Foreign Investment

Foreign Investment


The World Bank Convention on the Settlement of Investment Disputes (ICSID);
The Convention establishing the Multilateral Investment Guarantee Agency; and
Bilateral Investment Protection Agreements (IPPAs).
(London, 1994)

The issue of the protection and promotion of foreign investment in international law arises, principally, as regards to investment (specifically private investment) from developed to developing countries, and has traditionally been associated, on the one hand, with the attempt to extend to such investments and to the corporations effecting them the protection afforded under the international law of State responsibility for injury to aliens and alien property, and, on the other, the regulation of the activities of such corporations. In addition, the issue has to be considered against the background of conflicting views as regards to economic systems (free-market versus command economies) and as to the benefits to developing countries of foreign direct investment (FDI), the ubiquitousness of transnational corporations (TNCs), and the process of decolonisation in the 1960Â’s with the emergence of new independent states, in Africa and Asia, seeking to control their economic destiny and natural resources in the context of a world economic order considered by them as being unjust and exploitive. Nevertheless, over the years, despite the persistance of a certain element of distrust towards TNCs (sometimes justified), and conceptual differences, developing countries, in general, have come to recognize the importance of FDI for their development, as a way to bridge the gap between domestic savings and investment, obtain much needed foreign exchange, revenues, technology transfers, new export markets and employment opportunities for their populations.

The emphasis in developing countries, today, is in attracting FDI, even competing with each other, and collaborating in the development of a favourable policy environment for this to occur, whilst retaining control over the pace nd style of their development, and being able to regulate the activities of TNCs. The creation of a favourable climate for investment is even of more urgency to some developing countries given the competition they face from the former Soviet Union and Eastern Europe, with their espousal of the free-market economy, and their thirst for FDI.

For TNCs it is important not only to operate profitably, but to do so in the knowledge that their investment is secure or protected from arbitrary political decisions of the host state. The importance of FDI and the incentive for individual countries to create or reinforce a propitious environment for its attraction can be illustrated by reference to the growth of FDI and to its distribution. In 1986, FDI to developing countries totaled about $10 billion; by 1992 it had reached $38 billion (out of worldwide FDI of $126 billion). But whilst East Asia attracted about $15 billion, similar to the amount attracted by Latin America, the Middle East and North Africa attracted $4 billion and Sub-Saharan Africa less than $2 billion (1). Thus, given the importance attached to FDI, have the existing multilateral conventions and bilateral agreements established to protect and promote it, been succesful?
Before answering the question, it might be useful to refer back to the different approaches to the subject and to review the principals involved, opinio juris, and state practice.

Traditional principles of customary international law considered that, host states were duty-bound by international law to observe an international minimum standard in the treatment of aliens and their property. Although it was recognised that aliens would be subject to the domestic legislation of the host state when operating within its jurisdiction, it was not considered sufficient that aliens should be afforded the same treatment as afforded to nationals of the host state, especially if that treatment fell below the international minimum standard. A breach of the minimum standard by the host state would bring into play the concept of State responsibility and would allow the home state to afford diplomatic protection to its nationals and, if thought appropriate, to take up claims on their behalf. This position was adopted by developed states operating under the ideological paradigm of the free-market, who also placed a great importance on the principles of acquired rights, the duty of states to observe contracts (pacta sunt servanda), and the non-discriminatory treatment of aliens (i.e. between aliens) and alien property.

The opposition to such a position can be traced back to the objections by Latin American countries and their espousal of the doctrine of national treatment (or Calvo Doctrine), at the turn of the century, which emphasized the principles of sovereignty and equality between states and the role of non-interference, asserted that aliens had no more rights and privileges than nationals and, following this, that only national courts had jurisdiction and therefore no international adjudication was admitted.

The objections of Communist States to an international minimum standard and the application of the international law of State responsibility to protect aliens and their property (especially private property belonging to Capitalist corporations) centred on their rejection of the concept of private property, and, notwithstanding their general reservations about international law, contended that same was concerned with relations between states and should not be extended to private corporations with no international legal personality of their own.

The new independent states of Africa and Asia objected to the traditional principles on the basis that they reflected an eurocentric view of the world and merely perpetuated situation of economic dependence on colonial (now neo-colonial) lines.

