Need for Governance and Regulation of Foreign Direct Investment - Essay Example

The Need for Governance and Regulation of Foreign Direct Investment (FDI) for Its Effective Operation across Nations Introduction This essay analyses the subject of Foreign Direct Investment (FDI) and how the phenomenon should be regulated for its effective operation across countries. The essence of the essay is to evaluate whether or not FDI needs an orderly system of governance in order for the practice to operate effectively and competently across nations in the world. To answer this question, three key issues are examined in the essay. The first one is related to the history of FDI regulation and efforts at establishing a multilateral approach to regulating FDI. The factors that influenced the emergence of FDI regulation and the extent to which a multilateral approach to regulating FDI is effective in regulating the practice are examined. The second issue that is addressed in the essay is a critical analysis of how the “Agreement on Trade-Related Investment Measures” (TRIMS) regulates the regulation of member States. The third issue that is examined in the essay is an evaluation of the outcome of the “Free Trade Agreements” (FTAs) between Australia and its key Asian trading partners. Emergence of FDI regulation and effectiveness of the multilateral regulatory approach In general, the manner in which FDI is regulated across the world has developed in two main phases. The first phase of FDI regulation across the world was characterised by the existence of policies, rules and regulations that sought to control and even limit FDI flows. The second phase of FDI regulation, which is still in progress, is characterised by the establishment of rules that seek to stimulate rather than stifle FDI flows across different countries and regions in the world. The emergence of these two different approaches of regulating FDI was facilitated by different factors. In general, the development of policies and rules that sought to control the manner in which FDI occurred was based on opinion that FDI would not necessarily contribute to the economic development of the host nation in the first place.1 In addition to this, there was concern from local business organisations in different countries that allowing inflow of capital from foreign countries could expose the local companies to competition and that this would stifle their own growth.2 Hence, governments were required to develop regulations that would serve nationalistic interests by preventing unregulated inflow of capital from foreign-owned companies. There has been a sustained effort at deregulating the manner in which FDI is governed. What is important to note is that this trend has been taking place across the world. For example, te Velde notes that many countries across the world realised the economic value of FDI on their local economies and were obliged to change their stance towards FDI from viewing it as a practice that required to be discouraged to one that required to be promoted.3 It is noted that countries have realised that FDI can be an important engine to spur economic growth in local economies. Similarly, Singh notes that the relationship between FDI and local economic growth is attributed to the manner in which the host countries can direct capital from foreign-owned companies into sectors that can have the greatest impact on the local economies.4 Furthermore, through FDI, local companies are said to benefit from the knowledge and expertise that the multinational enterprises (MNEs) bring in the form of FDI.5 Hence, instead of being viewed as a threat to the local economy, FDI is now viewed as a catalyst to local economic growth and development. This change in stance is one of the main factors that triggered liberalisation in the governance of FDI across nations in the world. In the case of Australia, it is noted that the realisation of the role of FDI in the economic development of the country’s economy has been recognised as one of the main reasons as to why the government seeks to create an environment that fosters FDI.6 On a similar note, Golding observes that the need for the Australian government to promote FDI to the country was driven by the need to plug the gap caused by historically low levels of savings in the country’s economy.7 Furthermore, following realisation that the future economic development of countries relied heavily on international trade, many countries started to liberalise their FDI laws while still ensuring that the government still played a key role of screening the inflows of foreign capital. For example, the realisation of the growing importance of Asia-Pacific countries as trading partners of Australia played an important role in setting the for amendment of FDI laws in Australia.8 So far, developing a multilateral regulatory framework has not been effective. Young and Tavares observe that the main reasons as to why all attempts at developing a multilateral regulatory framework for FDI are related to concerns about the interests of individual countries and the unbalanced economic powers of countries in the world.9 Furthermore, the complex nature of the proposed agreements, which have to work at multiple layers, denotes that their implementation will be complex.10 This implies that in spite of the potential benefits of establishing a multilateral regulatory framework, concerns about possible conflicts of interest between countries and lack of a clear mechanism on how conflicts will be resolved has hampered the effectiveness of such a system. Analysis of the Canada – Administration of FIRA, BISD 30S.140, 1984 and TRIMS The Canada – Administration of FIRA, BISD 30S.140, 1984 can be understood within the context of global efforts at developing a comprehensive legal and regulatory framework that can be used to guide the manner in which FDI activities are carried out. Under the auspices of the General Agreement on Tariffs and Trade (GATT), world nations attempted to recognise the link between trade and FDI and sought to develop rules that would be used to regulate trade and investment among nations across the world. It is observed that that the overarching aim of the attempts was to develop a framework that would ensure that no country sets in place conditions or practices that may stifle trade and investment.11 Hence, at the basis of the rules was the knowledge that some practices by different countries could actually jeopardise trade