Is the Policy Framework for Investment developed by the OECD a possible alternative for the adoption of a multilateral instrument?
Term Paper 2012 18 Pages
Table of Contents
List of Abbreviations
B. Multilateral Agreement on Investment
II. Reasons for Failure
a. Developing countries
C. Policy Framework for Investment
List of Abbreviations
Abbildung in dieser Leseprobe nicht enthalten
Brunner, Serge; Folly, David: The Way to a Multilateral Investment Agreement. Swiss National Centre of Competence in Research Working Paper No. 2007/24. 2007.
Folly, David: The International Framework on Investment and the Shift towards a Multilateral Agreement on Investment. Fribourg. 2006.
Geiger, Rainer: Coherence in shaping the rules for international Business: Actors, Instruments and Implementation. In: George Washington International Law Review 2011, Volume 43, p. 295 - 324.
Gugler, Philippe; Hamida, Lamia Ben: How the PFI may contribute to a more coherent international policy framework on Investment. Swiss National Centre of Competence in Research Working Paper No. 2007/27. 2007.
IISD: Comments on the draft OECD Policy Framework for Investment. Winnipeg, Geneva, New York, Ottawa. 2006.
OECD: About the PFI Toolkit and an example of the Policy Guidance. Lusaka. 2007. OECD: Building Trust and Confidence in International Investment. Paris. 2009. OECD: Getting the most out of the PFI. Paris 2006.
OECD: International Investment Perspectives: Freedom of Investment in a changing World. Paris. 2007. OECD: Policy Brief: The Policy Framework for Investment. Paris. 2006.
OECD: Policy Framework for Investment. Paris. 2006.
Sornarajah, Muthucumaraswamy: The International Law on Foreign Investment. Cambridge. 2010.
Tieleman, Katia: The failure of the Multilateral Agreement On Investment and the absence of a global public policy network. Case Study for the UN Vision Project on Global Public Policy Networks. Firenze. 2000.
UNCTAD Series on International Investment Policies for Development: The Role of International Investment Agreements in Attracting Foreign Direct Investment to Developing Countries. New York and Geneva. 2009.
WTO: A Multilateral Agreement on Investment: Convincing the Sceptics. Staff Working Paper ERAD98-05. Geneva. 1998.
http://www.global-labour-university.org/fileadmin/Papers_Wits_conference_2007/B5/sanchez_paper.pdf, last checked: 06/06/2012.
http://www.wto.org/english/forums_e/ngo_e/policy_brief_investment_e.pdf, last checked 06/06/2012
When examining the development of foreign direct investment and the effects of multinational corporations over the last decades, one has to come to the conclusion that the importance increased and grew significantly. Until the 1970s most of the countries were opposed to foreign direct investment due to a fear of losing economic and political independence by allowing foreign control over their economic resources and their key industries. Since the 1990s, there has been a positive turn towards foreign direct investment and its liberalization, because it is predominantly seen as requirement for economic growth, productivity increase, creation of export potential and technology transfer. As a result, the amount of foreign direct investment expanded faster than the world economy and the volume of international trade resulting in a need to control the investment flows and to regulate the area.1
By virtue of the rather sensitive topic of foreign direct investments, it was impossible in the past for the international community to agree upon an uniform and harmonized international regime setting out the standards for international investments. Hence, a multitude of national and international policy rules and principles govern the relevant aspects in this field resulting in a variety of international investment agreements. As an example, more than 2670 bilateral investment treaties and more than 270 other international investment agreements have been adopted globally until the end of 2008.2
Nevertheless, the plurality of the different international investment agreements with their different scopes, different types, different signatories have led to a patchwork of treaties resulting in a highly fragmented and incoherent international investment regime. As a result of this and the problems accompanying it, such as a more and more complex structure and an increase in investment disputes due to the interpretation and implementation of these treaties, the desire to adopt a general coherent framework for investment has been stirred, especially by international organizations like the WTO or the OECD.3
The OECD (Organization for Economic Co-operation and Development) is an international economic organization consisting out of 34 countries and was founded in 1961 to stimulate economic progress and world trade.
