DO BILATERAL INVESTMENT TREATIES INCREASE FDI TO DEVELOPING(1)
1. M I N I S T R Y O F F I N A N C E
P R E S E N T E D B Y
P r o f H a n d l e y M p o k i M a f w e n g a
M a c r o - F i s c a l P o l i c y A n a l y s t & T a x E x p e r t
( U R T )
2. A: INTRODUCTION
Meaning of the BITS
Bilateral Investment Treaties (BITs) make up one part of a
global investment regime that governs how countries and their
governments can regulate foreign-owned assets. Another term
for the BITs is Foreign Investment Protection and Promotion
Agreements (FIPAs).
Provisions nearly identical to those found in BITs have also
been written into bilateral free trade agreements (FTAs) as
investment chapters alongside other trade provisions (e.g. the
North America Free Trade Agreement’s Chapter 11). This
investment regime is an area of international law designed to
provide very strong levels of protection to foreign investors
(individuals and corporations) from arbitrary treatment by host
states in which they own assets.
3. A: INTRODUCTION
Meaning of The Foreign Direct Investment (FDI)
FDI denotes the acquisition abroad of physical assets,
such as plant and equipment, with operational control
ultimately residing with the parent company in the home
country. FDI may take different forms such as the
establishment of new enterprises in an overseas country
either as a subsidiary or branch, the expansion of
overseas branch or subsidiary and the acquisition of
overseas business enterprise or its assets or to provide
goods and services.
4. A: INTRODUCTION
The Main Role of the Bilateral Investment Agreements
A BIT could help attract investment by serving as
a commitment device. In particular, a BIT could
be a commitment device to overcome or mitigate
dynamic inconsistency problems; Riskier
countries tend to attract a higher level of FDI,
most likely because of the risk premium payable
through such direct measures as tax holidays
5. INTRODUCTION-Roles Cont.….
The Main Role of the BITs Cont.…
BITs lay out various principles which include provisions on the
scope of application, entry and establishment of investment,
fair and equitable treatment, national treatment and MFN
treatment, expropriation and compensation, transfer of funds
and dispute settlement, both between contracting parties and
between a contracting party and an investor.
Rights secured in a BIT are reciprocal; investors from country
A investing in B are the same as those given to investors from
country B investing in country A. However, in practice there is
usually tremendous asymmetry as almost all the FDI flows
covered by BITs are in fact in one direction, mostly from
Developed Countries to Emerging Economy Territory;
6. A: INTRODUCTION-Roles Cont.….
The Main Role of the BITs Cont.…
Therefore BITs are unlikely to have much of an impact on FDI since
they lower risk. This is because, BITs defend and promote
investment abroad by providing core protections to foreign investors,
reducing investors’ exposure to political risk and uncertain business
environments.
7. A: INTRODUCTION-ROLES CONT.….
The Main Role of the BITs Cont.…
By signing more BITs with developed countries, particularly those
that are major FDI exporters, developing countries give up some of
their domestic policy autonomy by binding themselves to foreign
investment protection, but could expect to receive more FDI in
exchange. However, the effect was possibly more pronounced in
countries with weak domestic institutions, i.e. in countries for which
the confidence and credibility-inspiring signal to foreign investors
following the signing of BITs was most important.
Governments can promote sustainable development with
appropriate policies. There is nothing in BITs that would prevent
them from adopting these policies, as long as they affect all
economic actors evenly, and do not discriminate against foreign
investors merely because they are foreign.
8. A: INTRODUCTIO N CONT.……
The Main Role of the BITs Cont.…
These types of protections provide important benefits in
countries with poor rule of law, corruption, and regulatory quality.
As a rule, BITs and IIAs tend to make the regulatory framework
more transparent, stable, predictable and secure – that is, they
allow the economic determinants to assert themselves. And
when BITs/IIAs reduce obstacles to FDI and the economic
determinants are right, they can lead to more FDI.
The economic justification of BITs is derived from two
arguments, which explain the fact that sometimes investment
policies lack credibility. As a consequence of the lack of
credibility, an efficient investment, which would otherwise have
taken place, is not carried out in the absence of a BIT.
