Putting it to Work in Developing Countries - Nathan Associates

1998. 11 But many advocates, particularly among
developed countries, continue to argue that by
reducing host-country investment restrictions
and better protecting investors’ rights an agreement
will give rise to larger, more sustained
flows of FDI to developing countries.
Governments, however, cannot guarantee private
investment flows. And without such a guarantee
many developing countries are reluctant to
accept limits on investment policies that promote
their own perceived economic interests.
Should International Accords
Include Investor Obligations
The extent to which investment agreements
should commit signatories to
imposing obligations on investors and
what kind of obligations should be
imposed are matters of debate. Many of
these arguments are an extension of disputes
about the implications of FDI for
development, especially with regard to
environmental and labor issues. Thus,
some argue that investors from developed
countries should meet their home
countries’ environmental standards
when investing in developing countries
lacking such standards. Others argue
that governments should prevent homecountry
investors from manufacturing
overseas products banned in their home
markets. Some labor groups say that
governments should hold firms
accountable to high standards for labor
relations overseas regardless of local
requirements. Some countries have
argued that home governments should
ensure that their firms not engage in
anticompetitive or restrictive business
practices overseas. Some countries advocate
cooperation and sharing of information
generally to regulate the actions
of transnational corporations.
INVESTMENT ACCORDS—IN
PRACTICE, IN PROSPECT
Bilateral agreements have proliferated but perhaps
with limited effect. Multilateralism in
investment agreements seems as unlikely as ever.
But regional trade agreements and dispute settlement
are spreading and will probably continue
to do so.
RECORD TO DATE
Measured against the objective of increasing
FDI flows, the practical impact of BITs, regional
agreements, and WTO investment action is
mixed.
Little benefit from BITs. The proliferation of
BITs suggests that they satisfy the demands of
the states concluding them. Firms in developed
countries receive additional protections if they
choose to invest in a BIT partner’s territory, but
do BITs attract foreign investment 12 Research
suggests that they do not. 13 A review of 20 years
of data and FDI flows from OECD members to
31 developing countries shows that BIT signatories
were no more likely to receive additional
investment than countries without such treaties.
In addition, countries with weak domestic institutions,
including those for protection of property,
have not benefited significantly by signing
a BIT and countries already reforming and with
strong domestic institutions gain little from
doing so.
FTA/RIA boost for FDI. BITs alone seem to
have a negligible effect on investment flows, but
strengthening investor protections and reducing
trade barriers does appear to increase FDI. 14
Witness the remarkable rise in FDI flows into
Mexico as NAFTA took effect. Some experts
suggest that FTAs in general tend to increase
FDI, 15 others that the liberalization of Mexico’s
investment law in 1993, before NAFTA, made it
easier for firms to take advantage of North
American productivity-adjusted wage differentials.
Nonetheless, NAFTA’s protections have
provided investors additional comfort and offset
the disadvantages of Mexico’s investment
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