Impact of International Investment Law on developing countries

Introduction

International investment law (IIL) establishes a broad framework and central basis with considerable importance for governing cross-border investments. For this purpose, treaties, customary international law, arbitration mechanisms, and local law exist in support of foreign investors and the protection and establishment of a stable investment climate. Given their desire to attract foreign direct investment (FDI), developing countries have long engaged with extensive investment law in finally entering into many BITs and involvement in multilateral treaties such as the International Centre for Settlement of Investment Disputes (ICSID).[1] Their impact through IIL, however, is still disputed; while IIL encourages economic growth by attracting FDI, it often cuts back governmental powers on dictating certain approaches to development in favor of aid to investors, subjecting developing states to sad predicaments.[2]

Role of International Investment Law in Attracting FDI

1. Legal Certainty and Investor Protection

Investment treaties, specifically BITs, provide fundamental protections to an investor, including:

• Fair and Equitable Treatment: Ensuring that investors do not face any arbitrary and discriminatory measures.[3]
• Protection from Expropriation: Compensation must be provided to investors whenever their assets are nationalized or expropriated.[4]
• Investor-State Dispute Settlement (ISDS): The investor may launch proceedings directly before an international tribunal against the host state.[5]

With these protections in place, the investor knows that their investment will be secure, providing a boost to FDI.

2. Economic Growth and Development

FDI provides decreed countries with financial inflows, cutting-edge technologies, and managerial acumen to spur economic growth, job creation, and increased productivity. In fact, countries such as China, India, and Brazil have maximized the advantage of their expansion in the manufacturing and service sectors due mostly to FDI, accomplishing robust economic changes.[6]

3. Increased Global Integration

By adhering to the agreed international investment standards, developing countries get access to global markets, greatly improve prospects for trade, engage with enhanced economic diplomacy, and promote international partnerships.[7]

Impact of International Investment Law on Developing Countries

1. Attraction of Foreign Direct Investment (FDI)[8]  

• International Investment Agreements serve to provide guidelines to be used to attract foreign direct investment. They do this by establishing a more stable and predictable legal environment, arguably the main reason for international agreements.
• FDI treaties usually provide some combination of fair and equitable treatment, protection against expropriation, and investor-state dispute settlement mechanisms.
• These assurances may thus make a developing country more palatable to foreign investors by alleviating the risks arising from political instability and random government actions.
• But studies have suggested that while IIAs do contribute to the attraction of FDI, other determinant premises exist. Factors like the size of the market, the general economic state, and the quality of infrastructure will almost definitely play an important role in the final decision as to where an investment or whom to invest in.

2. Influence on Domestic Governance[9]

• The relationship that exists between international investment law and domestic governance within developing countries is complicated. On one hand, the adoption of IIAs can promote better governance in the form of transparency, the rule of law, and clearly articulated regulatory frameworks.
• At the same time, evidence indicates that the effect of investment treaties on domestic governance is quite limited.
• This study found little evidence to suggest that such treaties produce any real, significant change in domestic laws, institutional structures, or processes of policy-making; rather, their infrequent use could be construed as a suggestion for further investigation.

3. Challenges to Regulatory Sovereignty[10]

• At the same time that IIAs target the protection of investors from various kinds of disputes with the host states, seeking redress through these IIAs may also undermine the regulatory capacity of the governments of developing countries. Investor-state dispute settlement permits investors to contest domestic laws and regulations that they believe to be detrimental to their investments.
• This may drive a significant fiscal liability on the host state and make governments reluctant to create policy in specific fields such as environmental protections or in relation to public health because they fear possible litigation.
• The cohesion between investor protections and state sovereignty remains a contentious focus in international investment law.

4. Economic Reforms and Market Liberalization[11]

• International investment law is a bit of a catalyst for economic reforms in developing countries.
• For example, the recent enactment in Ethiopia of legislation allowing foreign banks to operate in its territory expresses a tiptoe into economic liberalization to attract foreign investments and boost development.
• However, such reforms are also prone to questions regarding their potential limits on domestic industries' ability to compete with foreign entities and on the loss of local control over key economic sectors.

5. Sustainable Development and Environmental Considerations[12]

• The merging of sustainable development goals with international investment law is gradually gaining attention.
• There has begun an increasing call from developing countries to balance investment promotion with environmental protection. For example, it has been suggested that countries should have the right to access International Monetary Fund (IMF) reserves to finance biodiversity projects.
• These and similar measures seek to provide fiscal liquidity for environmental projects in a manner that does not aggravate debt burdens, thus giving added meaning to the interaction of investment law with sustainable development.

Negative Impacts of International Investment Law on Developing Countries

1. Loss of Sovereignty and Policy Space

• Investment treaties, by their very design, almost always restrict governments' ability to exercise regulatory power in the public good. Environmental protection, labour rights, or public health policies could be challenged by foreign investors whenever it threatens their expected profit.[13]
• For instance, many ISDS claims have been brought against a number of developing countries as a consequence of their implementation of policies giving priority to domestic interests over those of foreign investors. In Philip Morris v. Uruguay[14], Philip Morris sued Uruguay by alleging that its anti-smoking regulations harmed its investments. Uruguay ended up winning the case; however, it had to incur substantial legal fees.