In the beginning, the OECD put the emphasis, as stated above, on economics and did not mention international legal cooperation at all. When the impact and influence of globalization, multinational corporations and foreign direct investment increased over the years, the organization shifted more and more towards setting rules and standards for international business activities. The most respected outcome of this new point of convergence are, for example, the “OECD Guidelines for Multinational Enterprises” or the “Convention on Combating Bribery of Foreign Public Officials in International Business Transactions”.4
Regarding the field of International Investment Law, the OECD pursued two major approaches towards a harmonization of this area, which will be the subject matter of this paper. Firstly, in the 1990s the OECD started negotiations to create a framework for the liberalization and protection of foreign direct investments which should serve as a basis for an international standard, the “Multilateral Agreement on Investment”. It was an ambitious approach with the aim of establishing a biding and freestanding agreement with high standards for liberalization and protection of investment as well as dispute settlement mechanisms. Despite that, there was a strong opposition and massive criticism by many different global actors. In the end, this combination of circumstances forced the OECD to abandon any further negotiations on the “Multilateral Agreement on Investment” and to end the project.
Secondly, bearing the failure of the “Multilateral Agreement on Investment” in mind, the OECD adopted in 2006 the “Policy Framework for Investment”. The difference between the two approaches is primarily that the “Policy Framework for Investment” is a non-binding instrument helping governments to identify important issues that need to be considered in order to establish an investment-friendly environment and to increase the investment attractiveness of a country. Additionally, it was negotiated with the help of NGOs and other international organizations as well as with non-OECD countries.
The key question for this paper is, logically, whether the idea of introducing a non-binding framework for investment can be an alternative for the adoption of a multilateral instrument. In order to answer this question, the paper will set out in “Part B” what the “Multilateral Agreement on Investment”, exactly is and what are its advantages and disadvantages. Following that, “Part C” will describe the idea behind the “Policy Framework for Investment”, and determine the benefits as well as the downsides of such a Policy Framework for Investment. Finally, in “Part D” the paper will contrast both approaches to allow a founded answer to the key question.
B. Multilateral Agreement on Investment
As a result of the desire to harmonize the international regime on investment, there have been various attempts in the past to reach a multilateral consensus. Given the positive attitude towards foreign direct investment in the 1990s and the successful establishment of the WTO, the OECD decided to promote a multilateral agreement to protect foreign investments and to ensure a liberalization of global investments. The idea was to create the “Multilateral Agreement on Investment” within the OECD Member States and then replacing the existing international investment agreements of non-member countries by allowing them to accede to the then existing system. By doing that, the initiators wanted to introduce a fair and stable global investment environment including clear rules and no hindrances.5
Consequently, the OECD started the negotiations in 1994 for a “Multilateral Agreement on Investment” with an initial deadline of Spring 1997. The short period of preparation shows clearly the high level of consensus between the participating parties thinking that they only conducted a mainly technical codification of existing rules and practices.
