Do Bilateral Investment Treaties Increase Fdi to Developing

5/24/2018 Do Bilateral Investment Treaties Increase Fdi to Developing

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M I N I S T R Y O F F I N A N C EP 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 )


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A: INTRODUCTION

Meaning of the BITS

Bilateral Investment Treaties (BITs) make up one part of a

global investment regime that governs how countries and theirgovernments can regulate foreign-owned assets. Another termfor 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) asinvestment chapters alongside other trade provisions (e.g. theNorth America Free Trade Agreements Chapter 11). Thisinvestment regime is an area of international law designed toprovide very strong levels of protection to foreign investors(individuals and corporations) from arbitrary treatment by hoststates in which they own assets.


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A: INTRODUCTIONMeaning of The Foreign Direct Investment (FDI)

FDI denotes the acquisition abroad of physical assets,

such as plant and equipment, with operational controlultimately 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 ofoverseas branch or subsidiary and the acquisition of

overseas business enterprise or its assets or to provide

goods and services.


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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 couldbe 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


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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 fromDeveloped Countries to Emerging Economy Territory;


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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 promoteinvestment abroad by providing core protections to foreign investors,

reducing investorsexposure to political risk and uncertain business

environments.


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A: INTRODUCTION-ROLES CONT..The Main Role of the BITs Cont.

By signing more BITs with developed countries, particularly thosethat are major FDI exporters, developing countries give up some oftheir domestic policy autonomy by binding themselves to foreigninvestment protection, but could expect to receive more FDI inexchange. However, the effect was possibly more pronounced incountries with weak domestic institutions, i.e. in countries for whichthe confidence and credibility-inspiring signal to foreign investorsfollowing the signing of BITs was most important.

Governments can promote sustainable development withappropriate policies. There is nothing in BITs that would preventthem from adopting these policies, as long as they affect alleconomic actors evenly, and do not discriminate against foreign

investors merely because they are foreign.


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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.


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B: PREVIOUS RESEARCH WORKS AND ANALYSIS

Argument for the Bilateral TreatiesNegative Impacts on FDI

In1998 UNCTAD studied the impact of 200 BITs on bilateral FDI

found a weak correlation between the signing of BITs andchanges 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 bilateralFDI 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.


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Argument for the BITSNegative Impacts on FDI Cont.

(Poulsen 2010; Yackee 2008) argue that some critics, especially

those who are skeptical about the effect of BITs on FDI, suggestthat BITs are often ignored by governments and investors andtherefore 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 largestsource of FDI in the world has only concluded twelve BITs, as ofJune 2006, and does not have any BIT with the CEC4(CentralEuropean Four Countries: The Czech and Slovak Republics,Hungary, and Poland)


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Argument for the BITSNegative Impacts on FDI Cont.

BITs do not have additional favourable effect on FDI in anenvironment with well developed and efficient financialinstitutions. BITs and financial depth and efficiency haveindividual 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 existenceof BITs (Annie Zaven Tortian (2007)).


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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 SouthEast 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 todeveloping 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.


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C: REGIONAL COMPARATIVE ANALYSIS OF

INTERNATIONAL AGREEMENTS AND FDI FLOWS


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8 8

15

3

9

6

36

24

13

7

46

5

16

12

30

76

87

8 89

68 8

9 97

9 9

15 14

23

10

17

14

45

30

15 15

55

14

2321

39

0

10

20

30

40

50

60

NUMB

ER

OFBITS&

IIAs

SADC MEMBER COUNTRIES

SADC Regional Comparative Analysis of BITS and IIAS

BITS

OtherIIAs

TOTA


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Determinants of Foreign Direct Investment (FDI) In Tanzania

Policy framework for FDI: This include economic, political and socialstability; 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.


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EAC Regional Comparative Analysis of FDI Flows And

Value Of Greenfield FDI Projects

SADC Regional Comparative Analysis of the FDI Flows and Greenfield FDI


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SADC Regional Comparative Analysis of the FDI Flows and Greenfield FDI

Projects

6898

493

3312

172

895

129

361

5218

357

114

4572

90

1706

1066

400

2741

10

421

37

0

50

89

9

5

4

4369

6

0

177

46

3031

148

517

10

363

24

142

3456

777

43

4571

7

1137

840

3074

Angola

Botswana

DRC

Lesotho

Madagascar

Malawi

Mauritius

Mozambique

Namibia

Seycheles

South Africa

Swaziland

URT

Zambia

Zimbabwe

Value of Greefield

FDI Projects

OUTFLOWS

INFLOWS


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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-statedispute 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.

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Do Bilateral Investment Treaties Increase Fdi to Developing