Putting it to Work in Developing Countries - Nathan Associates

Encouraging Local Supply Links:
Carrot or Stick
Many developing countries seek to maximize
the linkages between FDI-funded
foreign affiliates and local markets in
order to create jobs and impart the
technology and managerial know-how
of foreign affiliates to the domestic
economy. Linkage building is most
effective when workers and managers
are trained in the quality standards of
foreign affiliates, when they work
directly to meet those standards (e.g.,
for on-time delivery), and when transport
and communications infrastructure
allows local supply systems to function
efficiently. In contrast, mandatory local
content requirements imposed by some
host-country governments on foreign
affiliates raise production costs for foreign
investors, reduce the competitiveness
of exports, and worsen perceptions
of the investment environment. In addition,
such policies are inconsistent with
the provisions of the WTO’s Agreement
on Trade-related Investment Measures,
and are to be eliminated by WTO
members. Least developed countries
have until 2020 to accomplish this
phase-out.
the vast majority of these cases against states
using international arbitration procedures.
UNCTAD estimates that at the end of 2005,
the number of cases brought under bilateral and
plurilateral agreements totaled 229. 18 UNCTAD
believes that foreign investors will increasingly
avail themselves of the dispute settlement procedures
of international investment agreements to
challenge host-country actions that they perceive
as harming their investment. Increased FDI
flows could naturally lead to more occasions for
dispute, and the growing number of BITs provides
the ability to seek arbitration. UNCTAD
also suggests that, following well-publicized
claims, foreign investors are increasingly prepared
to litigate.
FUTURE OF INVESTMENT AGREEMENTS
Given this record, future agreements are likely to
be more regional and more attentive to investment
promotion and dispute settlement.
Regionalism. In the near to medium term, the
drive for investment liberalization and rule-making
is likely to be channeled through regional
agreements. First of all, the suspension of the
Doha Round threatens to retard multilateral
economic liberalization in general. In the late
1990s, developed countries had made no
progress on the multilateral agreement on
investment, and in 2004 developing countries
thwarted the negotiation of comprehensive
investment-related disciplines within the Doha
Development Agenda. With prospects for a
multilateral framework seriously dimmed, proponents
of WTO negotiations such as Japan and
the European Union are more likely to pursue
protections in FTAs and RIAs. Although Japan
concluded a relatively modest FTA with
Singapore in 2002, it signed its first truly comprehensive
FTA in 2004 with Mexico. This FTA
has investment provisions modeled on NAFTA,
including clauses on investor–state dispute settlement.
The agreement could serve as a precedent
as Japan moves to negotiate FTAs with
Korea and several ASEAN members. EU members
are already aggressive BIT participants, and
the EU itself has negotiated association agreements
that include BIT-like investment provisions
and requirements for the exchange of
information on and the promotion of FDI. The
Cotonou Agreement between the European
Union and former European colonies in Africa,
the Caribbean, and the Pacific also envisages the
negotiation of “side-BITs” among signatories.
And the United States will no doubt insist on
investment provisions in future FTA and RIA
negotiations. 19
Investment Promotion. Given developing countries’
demands in Geneva for a guarantee that
77