In the period since 1945, and especially in the late 1960Â’s and in the next decade, a spate of nationalisations in developing countries of foreign property, highlighted the gulf between the traditional principles promoted by developed countries and those enunciated by developing ones, with the latter asserting that such measures ere a legitimate exercise of their sovereignty to safeguard their economic independence and to restructure their economies. Their position was underpinned by various United Nations (UN) resolutions, in particular, the Resolution on Permanent Sovereignty over Natural Resources (GA 1803) adopted in 1962 by 87 votes (87:2:12 – the votes against were cast by France and South Africa and the abstentions were on the part of the Soviet Bloc, Burma, Ghana and Cuba), the Declaration on the Establishment of a New International Economic Order (GA3201) adopted in 1974 without a vote and with strong reservations on the part of Germany, France, Jpan, UK and the US and the Charter of Economic Rights and Duties of States (GA 3281) again, adopted in 1974, by 120 votes (120:6:10) – but in this instance all capital-exporting countries either voted against or abstained.

The focus of the traditional doctrine was on expropriation (for the purposes of this paper the term will be used interchangeably with that of nationalisation) and centred around the inviolability of private property and the duty to observe contracts, that coupled with international minimum standards and the respect for acquired rights led to the prohibition of expropriation. States that breached the prohibition were required to make reparations to the injured party with full restitution (see Chorzow Factory Case (2)).

However, over the years, state practice and opinio juris, paved the way for an “acceptance” of expropriation if: it was efected with due process of law; and was followed by prompt, adequate and effective compensation ( meaning compensation immediately upon expropriation, at market value on a going-concern basis plus an allowance for loss of future earnings, and in fully convertible currency). This re-formulation of the traditional doctrine was challenged by developing countries on the basis that: neither the legitimate exercise of their sovereignty, nor their assertion of what constituted their national interest should be questioned; that prompt and effective compensation would place an undue strain on their balance of payments; and that he measure to be applied in calculating compensation, rather than adequate, should be calculated on the basis of net book value.

The decisions and awards of international arbitration tribunals have been varied, and at times contradictory. In addition, as Asante (3) points out: “…The significance of case law in this area is further diminished by the paucity of international arbitral decisions on expropriations in the post-war era. In some cases, the decisions were complicated by the interpretation and application of specific treaty commitments outside the purview of general customary international law.” He then goes on to review some of the cases, namely, Aminoil, Topco/Calasiatic and Liamco. In Aminoil, the tribunal cited UN Resolution GA 1803 on Permanent Sovereignty over Natural Resources in holding the right of nationalisation even when there existed a stabilisation clause. The standard of compensation was to be appropriate compensation. In Topco/Calasiatic, the arbitrator held that the petitioners were entitled to restitution. But in Liamco, which as a case similar to the latter, another arbitrator held that compensation was to be equitable.

Greenwood (4), reviewing the same cases ( plus BP v Libya ) in the context of state contracts, also refers to “…the uncertain state of this area of international law”, but concludes that the decisions appear to support that: “a contract between State and a foreign company may be delocalized, thus withdrawing it from the automatic application of the contracting State’s legislation; that delocalization may take the form of subjection to a non-municipal system of law; that the non-municipal system by which the contract is to be governed may be public international law; that international law continues to impose limits upon a State’s freedom to nationalize property and contractual rights within its own jurisdiction; and finally, that States have the capacity to enter into binding undertakings not to exercise certain of their sovereign powers, so long as those undertakings do not amount to an attempted surrender of that sovereignty.”

As regards to State practice, Asante (5), notes that strategic nationalisations (as opposed to seizure of property, a distinction made in some of the cases brought before the Iran-US Claims Tribunal) have not been effectively challenged for failure to comply with the requirements of “public interest, non-discrimination, or due process of law.” As to compensation he refers to a study by Bring and another by the UN Centre on Transnational Corporations on compensation setlements to conclude that the only requirement supported by state practice was “effective” compensation.
In view of the above, what has been the role of multilateral conventions and bilateral agreements in protecting and promoting foreign investment?
The World Bank Convention on the Settlement of Investment Disputes and The International Centre for the Settlement of Investment Disputes (ICSID).

The World Bank Convention on the Settlement of Investment Disputes between States and Nationals of Other States ( the Convention) came into force on 14 October, 1966. As at 30 June, 1993 the number of signatories totaled 123 out of which 109 had deposited instruments of ratification.

