The Classical Theory on Foreign Investment - Essay Example

?Critically Analyse The Theoretical Conflicts Between Capital Exporting Countries And Capital Importing Countries With Regard To The Protection Of Foreign Investments In The Immediate Post-War Period. To What Extent Have These Controversies Been Settled? Table of Contents Table of Contents 2 Introduction 4 Theories 5 The Classical Theory on Foreign Investment 5 Dependency Theory 5 Middle-Path Theory 7 The Arguments of Capital Importing and Capital Exporting Countries 7 The Conflicts in Regards to Foreign Investment Protection 9 Standards of Treatment and Government Regulations 9 Compensation Upon Expropriation 13 Dispute Settlement 16 World Trade Organisation (WTO) 16 Bilateral Treaties 18 Foreign Investment Treaties 20 Role of OECD 21 NAFTA 22 ASEAN 22 Conclusion 24 References 25 Books 25 Journals 26 Introduction There have been certain fields in relation to the international law which have been stimulating quite some disagreements similar to the law regarding the foreign investment. The end of the colonialism resulted in letting loose forces with regard to nationalism. After breaking free from the fetters of colonialism, the freshly self-governing states got restless to put an end to the economic supremacy of the previous colonial authorities present in their own respective states. It was also followed by a further restlessness with regard to a world regulation which was thought to allow them increased possibility for the regulation of their respective economies along with providing the right of entry to the international markets. The Cold War among the then existing super-supremacies gave rise to ideological disputes regarding the law. The various theories that were triggered in relation to foreign investment would be further discussed1. Theories The Classical Theory on Foreign Investment The classical theory regarding the foreign investment states that the notion of foreign investment proves to be completely advantageous for the ‘host economy’. There have been stated to be numerous features which have been regarded to be substantiating this particular observation. The reality of the foreign funds being brought into the host country makes certain of the fact that the country’s or the states available funds which could be made use of would be capable of rerouted for the purpose of putting it to different uses. This rerouting of the capital would prove beneficial for the public of the state. The introduction of a foreign investor would typically bring in fresh technology which would have no chances of being available with respect to the host country. This scenario or aspect paves way towards technology distribution in the economy of the host country. This gives rise to fresh employment needs and without the presence of foreign investment, such employment prospects would not be triggered2. Dependency Theory The theory of dependency surfaced in the period of 1950s to be a serious response with respect to the conservative approaches towards the economic progress that materialised in the repercussion of the Second World War2. The consequences of foreign funds along with the multinational corporations (MNCs) on the host states could be drawn from the writings which were laid down by the “dependency school”. Dominant works done by this particular school entails the ontology regarding dependency like the theory of Karl Marx on development as well as underdevelopment, study conducted by Andre Gunder regarding the development as well as underdevelopment, study conducted by Paul Baran regarding the economic growth and backwardness and also the writings by Samir Amin on the subject of unequal growth4. Different countries took up the viewpoints of the dependency theory during that period like the Latin American and the East Asian countries. Among these, quite some countries agreed to the plan of import replacement and posed an aggressive approach towards the idea of foreign investment. These specific policies were noted to have damaging consequences on the economies of such countries. In the period of 1970 and 1980, the East Asian nations also moved their concentration from the theory of dependency towards additional liberal guiding principles for the reason of drawing foreign investments3. Middle-Path Theory The theory of ‘middle-path’ according to its name is founded on the blend of the other two existing theories. This particular theory recognises the advantageous and the damaging consequences of the foreign investments. From one viewpoint, the foreign investments that are made by the MNCs might prove advantageous in terms of the domestic economy with the capital as well as technology flow, fresh employment prospects and the establishment of fresh income prospects made with the help of exports. Whereas from the other viewpoint, it frequently occurs that the MNCs overpower the regulations related to tax with regard to the host countries by involving in ‘transfer pricing’. To further add to this, it needs to be also mentioned in this regard that the character related to the exported form of technology has been time and again neglected and is often considered to be perilous as well. This character of the technology could bring about possible damage to the environment as well as life2. The Arguments of Capital Importing and Capital Exporting Countries The belief or idea regarding the ‘permanent sovereignty’ on the natural resources was stated to be a basic standard of modern international law. It surfaced in the period of 1950 at the time of the process of decolonisation to be an essential element associated with the authority of self-determination along with an indispensable and intrinsic constituent related to state sovereignty. The notion was stated to have initiated from the dealings made on the conformity of developing natural resources as the developing states desired to keep away from the unfair and the burdensome agreements forced on their respective incautious and weak governments at the time of colonial period. The usual perspective