|The spectacular increase in foreign direct investment (FDI) as well as other forms of international private capital flows since the mid 1980s, is yet another manifestation of the "globalization" or integration of world economy also evident from the increasing share of trade in world output.
Data and statistics on FDI are widely available from a host of sources, including UNCTAD, OECD and the IMF, and the World Bank (see below for further information). There is also a vast literature covering all aspects of international capital movements in general and of FDI in particular, including their relation with economic growth, trade, transfer of technology, and so forth (see the list of articles below). The purpose of this site is to provide the reader a link to these sources of data and information as well as briefly to highlight some important issues that pertain to the current status of foreign investment in the body of international agreements.
Despite several efforts since the end of WW II, to date there does not exist a set of coherent, substantive and binding multilateral rules governing foreign investment.
The first multilateral abortive effort was the International Trade Organization (ITO) which would have regulated both trade and investment, but which was instead replaced by the GATT dealing only with trade in goods but not with investment. The most recent abortive effort is represented by the suspension on December 3, 1998 of the negotiations within the OECD on the creation of the Multilateral Investment Agreement.
Presently, matters relating to foreign investment are regulated by a multiplicity of instruments. These include:
- Bilateral Investment Agreements or BITs. According to UNCTAD, as of January 1, 1997, there existed a total of 1,330 BITs, compared to 400 at the beginning of 1990.
- Regional Investment Agreements which exist either as separate instruments or are incorporated in a broader framework of a regional preferential trade agreement, such as the EU, NAFTA, and many other regional groupings.
- Plurilateral Instruments, such as the APEC (non-binding) Investment Principles, the Code of Capital Movements or the Declaration on Investment and the Multilateral Enterprise (OECD).
At a multilateral level, the existing instruments tend to be either binding but narrowly focused, or establishing substantive norms but of a non-binding nature. Examples of the former are the Convention on the Settlement of Investment Disputes between States and Nationals of Other States through conciliation and facilitation of the International Center for the Settlement of Investment Disputes (ICSID) and the Convention Establishing the Multilateral Investment Agency (MIGA), concluded in 1965 and 1985, respectively, within the World Bank.
Despite the lack of a substantive and binding multilateral accord, important progress in that direction has been achieved with the signing of the Trade Related Investment Measures (TRIMS), the General Agreement on Services (GATS), the Agreement on Subsidies and Countervailing Measures (ASCM) and the General Agreement on Government Procurement (GPA) at the conclusion of the Uruguay Round multilateral negotiations. Together, these Agreements establish important rules and obligations for governments in their treatment of foreign companies that undertake investment activities in those governments' national territories.
The importance of the TRIMS Agreement, in particular, consists in identifying explicitly, and then requiring their removal within a certain period of time, a dozen or so measures, adopted widely by governments in the past, that are in violation of GATT Articles III (National Treatment) and XI (the general rules against quantitative restrictions). The most important measures explicitly identified as being contrary to the spirit of the GATT are those that impose the use of certain local contents in the products of enterprises or require some degree of balancing between exports and imports, such as requiring the enterprises to export certain portion of their output in relation to the volume of value of their imports. However, export performance requirements are not subject to WTO disciplines.
Currently, the issue of investment at the WTO is being followed by the Working Group on the Relationship between Trade and Investment which was established by a decision taken at the WTO Ministerial Conference held Singapore in December 1996 to examine the relationship between trade and investment. The most recent report of the Working Group was issued in December 1998 and can be obtained free of charge directly from the WTO by following the instructions below.
For further information and data see the following:
Multilateral Agreements on Investment
Determinants of FDI Inflows
- Carr, David L., James R. Markusen and Keith E. Maskus (2001) "Estimating the Knowledge-Capital Model of the Multinational Enterprise", American Economic Review v91, n3: 693-708
- Matoo, Aaditya, Marcelo Olarreaga and Kamal Saggi (2001) "Mode of Foreign Entry, Technology Transfer, and Foreign Direct Investment Policy" World Bank Research Working Paper 2737
- Smarzynska, Beata K. (2000) "Technological Leadership and Foreign Investors' Choice of Entry Mode", World Bank Research Working Paper 2314
- Smarzynska, Beata K. (2002) "Composition of Foreign Direct Investment and Protection of Intellectual Property Rights: Evidence from Transition Economies", World Bank Research Working Paper 2786
- Smarzynska, Beata K. and Shang-Jin Wei (2001) "Pollution Havens and Foreign Direct Investment: Dirty Secret or Popular Myth?" World Bank Research Working Paper 2673
- Smarzynska, Beata K. and Shang-Jin Wei (2000) "Corruption and Composition of Foreign Direct Investment: Firm-Level Evidence", World Bank Research Working Paper 2360
- Wheeler, David and Ashoka Mody (1992) "International Investment Location Decisions: The Case of U.S. Firms" Journal of International Economics, v33, n1-2: 57-76
Impact of FDI on Host Countries
Trade and Foreign Direct Investment