The Convention (an initiative of the World Bank) was designd to address the problems arising out of investment disputes between states and foreign private investors, and to provide a forum for their resolution by means of conciliation and arbitration. It was the fifth attempt since 1945 to address the problems on a multilateral basis, the previous four (Havana Charter 1948, Abs-Shawcross Draft Convention on Investments Abroad 1959, and the OECD Draft Conventions on the Protection of Foreign Property 1962 and 1967) having failed in their objective. In essence, the Convention sought to resolve the problem of jurisdiction in such matters, to recognize the problem posed by the lack of international legal personality of foreign investors, and to provide a mechanism by which awards would be easier to enforce. And, thus, resolve some of the shortcomings encountered by international arbitration tribunals. However, it is important to note that the Convention itself does not attempt to regulate for the protection of foreign investments or to enforce awards, but rather to place at the disposal of the contracting states the framework by which these ends may be achieved.

Such framework is provided by the ICSID, an organization based in Washington with full international legal personality (although its members must also be members of the World Bank) composed of an Administrative Council, a Secretariat, and the Panels of Conciliators and Arbitrators. Appointments to each Panel are made by the Contracting States (each State designating four persons to each Panel) and the Chairman of the Administrative Council (who may designate 10 persons to each Panel, each of a different nationality, and having regard to a balanced representation of the worldÂ’s principal legal and economic systems).

The jurisdiction of ICSID is covered by Articles 25, 26 and 27 of the Convention, and as Sutherland (6) points out: “The Executive Directors of the World Bank have described the requirement of consent stipulated by Article 25(1) as the cornerstone of the jurisdiction of the centre… the consent requirement is constant… [and] serves to raise an agreement between foreign investor and host State to submit to the jurisdiction of the Centre to the level of an international legal obligation”, and thus delocalize it from the domestic legislation of the host state. The other important feature of this article is that once consent is given it cannot be withdrawn, it is irrevocable, and, further, consent is deemed to exclude any other remedy, including diplomatic protection (the remedy that the supporters of the traditional doctrine sought to apply under the international law of State responsibility).
As regards to the nature of the disputes over which ICSID has jurisdiction, the requirements are that they be related to investment matters and that they be a “legal” dispute (the latter requirement resembling that of the International Court of Justice in its area of jurisdiction).

The procedure for conciliation and arbitration in ICSID follows a pattern similar to that adopted by other Commissions and Tribunals and is designed to be as flexible, but at the same time as effective, as possible. The Convention provides for Conciliation and Arbitration Rules to be applied in the event that the parties cannot agree on procedural issues. As to applicable law, although the parties are free to agree on choice of law, even not to defer to law, should they not be able to do so, Article 42(1) stipulates that the law shall be the law of the Contracting State party to the dispute (including its rules on the conflict of laws) and such rules of international law as may be applicable.

One of the most difficult obstacles of arbitrations is that of enforcing an award. The salient characteristics of the Convention in this respect are that: the award is final; it is binding; and that the municipal courts of the Contracting Parties are obliged to enforce it without further examination (although Art.55 on immunity rules and the Letco v Liberia case, 1986 should be noted). Failure on the part of the Contracting Parties to abide by the award, allows the national of a Contracting State to request diplomatic protection from his own State (a remedy up to this stage excluded by the consent clauses). It should also be noted that, as with other international treaties, disputes arising between Contracting States relating to the interpretation or application of the Convention can be referred to the ICJ.

The importance attached to ICSID may be illustrated by the increase in its membership and especially by considering which States have signed the Convention: China (ratified 7.1.93); in Latin America 12 States have signed of which 6 have ratified; Eastern European and Central Asian States (although as at 30.6.93 Russia had not yet ratified) and most African States.

Conversely, Libya and Iran are not signatories, neither is Mexico (but the North Amrican Free Trade Agreement of which Mexico is a member incorporates references to ICSID in the provisions on the resolution of disputes). There are now 27 national investment laws and 268 bilateral invstment treaties that make reference to ICSID.
Since its inception, ICSID has received 28 requests for arbitration of which 16 were settled by agreement, and 9 by final award (one of which was anulled). As at 30.6.93 there were 3 cases pending before the Centre.
The Multilateral Investment Guarantee Agency (MIGA).

The Convention establishing MIGA came into force in April, 1988. MIGA is a member of the World Bank Group and its aim is to encourage the flow of FDI to, and among, developing member countries, and by providing advisory services to the latter in order that they may create a favourable policy environment for such investment.
MIGA is owned by its member countries, who must be members of the World Bank. As at 30.6.93 there were 139 signatories to the Convention of which 107 were full members. The geographical distribution of members is similar to that of ICSID (except for the fact that Libya is a member).