and investment activities. Prior to the development of the Foreign Investment Review Agency (FIRA), GATT attempted to include foreign investment activities as one of the main contents of the charter on economic development that was being developed at the time.12 Although the Havana Charter that was developed at the time was not ratified, its provisions in relation to how foreign investments should be treated were made part of the GATT. This step formed the foundation for the next step in the process in which countries were required to fast track the process of concluding bilateral agreements and resolving any trade-related conflicts that existed at the time. It is within this context that the Canada – Administration of FIRA, BISD 30S.140, 1984 came into play. The United States brought a dispute before the FIRA panel in relation to specific undertakings that United States was required to accomplish before being allowed to access specific markets in Canada.13 Therefore, the duty of the panel was to determine whether the specific undertakings that Canada was imposing on the United States contravened the specific provisions of GATT. It is important to note that in determining the matter, the FIRA panel relied on a specific approach of interpreting local legislation within the context of the general provisions of GATT.14 To do this, the panel based their approach on the fact that Canada has the right to exercise its sovereign laws in regulating the manner in which foreign direct investments are carried out in the country. Therefore, the work of the panel was to only interpret whether the undertakings that the Canadian government imposed on United States investors contravened the obligations of Canada under the provisions of GATT. One of the findings of the panel was related to the complaint by the United States that Canada had in place undertakings that required investors to only export specific quantities of goods.15 The argument of the United States was that the requirements were inconsistent with the basic rules of trade and investment in that the companies that were forced to export a specific proportion of their production could not be said to be making the decision to export their products based on commercial considerations. In relation to this complaint, the panel concluded that the manner in which Canada carried out the practice could not be said to be inconsistent with the specific provisions of GATT. Another complaint submitted to the panel by Canada was in relation to the undertaking that the purchases that the investors make should be carried out in such a manner that preference is given to goods of Canadian origin. According to the findings of the panel, these local content requirements that the Canadian government imposed on investors were completely inconsistent with the provisions of GATT. As a result, the panel found that Canada had failed in its obligations as a party to GATT by imposing these specific requirements on investors. There are several key issues that arise from the findings of the panel in relation to the complaints that were filed before it. First, the ruling of the panel shows that as much as countries have the right to regulate the flow of foreign investments within their borders, they are required to ensure that the manner in which they regulate the flow of FDI does not contravene the provisions of GATT. In this case, it can be seen that Canada had set its guidelines that were used to determine whether or not a proposed investment would be beneficial to the country under the FIRA.16 To determine the impact of any proposed investment on the country, the act provided that the investment be evaluated in terms of its effect on the level of industrial technology in the country, its significance in relation to the participation of locals, and the extent to which the new investment would be in line with the established practices in the country.17 It can be seen that much as Canada sought to safeguard its domestic interests, it was still obliged to do so in such a manner that could not be seen to have contravened the country’s obligations under the internationally accepted rules of GATT. In general, the extent to which TRIMS have been effective in disciplining the laws and regulations of member states in relation to trade and investment remain varied.18 On one hand, the measures could be said to have played a key role in helping to develop a pluralistic approach to regulating trade and investment among nations.19 On the other hand, the extent to which the main objectives of the measures has been achieved can be disputed, given the general manner in which countries have met the specific targets of implementing the measures over the course of time.20 There are several reasons for this state of affairs. First of all, the development of the measures and their actual implementation has been slowed down by frequent disagreements over the specifics that should be included in the measures. The need to develop the measures was born out of the realisation that there was a need to set up rules and regulations which would prevent countries from engaging in practices that were detrimental to the development of FDI practices.21 Therefore, the agreement was set up to ensure that no country carries out practices that are discriminatory in nature or contravene the need for supporting FDI. However, there have been disagreements among member nations over what actually constitutes a practice that hinders trade and investment activities.22 This has not only caused delays in the actual manner in which the measures are being implemented, but has also contributed to the emergence of disputes among nations. Secondly, the effectiveness of TRIMS in regulating the policies that countries establish has been criticised based on the argument that the measures are contradictory in nature.23 It is argued that when countries attempt to comply with the measures, they end up interfering with the manner in which free markets work since investors are required to adhere to measures which have been developed to serve the interests of states and not of the market.24 However, whereas the effectiveness of TRIMS has been challenged, the result of the effort of countries to report policies that do not comply with the developed measures and the resolution of disputes between nations based on the provisions of the measures means that TRIMS have been effective in regulating trading and investment policies of nations to an