2. Financial Burden of Investor-State Dispute Settlement (ISDS)

• ISDS cases are highly expensive, with legal fees and damages often in the million-dollar range. Thus, developing nations are at a disadvantage vis-à-vis rich multinational corporation.[15]
• For example, countries such as Venezuela, Ecuador, and Argentina have received multiple ISDS claims with orders for compensation amounting to billions of dollars. Such payouts lead to poor development outcomes by diverting funds from essential public services such as education, health care, and infrastructure.

3. Environmental and Social Risks

• The inflow of large-scale foreign investments in mining, oil, and agribusiness in various developing countries has led to environmental degradation, displacement of local communities, and labour exploitation. While investment treaties highlight investor rights, these treaties sometimes tend to forget corporate accountability and environmental standards.[16]
• Investors, for example, in Chevron v. Ecuador[17] resisted attempts by Ecuador to hold it accountable for environmental damages, sponsoring investment treaties to contest local judicial decisions.

Conclusion

International investment law holds the scope to fundamentally shape the economic and regulatory structures within developing countries. While it creates new opportunities to attract foreign investments and fortify economic growth, it brings in the challenges surrounding regulatory sovereignty and sustainable development. The delicate balance that is needed in navigating these challenges will have to be maintained by developmental countries in order to reap the benefits of international investment law while preserving the scope for domestic policy formulation and development objectives.

[1] ICSID, Investment Treaties (Feb. 10, 2025, 10:30 PM) https://icsid.worldbank.org/node/20271.

[2] COLUMBIA CENTRE OF SUSTAINABLE INVESTMENT, Primer on International Investment Treaties and Investor-State Dispute Settlement (Feb. 10, 2025, 11:30 PM) https://ccsi.columbia.edu/content/primer-international-investment-treaties-and-investor-state-dispute-settlement.

[3] Ying Zhu, Fair and Equitable Treatment of Foreign Investors in an Era of Sustainable Development (Feb. 10, 2025, 11:50 PM) https://digitalrepository.unm.edu/cgi/viewcontent.cgi?article=4009&context=nrj&utm.

[4] NORTON ROSE FULBRIGHT, https://www.nortonrosefulbright.com/en/knowledge/publications/8014c6b7/frequently-asked-questions-about-investor-state-dispute-settlement (last visited Feb, 11, 2025).

[5] GEORGETOWN LAW, Bilateral Investment Treaties (BITs) (Feb. 10, 2025, 12:30 PM) https://guides.ll.georgetown.edu/c.php?g=371540&p=4187393&utm.

[6] COLUMBIA CENTRE OF SUSTAINABLE INVESTMENT, Primer on International Investment Treaties and Investor-State Dispute Settlement (Feb. 10, 2025, 11:30 PM) https://ccsi.columbia.edu/content/primer-international-investment-treaties-and-investor-state-dispute-settlement.

[7] Jérémie Bertrand, Joseph Lemoine, Dan Negrea, and Caroline Perrin, Attracting foreign direct investments (Feb. 10, 2025, 12:30 PM) https://www.atlanticcouncil.org/in-depth-research-reports/report/attracting-foreign-direct-investments/.

[8] UN TRADE & DEVELPOMENT, The Role of International Investment Agreements in Attracting Foreign Direct Investment to Developing Countries (Feb. 10, 2025, 1:30 PM) https://unctad.org/publication/role-international-investment-agreements-attracting-foreign-direct-investment.

[9] Jonathan Bonnitcha & Zoe Phillips Williams, The impact of investment treaties on domestic governance in developing countries (Feb. 10, 2025, 2:30 PM) https://onlinelibrary.wiley.com/doi/full/10.1111/lapo.12234.

[10] ADVOCATE TANWAR, https://advocatetanwar.com/the-impact-of-international-investment-law-on-investor-state-disputes/ (last visited Feb, 11, 2025).

[11] Dawit Endeshaw, Ethiopia passes law to open banking to foreign competition (Feb. 10, 2025, 3:30 PM) https://www.reuters.com/business/finance/ethiopia-passes-law-open-banking-foreign-competition-2024-12-17/.

[12] Oliver Griffin, Let countries access IMF-held reserves to protect nature, Mexico's Barcena says (Feb. 10, 2025, 3:30 PM) https://www.reuters.com/business/environment/let-countries-access-imf-held-reserves-protect-nature-mexicos-barcena-says-2024-10-30/.

[13] Elisa Morgera & Thierry Berger, Better Understanding the Negative Impacts of International Investment Law For Human Rights and the Environment says (Feb. 10, 2025, 4:30 PM) https://oneoceanhub.org/better-understanding-the-negative-impacts-of-international-investment-law-for-human-rights-and-the-environment/.

[14] Philip Morris Asia Limited v. The Commonwealth of Australia, UNCITRAL, PCA Case No. 2012-12.

[15] Armand de Mestral, The Impact of Investor-state Arbitration on Developing Countries (Feb. 13, 2025, 4:30 PM) https://www.cigionline.org/articles/impact-investor-state-arbitration-developing-countries/.

[16] Elisa Morgera & Thierry Berger, Better Understanding the Negative Impacts of International Investment Law For Human Rights and the Environment says (Feb. 10, 2025, 4:30 PM) https://oneoceanhub.org/better-understanding-the-negative-impacts-of-international-investment-law-for-human-rights-and-the-environment/.

[17] Chevron Corporation and Texaco Petroleum Corporation v. Ecuador (II), PCA Case No. 2009-23.

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