MIGA consists of a Council of Governors, a Board of Directors, a President, and staff. The Council is composed of one Governor and an alternate appointed by each member, and the Board, responsible for the running of the Agency, is composed of 20 Directors. The voting arrangements are designed to reflect the equal standing of all member countries and the importance of their financial contribution, and unless otherwise specified in the Convention, decisions of the Council and the Board are taken by a majority vote (it is worth pointing out that the votes of those members who belong to the OECD amount to 57.19% of the total).

MIGA issues guarantees to eligible investors for elegible investments and provides cover for currency transfer, expropriation, war and civil disturbance, and breach of contract. There are, however, certain conditions and/or exclusions which should be highlighted. These are as follows:
• MIGA has to ensure that the investment will have positive developmental effects for the host country, and in fact, the agreement of the host country has to be obtained before any guarantee is issued. MIGA also has to verify that the investment conditions provided by the host country afford the necessary legal protection for the investment (thus, advocating some form of international minimum standard).
• Cover for expropriation following non-discriminatory measures adopted by the host state for the purposes of regulating economic activity in its territory is excluded (thus, it woul appear, making a distinction between straightforward seizure of property and nationalisation for a public purpose).

As regard to dispute settlement, those that may arise between the Agency and its members or between members are referred in the first instance to the Board (a non-judicial body), but there are provisions for negotiation, conciliation and arbitration. Disputes arising between the Agency and an investor out of the contract of insurance may be referred to arbitration. The Convention refers to ICSID rules of procedure.

As at 30.6.93 the Agency had contingent liabilities under guarantees issued amounting to $745 million, spread over 17 countries, with Sub-Saharan Africa representing only 3.78% of the portfolio.
Bilateral Investment Protection Agreements (IPPAs).

In the absence of a multilateral convention for the protection of FDI (ICSID which dealt with the settlement of disputes and the compulsory international arbitration of same cam into force in 1966, and, as mentioned above, previous multilateral initiatives had failed) a number of developed countries began to formulate bilateral agreements to this end. These agreements can be seen as a way to formalise and particularise the modern conception of traditional principles of customary international law, including that of State esponsibility. For example, in the first UK IPPA, signed with Egypt, and quoted by Denza and Brooks (7), Article 5(1) prohibits expropriation, “… except for a public purpose related to the internal needs of that party [the host state] and against prompt, adequate and effective compensation. Such compensation shall amount to the market value of the investment… [and] shall be made without delay, be effectively realisable and be freely transferable…”. The article further refers to the due process of law.

The IPPA between Japan and Sri Lanka, signed on 1 March, 1982, to quote another example, includes a similar stabilisation clause as regards to expropriation; undertakings of non-discrimination as between foreign investors and between foreign investors and nationals of the host state (except for specified industries, something which is not uncomon in developed countries); provisions for the repatriation of profits, etc, but with allowances for the imposition of exchange controls in exceptional financial or economic circumstances; and the provision for arbitration under ICSID.

In conclusion, it would appear that, the role of multilateral conventions and bilateral agreements, in the protection and promotion of foreign investment, has been to try and depoliticise, as far as possible, the relationship between the foreign investor and the host state, and to create a legal environment in which the interests of both parties are recognised. The increased membership of ICSID and MIGA, and the increase in the number of IPPAs, would appear to confirm their success, but also, the realisation by developing countries that, in a situation of dependency, they have to adopt a pragmatic position if they wish to attract foreign investment into their economies.

Committee on Foreign Investment in the United States in 2013

United States views on international law [1] in relation to Committee on Foreign Investment in the United States: In 2012, (As reviewed in this legal encyclopedia in relation to international law issues in the year 2012) at 397-407, the Committee on Foreign Investment in the United States (“CFIUS”) found national security implications in an acquisition by Ralls Corporation, a Chinese-owned entity, of certain wind farm project companies located in Oregon, within or in the vicinity of restricted air space at a U.S. Navy weapons system facility. President Obama issued an order pursuant to § 721 of the Defense Production Act of 1950 (“DPA”), 50 U.S.C. App. § 2170, (as amended by the Foreign Investment and National Security Act of 2007 (“FINSA”), Pub. L. No. 110-49, 121 Stat. 246, requiring Ralls Corporation and its owners to divest all interest in the wind farm project companies and their assets and remove all construction, improvements, and installations they had made on the sites. Ralls Corporation challenged the actions of CFIUS and the President in federal court in the District of Columbia. On February 22, 2013, the district court granted the government’s motion to dismiss all but one claim brought by Ralls. Ralls Corp. v. Committee on Foreign Investment in the United States, No. 12-1513 (D. D.C. 2013). Specifically, the court reasoned that the claim that the President acted ultra vires and the equal protection claim were both barred by the finality provision in the statute. The court also found that challenges to CFIUS actions that preceded the President’s order were barred as moot. However, the district court allowed the challenge on due process grounds to proceed. Part I of the opinion’s analysis, addressing challenges to the President’s order, is excerpted below (with footnotes and citations to the record omitted).