where enduring sovereignty was called upon, considered the association among the host nations that had plentiful natural resources and the international or the MNCs. The MNCs were believed to be concerned with or desired to commence the course of utilisation of those resources particularly in terms of nationalisation of those international ventures and the subject of compensation4. The most noteworthy statement made on the subject of permanent sovereignty on the natural resources affirmed that the authority of people and the states of permanent sovereignty on their respective natural possessions as well as resources needed to be implemented keeping in concern the objective of their national growth and the welfare of the relevant country’s people. Therefore, it can be stated that the permanent sovereignty mirrored the intrinsic and the superseding authority of a nation to manage the utilisation and the employment of its respective natural resources. However, a nation had to implement this authority taking into concern the welfare of the citizens5. The principle with regard to the ‘permanent sovereignty’ of the natural resources offers an outstanding instance of dispute of interest among the ‘capital exporting’ as well as ‘capital importing’ countries. The ‘capital-exporting’ nations were stated to look for assurances with respect to the arbitrary behaviour in terms of host nations with regard to international investors and investments. The other scenario involved the ‘capital-importing’ nations that were stated to look for ways of implementing independent economic guiding principles in agreement with their respective national purposes5. The Conflicts in Regards to Foreign Investment Protection Standards of Treatment and Government Regulations The entirety of the responsibilities in relation to a host nation for which it is obliged to an international or foreign investment or even an investor has been usually mentioned to be the treatment for which an investment or investor is entitled to. The word of ‘treatment’ has been therefore stated to be an expression of art with regard to investment treaties and arbitration related to the investor-state. The investment treaties are believed to specify the customary treatment that a host nation needs to agree with in terms of foreign investment with regard to two aspects8. The investment treaties have been learnt to describe definite usual regulations of treatment along with affirming particular specifications for certain subjects, for instance the confiscating investment property, the decisions regarding conflicts with the government of the host country, the financial transfers and the engagement of foreign human resources. Besides these, some usual specifications, for instance the assurances of complete security and safety or just and impartial treatment have been mentioned as unconditional in character. Others, like the national treatment along with the treatment of the highly supported country have been stated to be measured as dependent or comparative owing to their implementation being reliant on the agreed treatment made by the nation to the other foreign investors8. The issue that arose with regard to international investment was correlated to the matter entailed in the international law. This law restricted the authority of the host nation regarding the dealing of the foreign investor. Varying claims were made by various groups of nations with regard to the customary law. On the subject associated with foreign investments, the capital-exporting nations made a declaration regarding the presence of the international customary law. It was stated that the law would restrict the nation’s sovereignty with respect to enforcing limitations on the alien investors. The customary law has been stated to deal with a specific subject referred to as the responsibility of the states regarding dealing with the foreign investors. This particular law enforces specifications on the nations with regard to the treatment of the foreign investors existing in their respective territories6. The regulations associated with regard to the state or the nation’s responsibility towards damages to foreign investors includes the body relating to international law. This body searches to present a ‘standard of treatment’ for the foreign investors who enter the nations for different causes, entailing the objective of carrying out business. They generate accountability in the host nation for the failure to monitor the agreed specifications while dealing with the aliens. Security of the home nation is always carried by a foreign investor even after leaving the home state. This aspect and regulation referred to as ‘diplomatic protection’ has been prevalent since the early days. The legitimacy of this kind of interference in the present international law has been doubtful. The theory in relation to the state responsibility regarding damages to the foreign nationals has been based on the thought that any damage to a foreign national is considered to be damage to the home state of the national7. The viewpoint of Latin America according to which the foreign investors were focus of the regulations in relation to the host nation solely and enjoyed no security with the help of any external specifications. This was a perception that was majorly supported by the international law which prevailed at the time when the controversy was initiated. There was evidently no security predicted in the international law concerning the contracts entered by the foreign investors with the host nation. During the beginning of the twentieth century, the writings found on the problem were learnt to encourage the view in support of the nation’s responsibility. This responsibility was with regard to any kind of an injury done to the foreign national or even for any kind of destruction caused to the investor’s property by the national forces or in the form of a consequence out of carelessness in offering security by the host nation or country. But there existed an absence of explicit support with regard to the