First and foremost, the major advantage of a multilateral agreement is that it binds several parties to certain obligations and offers every signatory the same rights. Hence, to achieve the aim of a global liberalization and harmonization in investment law an international standard is more likely to support policy reforms in domestic law and to ensure their endurance. National legislation often does not have the capability to address legal certainty concerns of foreign investors, e.g. in the case when the enforcement differs between host and home country, which makes an international dispute mechanism necessary. Otherwise, investors will choose the countries providing the best legal protection and fiscal incentives to them. Especially with fiscal incentives researches have shown that they are not beneficial for a good investment climate. It is questionable whether one can convince countries to stop using them, if no international agreement guarantees that all other countries will reduce their fiscal incentives as well providing an equal level playing field.6
The main intention behind the “Multilateral Agreement on Investment” was to come up with a stable instrument that supported economic growth while setting out consistent and transparent rules on liberalization and foreign investor protection. As a result, today’s complex existing patchwork of regulations would be removed allowing a better overview and an efficient working environment for investors.7
As a matter of fact, the current international investment regime with its variety of international investment agreements and legal details creates massive transaction costs for multinational corporations including legal advice costs or the costs of uncertainty about rights and duties. Clearly, high transaction costs reduce the total amount of foreign direct investment due to confusion. In addition to that, a complex system mainly favors large undertakings which are capable to operate their own specialized legal departments fostering a concentration of powers and the exclusion of smaller undertakings on the international investment scene. To put it in a nutshell, a multilateral agreement would advance competition in this area as well as economic growth and technology transfer entailing benefits for consumer and producer.8
To allow a sustainable and coherent international regime on investment with a high level of certainty for foreign investors, every signatory had an obligation to remain a member for a period of at least five years and the commitments of the treaty were valid for another 15 years after retreating. Moreover, the new established regime should remove all occurring hindrances by obliging a top-down approach to the participating countries. Basically, this means that every exception to the given provisions has to be laid down in the agreement by the time of adopting it in order to ensure coherence. Furthermore, very broad definitions, far-reaching provisions on expropriation and performance requirements, a national treatment provision ensuring equal treatment of domestic and foreign undertakings and a dispute resolution mechanisms supporting investor-state provisions should help to safeguard an adequate investor protection.9
II. Reasons for Failure
The advantages of a multilateral agreement, or more particular of the “Multilateral Agreement on Investment” as proposed by the OECD are noticeable. Nevertheless, in 1998 the negotiations came to an end due to massive criticism and deep disagreement on the content between the participating parties.
As mentioned before, the initial estimation was that it would rather be a codification of existing rules without major points of concern. But in the end, the negotiations revealed various controversial issues between the parties which made it impossible to reach a consensus. In general, conflicting approaches to occurring issues and opposing systems intensified by ideological riffs and clashes of interest led to most of the conflicts between the parties. One example therefor is the fear of the USA that any new obligations under the “Multilateral Agreement on Investment” could revoke the provisions set out in their NAFTA agreement if the minimum standards would be lower. Contrariwise, Canada and France suspected that an unrestricted market access would result in an overrun of their cultural and entertainment industry by the American counterparts and hence, they wanted protection for their industry.10
One of the major concerns were whether security considerations are a legitimate reason for a country to prefer domestic suppliers and investors over foreign ones. Security considerations would include investment decisions for defense industries or other sensitive industries. Main problem here is the definition of a country’s security interest which can include, depending on the country, the protection of special interest groups, greater concern with equity or the protection of certain key industries or companies. As long as countries do not clearly define what a national interest is a consensus on a multilateral agreement is unlikely. Furthermore, security interests often go along with a fear of a loss of sovereignty with respect to taxation, to promoting economic activities that are vital for the country, to important domestic undertakings that might not be able to compete with multinational corporations, to culture or to social engineering.11
1 Cf. Tieleman, The failure of the MAI, 2000, p. 3 f.
2 Cf. UNCTAD, The Role of International Investment Agreements, 2009, p. 2.
3 Cf. Gugler/Hamida, How the PFI may contribute to a more coherent international policy framework in investment 2007, p. 3 f.
4 Cf. Geiger, GWILR, 2011, p. 296.
5 Cf. http://www.global-labour-university.org/fileadmin/Papers_Wits_conference_2007/B5/sanchez_paper.pdf, last checked: 06/06/2012.
6 Cf. WTO, MAI: Convincing the sceptics, 1998, p. 3 ff.
7 Cf. Gugler/Hamida, How the PFI may contribute to a more coherent international policy framework in investment, 2007, p. 3 f.
8 Cf. Brunner/Folly, The Way to a Multilateral Investment Agreement, 2007, p. 1 f.
9 Cf. Tieleman, The failure of the MAI, 2000, p 3 ff.
10 Cf. Sornarajah, The International Law on Foreign Investment, 2010, p. 236 f.
11 Cf. WTO, MAI: Convincing the sceptics, 1998, p. 6 f.