Some Aspects of Committee on Foreign Investment in the United States

A. The Court lacks jurisdiction to review Ralls’s ultra vires claim. Count III alleges that certain provisions of the Presidential Order exceed the authority granted to the President under section 721. Ralls specifically challenges the provisions of the Presidential Order that:

require Ralls to remove all items from the relevant properties and prohibit any access to the properties except to remove items;

prohibit Ralls from selling or transferring any items made by Sany to any third party for use at the properties;

prohibit Ralls from selling the Project Companies or their assets to any third party until it removes all items from the properties and ensures that CFIUS does not object to the proposed buyer; and

authorize CFIUS to implement measures it deems necessary and appropriate to verify that operations of the Project Companies are carried out in such a manner as to ensure protection of the national security interests of the United States, such as by requiring the Companies and Project Companies to allow government employees to access their premises to inspect and copy books, accounts, documents; inspect any equipment and technical data, including software; and


See Also

  • Multinational
  • International Commercial Law
  • Corporate Law
  • Business Entity
  • Foreign Direct Investment
  • Permanent Establishment
  • International Joint Venture
  • Foreign enterprise



[1] MIGA Annual Report 1993 and Financial Times World Economic Survey 24.9.93

[2] D.J.Harris, Cases and Materials on International Law, 4th edn. (London, 1991), pp.490-492.
[3] Samuel K.B.Asante, International Law and Foreign Investment: A reappraisal, International and Comparative Law Quarterly, Vol.37, [1988], pp.588-628, p.602.
[4] C.Greenwood, State Contracts in International Law – The Libyan Oil Arbitrations, British Yearbook of International Law, Vol.53, [1982], pp.27-81, p.79.
[5] Asante, op.cit. p.605.
[6] P.F.Sutherland, The World Bank Convention on the Settlement of Investment Disputes, International and Comparative Law Quarterly, Vol.28, [1979], pp.367-400, p.380.
[7] E.Denza and S.Brooks, Investment Protection Treaties: United Kingdom Exprience, International and Comparative Law Quarterly, Vol.36, [1987], pp.908-923.

Further Reading

  • Amerasinghe, C.F. Issues of Compensation for the Taking of Alien Property in the light of Recent Cases and Practice, International and Comparative Law Quarterly, Vol.41, [1992], pp.22-65.
  • Asante, S.K.B. International Law and Foreign Investment: A Reappraisal, International and Comparative Law Quarterly, Vol.37, [1988], pp.588-628.
  • Denza,E. and Brooks,S. Investment Protection Treaties: United Kingdom Experience, International and Comparative Law Quarterly, Vol.36, [1987], pp.908-923.
  • Greenwood, C. State Contracts in International Law – The Libyan Oil arbitrations, British Yearbook of International Law, Vol.53, [1982], pp.27-81.
  • Harris, D.J. Cases and Materials on International Law, 4th edn., (London, 1991).
  • Sutherland, P.F. The World Bank Convention on the Settlement of Investment Disputes, International and Comparative Law Quarterly, Vol.28, [1979], pp.367-400.

Hierarchical Display of Foreign investment

Finance > Financing and investment > Investment
Business And Competition > Business classification > Type of business > Multinational enterprise
Business And Competition > Business classification > Type of business > Foreign enterprise
Finance > Free movement of capital > Free movement of capital > Capital movement > Foreign capital

Foreign investment

Concept of Foreign investment

See the dictionary definition of Foreign investment.

Characteristics of Foreign investment

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Translation of Foreign investment

Thesaurus of Foreign investment

Finance > Financing and investment > Investment > Foreign investment
Business And Competition > Business classification > Type of business > Multinational enterprise > Foreign investment
Business And Competition > Business classification > Type of business > Foreign enterprise > Foreign investment
Finance > Free movement of capital > Free movement of capital > Capital movement > Foreign capital > Foreign investment

See also


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