suggestion for the need of the rule to be made absolute to the protection of international investment. The writings were found to include evident statements stating that violations of contracts made by the citizens of the US with the states of Latin America need not be considered to be a state concern8. It needs to be mentioned that six usual ‘standards of treatment’ could be recognised in this context and they are the just and impartial treatment, the security from irrational or biased measures, the necessity to revere the responsibilities arising towards the investments as well as the investors, the complete security and safety, the treatment in compliance with the agreements made under the international law and the treatment of national and/or the highly supported state or country. A separate treaty of investment might offer for few or each one of the mentioned specifications regarding the treatment9. However, it was observed that the significance of the international law with regard to encourage and indulge in foreign investments was usually stated to be discarded by the developing countries. The rejection of the significance of the law was done apart from such assurances with regard to these kinds of investments that were shaped with the help of a treaty. In this regard, the developed nations or countries had on the other hand, took on a plan of protecting foreign investment with regard to the possibility pertaining to the domestic law. Instead of focusing on the law of foreign investment, it was subjected to the least specifications of treatment which the developed nations declared to be a necessary part of the international law. This created a conflict between the capital exporting and the importing nations10. Compensation Upon Expropriation Compensation has been stated to be the most ordinary kind of cure wanted and rewarded in cases of state arbitration with regard to the investor. The structure of the standards of ‘compensation for expropriation’ with regard to the usual international law had been structured based on a particular idea known as the ‘Hull Formula’. According to the present condition of the usual international law, it is believed that nations possess the authority to confiscate the possessions of other foreign nationals. It could be only done under the condition that such an act is carried out for the welfare of the public, in an unbiased way and also by paying compensation in exchange of the possessions9. For the purpose of being legally recognised, it is regarded necessary for the compensation to obey the prerequisites of the ‘Hull Formula’. This particular formula was stated to be derived from a note written by Cordell Hull who was the Secretary of State of the US in the year 1938. The note was addressed to the government of Mexico, as a repercussion to the insurgency that occurred in Mexico in the start of the twentieth century. The formula states that the compensation needs to be disbursed without much irrational postponement and the amount needs to match up to the reasonable and just market valuation of the possessed property right away prior to the possession. The amount also requires to be paid in such a currency which is capable of being freely transferred9. Under the law of international investment, the behaviour of the government which has been considered to pose economic damage to the foreign investments or the investors might be measured as lawful as well as unlawful. The lawful sort as laid down has been stated to be restricted to legally recognised expropriation. This implies that the behaviour is conducted for the welfare of the nation and its people in an impartial way and is followed with a disbursement of an amount which is thought to be a reasonable market value for the possessed property11 . The normal international law has been stated to not prevent the host countries from confiscating foreign investments under the condition that specific clauses are agreed to. These clauses entail indulging and accepting investment for the reason of public purpose, as offered by the law. The law also includes that the acceptance of the investment should be of an unbiased nature and must be with appropriate compensation. It has been stated that expropriation or in other words “wealth deprivation” is capable of taking various forms. Those forms entail that the idea of expropriation could be in a direct form. This occurs under the condition when a particular investment is in the nationalised form or else directly expropriated with the help of official shift of the title or absolute physical seizure. Besides the usual term of expropriation, other expressions like acquisition, privation, dispossession and deprivation have also been used. The international law has been quite evident regarding the fact that a capture of a property’s legal title would certainly comprise of a ‘compensable expropriation’12 Expropriation or in other words the dispossession of property has been stated to even take place owing to state intrusion for the use of a particular property or also in the instance of benefitting from a property. The condition of taking pleasure in the advantages derived from a property could occur without the seizure of the property and also without having a result or influencing the particular property’s officially authorized title. The actions or procedures adopted by a particular nation have been learnt to pose a related consequence to nationalisation or rather expropriation. The procedures or actions have been usually expressed as creeping, tantamount, indirect or de facto to expropriation10. However, it is necessary to be mentioned in this regard that according to the international law, the procedures that are intrusive with property are termed as expropriation by every state. Thus, it was stated that the foreign assets along with their application might be entitled to taxation, procedures of devaluation or trade limitations entailing quotas as well as licenses. While extraordinary actualities are believed to change cases, in standard such procedures are