However, the real controversial issues rise while differentiating amid the expropriatory measure and the normal measure of the host state where there is no set criterion or universally accepted mechanism14. This has also hindered in exercising the rights of the investors in the host state up to a considerable extent. Notably, from the above analysis, it can be comprehended that there are several key legal issues that are associated with FDI in the host nations. Despite of the presence of various treaties and contractual norms on legal grounds, the interests of the investors with regard to protection and security are continuously kept at stake. In this regard, several steps or measures can be taken into concern into order to mitigate this sort of issues. On the foremost measure that can be suggested is the proper application of the present rules and regulations regarding FDI in the host nations. It is believed that FDI is quite important for the growth and development of a country or state15. Hence, the legal authorities in the host state will need to be fair and equitable in their approach of protecting the interests of the foreign investors through adhering to the present laws and regulations relevant to foreign direct investment. Again it has also been noted that there are several treaties and contractual approaches that exists in the domain of safeguarding the interest of the foreign investors to safeguard in the host state16. This aspect will encourage the free flow of FDI in the host state that further results positively in the field of infrastructural development. Contextually, host state should mentions all the implications of the investment to the investors well in advance prior to the formation of the treaties or contracts in order to avoid any sort of conflict in the later stage. Furthermore, in similar regard, it will also be suggested to the host state to develop a universally accepted mechanism that can provide a clear explanation of the approach of the state towards expropriatory measure or any other routine measures. This will also probably work towards mitigating the controversial issue of expropriation in FDI in the host state17. Conclusion From the overall analysis of the paper, it can be comprehended that with the advent of globalisation, the concept of FDI has become one of the major sources of development of any state or nation. The free flow of FDI in the state or nation is amid the major need for state or nation towards gaining infrastructural development within the nation. In this regard, the state or the nations encourage the flow of foreign investment in the country. However, in the recent time the protection of the investment of the investors has become one of the major issues in the domain of FDI. There are certain rules and regulation that has been established to safeguard the interest of the investors in the host state. The legal norms might take the form of contractual terms and conditions, the treaties and the standards set by the international investment governing bodies among others which are universally accepted all over the world. The investors has the legal liability to claim for remedy in case their expectations of investment were not been fulfilled by the state as per the conditions of the treaties and the contractual relationships. However, the generalizability of the laws is often been argued by the experts which further raise controversial issues in the domain of investment. Hence, it can be concluded FDI is one of the most important source of funds for national development and the authorities should develop plans to encourage the free flow of FDI in their respective state or nation. References Anderson, Rachel J, ‘Toward Global Corporate Citizenship: Reframing Foreign Direct Investment Law’ (Home, 2009) accessed 30 April 2014 Anbarasu, Joseph, Global Financial Management. (Ane Books Pvt Ltd, 2010). Center for International Legal Studies, ‘About the FDI Moot’ (Home, 2014) < http://www.fdimoot.org/> accessed 30 April 2014 Dolzer, Rudolf. and Schreuer, Christoph, Principles of International Investment Law. (Oxford University Press, 2012). Eyth, Marcus, ‘The Telmex Saga Continues: Foreign Investors Expectations and Realizations in the Struggle to Compete in the Mexican Telecommunications Market’ (Pace International Law Review, 2002) accessed 30 April 2014 Froot, Kenneth A, Foreign Direct Investment. (University of Chicago Press, 2008). Franck, Susan D, ‘Foreign Direct Investment, Investment Treaty Arbitration, and the Rule of Law’ (Documents, 2007) accessed 30 April 2014 Li, Quan, ‘Democracy, Autocracy, and Expropriation of Foreign Direct Investment’ (Home, No Date) accessed 30 April 2014. Quick Guides, ‘International Investment Protection’ (Home, 2010) < http://www.ashurst.com/publication-techguide.aspx?id_Content=5974 f > accessed 30 April 2014 Sauvant, Karl P. Sachs, Lisa. Davies, Ken. and Zandvliet, Ruben, ‘Issues in International Investment’ (Files, 2011) accessed 30 April 2014 Schreuer, Christoph, ‘Investment International Protection’ (Downloads, No Date) < http://www.univie.ac.at/intlaw/wordpress/pdf/investments_Int_Protection.pdf> accessed 30 April 2014 UNCTAD, ‘Expropriation’ (United Nations, 2012) accessed 30 April 2014 United Nations Conference on Trade and Development, ‘International Investment Instruments: A Compendium’ (Home, 2005) accessed 30 April 2014 Read More