Time and patience

Global FDI, a key component of the world’s economic growth engine in good times, is slow to recover from the financial crisis. GDP growth has been back in positive territory for a while, world trade has returned to its pre-crisis levels, and the income that firms earn on their foreign investments is close to 2007 highs, but FDI flows still remain some 15 percent below their pre-crisis average and nearly 40 percent below their 2007 peak, according to the recent UNCTAD 2011 World Investment Report.

This is serious: the global thirst for private productive investment increases as public investment runs out of steam in one country after another. It is all the more serious as the investment drought is neither caused by a lack of funds nor by a lack of opportunity for multinational firms to invest. Could an improved and reenergised investment policy regime make a difference?

The reluctance of multinational firms to invest is not due to a lack of capital. Companies across the developed world are sitting on record amounts. US firms are holding an estimated $1.3trn in cash, EU and Japanese firms are holding even more, at around $2trn each. The increase of these cash holdings in the last two years has been astronomical: Federal Reserve data indicates that cash holdings by (non-bank) US companies rocketed after a steep drop in 2008 to almost twice the pre-crisis levels in 2010. These are untapped funds that could be gainfully employed to stimulate the global economy, create jobs and finance development.

Opposite directions
However, as reported in WIR11, many governments are sending mixed signals to investors. On the one hand, there are moves to liberalise investment regimes and promote foreign investment in response to intensified competition for FDI.

On the other, governments are increasingly regulating and restricting FDI in the context of industrial policies or motivated by less well-defined notions of national economic security. The two opposing policy directions can even be witnessed simultaneously in the same country.

Today’s dichotomy in national investment policymaking contrasts with the more clear-cut trends of previous decades. The 1950s to 1980s focused on regulation, the 1990s to early 2000s focused on liberalisation. In the last two years, out of a total of some 200 national investment policy measures identified by UNCTAD, a little under 70 percent supported liberalisation and promotion of foreign investment, against a 30 percent share of more regulatory/restrictive measures, the highest level since 1992. Such restrictive measures range from tighter implementation of entry requirements to more stringent application of national regulations, expropriation measures and nationalisations (some in connection with bailouts).

Meanwhile, the international investment regime is equally confusing. There are more than 6,000 international investment agreements (IIAs) today at the bilateral, sub-regional, regional, inter-regional and sectoral levels. The investment regime is multi-layered, multi-faceted and highly atomised. On average, three investment treaties are signed a week over the past few years. With thousands of treaties, numerous ongoing negotiations and multiple dispute-settlement mechanisms, the regime has become too large for states to handle, too complicated for firms to take advantage of, and too complex for stakeholders at large to monitor. At the same time, the regime is still too limited to cover the whole investment universe. In fact, according to UNCTAD estimates, some 80 percent of bilateral investment relationships accounting for 30 percent of global FDI stocks are not covered by any form of post-establishment protection. In terms of substance, common modalities of firms’ international operations, such as contract manufacturing, franchising or licensing are not accounted for, and many other substantive gaps remain.

Repairing the damage
Paradoxically, while almost all countries are actively engaged in IIAs, hardly any are satisfied with the regime. First, it is full of gaps, overlaps and inconsistencies between investment agreements, including among those signed by the same countries. The regime’s investor-state dispute settlement mechanism has also raised serious concerns with stakeholders. Second, the regime lacks clear obligations on the part of investors; it is weak in the development dimension and often unduly limits policy space for developing-country governments. Third, there are hardly any mechanisms for coordination between the IIA regime and other parts of the global economic governance system. The ‘interconnect’ between investment policies and other policies such as trade, finance, competition or environmental (eg: climate change) policies, is missing.

The world has a multilateral trade system (WTO) and a multilateral monetary system (IMF), however flawed, but no equivalent for international investment policymaking.

If undertaken in an inclusive and transparent manner, multilateral consensus building on investment methods can help to:
– Consolidate the myriad of international investment treaties to address systemic gaps and inconsistencies, and coordinate international investment policymaking – such coordination would also allay long-standing fears of a ‘race to the bottom’ of regulatory standards and a ‘race to the top’ of incentives and handouts.
Integrate the development dimension, maintaining proper balance between regulation and liberalisation in investment policies and ensuring sufficient policy space for developing countries to pursue development strategies or industrial policies.
– Establish a set of multilaterally agreed principles for sustainable investment (investment that makes a positive contribution to development and is socially and environmentally responsible) to guide investment policy making at national and international levels.

So far, discussions on the future of global economic governance lack an investment angle and the international community appears reluctant to pursue it – the failed attempts of the past to come to a multilateral agreement on investment are still a powerful deterrent. However, effective global coordination on international investment policies is desirable – if not indispensable – to encourage a new investment boom and to harness investment for future development in needed areas.