however not considered to be illegitimate and as a result does not amount to expropriation. Similarly, the unbiased procedures associated with consumer security, environmental security, anti-trust, land planning and securities have been mentioned as non-compensable takings as they are considered as indispensable for the competent operation with regard to a nation. As mentioned earlier, there exists no normally acknowledged and apparent description of the idea of indirect expropriation and the features which could differentiate between it and the non-compensable regulation10. Post colonialism, a confusion of nationalisations planned to resume management of the economy from previous companies with respect to the former colonial powers. After the early precipitation of nationalisations, a shift was initiated which had set aside the extensive takings of the industrial segments and concentrated on aiming towards particular companies. There were certain arguments which were initiated owing to the origination of the investment treaties. The arguments were further combined with the actuality that the development of the law occurred for the reason of providing security to the investments taking place in the developing nations. This law was then being used in opposition to the developed nations which was a consequence of treaties such as NAFTA13. Dispute Settlement World Trade Organisation (WTO) The World Trade Organisation (WTO) was established in the year 1955 and is the sole existing international organisation that is responsible for the international trade regulations among various nations. It was a fresh addition amongst the other international organisations. WTO originated as a descendant of the General Agreement on Tariffs and Trade (GATT) which was set up during the period of Second World War. The multilateral system of trading was initially established under GATT some 50 years ago. The various countries around the world had built an international system of investment. The countries also worked hard at building an international system of trade with the help of GATT8. WTO ensures that the trade carried out with regard to the Foreign Investment Law is as just as possible. The members of the WTO, functions an unbiased method of trading which takes heed of their obligations as well as rights. Each member country is given an assurance that the exports of the country would be taken care of in a just and reliable way in the respective markets of various countries’. The same assurance is given by the countries for the treatment of imports in their own respective markets. This particular method of trading even provides the growing and the progressing countries with certain flexibilities while putting into practice their commitments11. The process of WTO for deciding on the solutions with respect to trade squabbles under the Dispute Settlement Understanding is considered quite crucial for the reason of implementing the rules. The implementation of the laws makes certain that the trades are carried out easily. Conflicts of several countries are brought to WTO when it is felt by the countries that their civil liberties are disobeyed with respect to the agreements. Verdicts given by specially-selected self-governing specialists have been stated to be supported by the understanding of the contracts and the assurances provided by the individual nations. This method of trading supports nations to resolve their conflicts with the help of consultation14. GATT was stated to be mainly concerned with the aim of supporting trade liberalisation which could have had a positive consequence on the matter of technology transfer. It is a known fact that dealing in goods particularly capital goods was considered to have a significant part in distributing technology globally. This initiated the agreement of Trade Related Investment Measures (TRIMs) and Trade-Related Intellectual Property Rights (TRIPS). The agreement of TRIMs was considered to be quite noteworthy owing to the strong association between the Foreign Direct Investment (FDI) and shift of technology. On the other hand, the agreement of TRIPS was stated to be concerned clearly with the rights pertaining to intellectual property15. The agreement of TRIMs prevents the member nations from accepting investment measures such as foreign exchange, balancing of business for the reason of supporting the domestic producers to make use of the locally produced goods16. The agreement of TRIPS which became applicable since the year 1995 was declared to be amongst the most complete multilateral agreement relating to the intellectual property. It was stated to be concerned with every vital individual group relating to the privileges concerning intellectual property. This particular agreement ascertains specifications with consideration to protection and to implementation. It also offers the implementation of the conflict settlement method adopted by the WTO for the purpose of providing solutions to the conflicts arising among the member nations13. Bilateral Treaties Bilateral in its simplest form means two and thus a bilateral treaty entails two parties, in this instance, it refers to two nation parties devoted to the encouragement and the security of the behaviours related to global foreign investment. Since it was found that nations themselves hardly perform activities that are directly related to global foreign investment, these kinds of treaties were stated to describe and to structure the legal fields. These legal ambits were structured to commence, put into practice and comprehend the behaviours related to foreign investment for the investors from any one of the nation with regard to the other nation’s economy. This was also defined to be the association entailing two nations in a treaty of investment initiating and safeguarding the behaviours related to investment of the foreign investors from any of the nations. This was referred to as a connection which had two nations and the involvement of foreign investors as well17. Foreign Investment Treaties It was stated that if