extent. Free Trade Agreements between Australia and Asian countries: Aims, operation and challenges Australia has entered into a number of several FTAs with its key trading partners in Asia. In general, it is noted that the need for Australia to get into such agreements is born out of the fact that the geographical location of the country does not place it into any large region that is composed of a large number of countries that Australia can trade with.25 Therefore, the need for the country to grow its level of trade and ensure that it benefits from the global trend in the form of increasing FDI meant that the country had to get into agreements with other countries. Furthermore, it is observed that the importance of Asian countries as potential trading partners for Australia was one of the main factors that led the Australian government to initiate the process of developing FTAs with specific countries in Asia.26 The government of Australia realised the growing importance of countries such as Thailand, Singapore and China in the Australian economy and, as a result of this, sought to create an environment in which foreign capital from these countries would freely flow into the Australian economy. There are several FTAs between Australia and different Asian countries that are currently in force.27 More so, there are many other FTAs between Australia and other Asian countries that are still being developed.28 However, what is important to note is that these agreements tend to share some basic aims and objectives. These are briefly described here as follows. One of the main aims of developing the agreements is related to the need to ensure that Australian businesses have access to markets in the different Asian countries. Many of the Asian markets that the Australian government is seeking access for local businesses in are emerging economies. This means that the countries are experiencing rapid growth in terms of development of new industries. To take advantage of this trend, the Australian government sought to develop FTAs with countries such as Singapore and Thailand as a way of making it possible for Australian investors to easily access the new markets that are emerging in the rapidly growing economies of the Asian economies. Another objective of developing FTAs with specific Asian countries is to enable Australian investors to successfully invest in specific industries in the Asian countries involved in the agreements. The need to develop agreements with Asian countries which are active trading partners of Australia was also partly motivated by global trends in relation to developing multilateral agreements. It is noted that failure of the countries of the world, under the leadership of the World Trade Organisation (WTO) to develop a comprehensive consensus on how to remove inter-country barriers to trade and movement of capital necessitated the creation of inter-country agreements.29 Within this context, the Australian government sought to develop agreements with specific countries that would enable the investors of the country to have rights of transferring funds into the specific countries. By doing so, Australia seeks to safeguard the investments that its local companies have made in the specific Asian countries. There are several challenges that have to be dealt with in order for the different FTAs between Australia and its key trading partners in Asia to be successfully implemented. One of the challenges is associated with the practice in which agricultural goods are not included in the details about how free trade is supposed to be carried out between different partners involved in FTAs. According to Kawai and Wignaraja, many countries tend to favour leaving out the agricultural sector in general from the FTAs that they sign with their trading partners.30 The FTAs that are in force in the Asian region for example are not an exception. The countries involved tend to avoid including the agricultural sector in the agreements. The reasons for this stance are varied; however, what is common is that many countries which are still developing express concern that attempting to include the agricultural sector in the FTAs that they sign with their trading partners may cause a backlash from their mainly rural populations.31 In the many FTAs that Australia has been involved in with its key Asian trading partners, agricultural goods are excluded from the agreements. This means that under the terms of the agreements, Australian investors are not able to access the agricultural sector of the Asian countries that are partners in the agreements. Another common challenge that is associated with implementing the FTAs between Australia and its key trading partners in Asia is related to the need to ensure that many companies take advantage of the provisions of the agreements. The basic aim of developing the agreements, from the perspective of Australia, is to open up the markets in different countries for local companies.32 Local Australian companies are expected to take advantage of the trading environment in which barriers to the flow of capital and other resources have been removed under the terms of the agreements. However, it is noted that, in general, many companies are not actively taking advantage of the FTAs that are already in force.33 It is in light of this that the Australian government, through the Australian Trade and Investment Commission, seeks to sensitize local companies about the opportunities that are now available in different Asian countries under the terms of the various FTAs that are already in force.34 Conclusion In conclusion, there is need for governance in the regulation of FDI activities. This needs to be the case regardless of the trend that has been observed in the world in which different forms of regulations that have been developed have achieved mixed results. As well, it can be concluded that the TRIMS has achieved its objective of regulating the trading and investment policies of countries to some extent. This was witnessed in the ruling of the FIRA panel which showed that much as countries were required to regulate FDI activities, they were obliged to do in ways that do not compromise their international obligations under GATT. Lastly, the FTAs that Australia has signed with its key Asian trading partners seek to help Australian investors to access specific markets in those countries. However, a low level of uptake by companies remains one of the key challenges. Read More