9. B: PREVIOUS RESEARCH WORKS AND ANALYSIS
Argument for the Bilateral Treaties’ Negative Impacts on FDI
In1998 UNCTAD studied the impact of 200 BITs on bilateral FDI
found a weak correlation between the signing of BITs and
changes in FDI flows. Its cross-section analysis of 133 host
countries in 1995 concluded that BITs do not play a primary role
in increasing FDI.
Hallward-Driemeier (2003), looking at a panel dataset of bilateral
FDI outflows from 20 OECD countries to 31 developing countries
over the period 1980 to 2000. she finds little evidence that the
existence of a BIT between two countries does stimulate
additional investment from the developed to the developing
signatory country.
10. B: PREVIOUS RESEARCH WORKS AND ANALYSIS
Argument for the BITS’ Negative Impacts on FDI Cont….
(Poulsen 2010; Yackee 2008) argue that some critics, especially
those who are skeptical about the effect of BITs on FDI, suggest
that BITs are often ignored by governments and investors and
therefore are of little practical import.
However, a BIT is not a necessary condition to receive FDI.
There are many source-host country pairs with substantial FDI
that do not have a BIT. Japan, for example, the second largest
source of FDI in the world has only concluded twelve BITs, as of
June 2006, and does not have any BIT with the CEC4(Central
European Four Countries: The Czech and Slovak Republics,
Hungary, and Poland)
11. B: PREVIOUS RESEARCH WORKS AND ANALYSIS
Argument for the BITS’ Negative Impacts on FDI Cont….
BITs do not have additional favourable effect on FDI in an
environment with well developed and efficient financial
institutions. BITs and financial depth and efficiency have
individual impact on FDI. The role of financial institutions –
in terms of both depth and efficiency – seems to be more
crucial and important for FDI attraction than the existence
of BITs (Annie Zaven Tortian (2007)).
12. B: PREVIOUS RESEARCH WORKS AND ANALYSIS
Argument for the Bilateral Treaties Positive Impacts on FDI
Banga (2003) examines the impact of BITs on aggregate FDI
inflows to 15 developing countries of South, East and South
East Asia for the period 1980-81 to 1999-2000. She finds that
BITs have a significant impact on aggregate FDI. But it is BITs
with developed countries rather than developing countries that
are found to have a significant impact on FDI inflows to
developing countries.
Neumayer and Spess (2005) finds that the more BITs a country
signs, the greater the FDI flows to that country. Their study
includes 119 countries over the period 1970 to 2001.
14. C: REGIONAL COMPARATIVE ANALYSIS OF
INTERNATIONAL AGREEMENTS AND FDI FLOWS
8 8
15
3
9
6
36
24
13
7
46
5
16
12
30
7 6
8 7 8 8 9
6
8 8 9 9
7
9 9
15 14
23
10
17
14
45
30
15 15
55
14
23
21
39
0
10
20
30
40
50
60
NUMBEROFBITS&IIAs
SADC MEMBER COUNTRIES
SADC Regional Comparative Analysis of BITS and IIAS
BITS
Other
IIAs
TOTA
15. C: REGIONAL COMPARATIVE ANALYSIS OF
INTERNATIONAL AGREEMENTS AND FDI FLOWS
Determinants of Foreign Direct Investment (FDI) In Tanzania
Policy framework for FDI: This include economic, political and social
stability; rules other regulating entry and operations of FDIs; standard of
treatment of foreign affiliates; policies on functioning and structure of the
market; international agreement on FDIs; privatization policy; trade policy
(tariffs and non-tariff barriers and coherence of FDI and trade policy; and
tax policy.
Economic determinants: These include business facilitation; investment
promotion (including image-building and investment-generating activities
and investment-facilitating services); investment incentives; hassle costs
(related to corruption and administrative efficiency); social amenities (for
example quality of life); and after investment services.
18. D: CONCLUSION
Tanzania should consider updating its investment treaty provisions
and better reflecting some innovative practices in its future bilateral
investment treaties (BITs) OECD (2013) .
BITs should go into further detail on issues such as investor-state
dispute settlement (ISDS), or guarantee against unlawful
expropriation.
Objective relating to the Promotion is not fulfilled, Tanzania should
perhaps consider alternative instruments to attract foreign investors.
Major determinants of FDI are macro economic and political stability,
having a large and growing GDP, or being in proximity to a country
with a large and growing GDP that can be exported to. A BIT may
help but without a stable and growing economy (or the ability to
serve as an export platform to a stable and growing economy) a BIT
is of little help.