the nations were in conformity according to the norms comprising the international law with regard to foreign investment then there would have existed a probability to comply with a multilateral agreement with regard to the foreign investment which would have laid down the rules applicable in the particular field. The non-existence of such multilateral contracts was attributed to the presence of the disputing approaches towards the issue of protection of foreign investment along with the prevailing competing systems with regard to the foreign investment treatment. This gave rise to a movement supporting the formation of New International Economic Order which provided greater degree of authority on the foreign investment of the developing nations. With regard to this, codes were outlined by a specially formed body known as the United Nations Commission on Transnational Corporations (UNCTC). These outlines were opposed by the developing nations and they proceeded with another version. This was attributed to be the major reason for the failure of the non binding Multilateral Instruments18 The foreign investment treaties have been stated to be founded on the assumption that the assurances offered to the foreign investors’ host nation’s local legal system might prove to be inadequate for the special reason proposed by such treaties. The prime purpose proposed by these treaties has been stated to be the formation of an atmosphere that is investment friendly and would facilitate in luring foreign investments preferred by the host nation. This particular fundamental validation is considered equally appropriate for traditional ‘bilateral investment treaties’ as well as the current group of ‘free trade agreements’ which includes the investment rules19. Characteristically, the assurances offered in case of such treaties have been stated to be approved in accumulation to those included in the national system of the host nation. The treaties have been stated to be dealing with the management of the foreign investors solely and are considered to be intrinsically unresponsive to the matters related to the legal arrangement associated with the host nation15. Role of OECD The Organisation for Economic Cooperation and Development (OECD) is being stated to be a global organisation and comprises of few of the affluent States in the world. This organisation was established in the year 1961 and its vital objective is to encourage policies for the reason of motivating and complementing the endeavours of its members in support of the growing countries. The guiding principles in relation to the Multinational Enterprises that are laid down by OECD facilitate to create a common platform for the involved parties. The guidelines have been stated to make the companies, who are considered to be quite influential compared to the local governments, take up a responsible behaviour in exchange of the investment guiding principles of the government20. NAFTA The concept of economic regionalism has been referred to be privileged form of trading agreements between a subset of countries or even as a rising model of focused investments as well as trades on regional associates. North American Free Trade Agreement (NAFTA) has been referred to as the biggest area of free trade in the entire world in absolute economic output. It was enforced from January 1994 and this organisation had mainly focused on eradicating tariffs and supporting just competition amongst its existing members Mexico, Canada and United States. The organisation also aimed at extraordinarily enhancing trade in comparison to the other existing regional organisations. However, the other purposes of this organisation include amplifying the foreign investment and to safeguard the intellectual property constitutional rights from technology to even drug patients17. ASEAN NAFTA has been stated to be single-focused organisation and there was a need for organisations with multiple roles. The Association of Southeast Asian Nations (ASEAN) could be cited as an example of such an organisation. It was established in the year 1967 with the authorisation to promote economic harmony between its original members. The organisation soon emerged to be an establishment for deciding on conflicts and encouraging peace. It even facilitated in forming other regional groups, for instance the ASEAN Free Trade Area (AFTA) and also the ASEAN Regional Forum (ARF)21. Conclusion From the above discussion, the theoretical disputes among the capital exporting and the capital importing countries with regard to the protection of foreign investments in the immediate post-war period are quite evident. Various aspects associated with the foreign investment law have been discussed as well. The disputes with regard to the foreign investment protection was identified and further discussed with special emphasis on the treatment specifications and government regulation. The role of certain organisations and treaties which worked towards settling the disputes were also paid attention to. Foreign investments were encouraged and considered to be quite important for the growth of the developing countries but certain aspects were needed to be considered to ensure that the developing countries were not exploited as a reason of it. These aspects were discussed and the relevant endeavours for the prevention for such acts were also focused on. References Books Campbell Dennis. International Protection of Foreign Investment [2008]. (Lulu.com, 2008). Fru Valentine N. The International Law on Foreign Investments and Host Economies in Sub Saharan Africa. (LIT Verlag Munster, 2011). Organization for Economic Co-operation and Development. OECD Forum 2002: Forum Highlights. (OECD Publishing, 2002). Rahman Fath E and Sheikh Abdalla E. The Legal Regime of Foreign Private Investment in Sudan and Saudi Arabia. (Cambridge University Press, 2003). Sabahi Burzu. Compensation and Restitution in Investor-State Arbitration: Principles and Practice. (Oxford University Press, 2011). 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