The Role of International Investment Agreements in Attracting FDI To Developing Countries: An Assessment of Mauritius

International Journal of Law and Management
The Role of International Investment Agreements in attracting FDI to developing countries: An

assessment of Mauritius
Ambareen Beebeejaun,
Article information:
To cite this document:
Ambareen Beebeejaun, "The Role of International Investment Agreements in attracting FDI to developing countries: An
assessment of Mauritius", International Journal of Law and Management, https://doi.org/10.1108/IJLMA-09-2016-0082
Permanent link to this document:
https://doi.org/10.1108/IJLMA-09-2016-0082
Downloaded on: 20 February 2018, At: 07:44 (PT)
References: this document contains references to 0 other documents.
To copy this document: permissions@emeraldinsight.com
The fulltext of this document has been downloaded 29 times since 2018*
Access to this document was granted through an Emerald subscription provided by emerald-srm:514693 []
Downloaded by Goethe-Universität Frankfurt At 07:44 20 February 2018 (PT)
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service
information about how to choose which publication to write for and submission guidelines are available for all. Please
visit www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of
more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online
products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication
Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.
*Related content and download information correct at time of download.

The Role of International Investment Agreements in attracting FDI to developing
countries: An assessment of Mauritius
ABSTRACT
Purpose:
The study focusses on the effectiveness of international investment agreements (IIAs) in helping
or facilitating the influx of foreign direct investment (FDI) to host developing countries.
Methodology:
In order to critically examine the topic, the black letter approach and the socio-legal analysis are
adopted. The study has analysed how Mauritius, being a developing country, is responding to
FDI needs from the various bilateral and multilateral investment treaties concluded and the
research includes the analysis of official data publicly made available by the WTO, OECD, IMF
and Mauritius governmental agencies’ reports.
Findings:
From the methodologies used, it was found that other than IIAs, they are various key
determinants which foreign investors consider prior to injecting their capital in developing
countries in terms of environmental, social and cultural factors. It has also been seen that there
are some inherent loopholes mostly in terms of monitoring, in the way IIAs are concluded and
are applied in practice by and amongst signatory states.
Originality/Value:
This research is amongst the first studies to conclude the link between IIAs and FDI flows in
developing countries with a particular focus on Mauritius. Additionally, an overwhelming
1
number of studies have emphasized on efforts to boost FDI which are inspired mostly by action
plans of developed nations, but this research will analyse the policy options adopted by China
being itself a developing country, and the extent to which such recommendations are applicable
in the context of Mauritius will also be considered.

2
1. INTRODUCTION
1.1 The concept of FDI
Foreign Direct Investment (FDI) is defined as or defines a situation when a company from one
country makes a physical investment into things like building a factory in another country.1 The
aforesaid classical definition refers to investment in buildings, machinery or other forms of
tangible assets. However, in recent years, the change in global investment patterns and the
unprecedented increase in economic growth have broadened FDI definition to also encompass
the acquisition of shares or interest outside the investee’s home country, investment in joint
ventures, input of technology, licensing of intellectual property amongst others. Therefore, FDI
not only adds to investible resources and capital formation, but it is also a means of transferring
production technology, skills, innovative capacity, organisational and managerial practices
between locations as well as accessing international marketing networks.2
1.2 Problem Presentation: FDI and IIAs
FDI is said to entail various benefits to the host country such as increase in economic growth,
technological spillovers, job creation and hence, improved living standards, which is an
important tool for alleviating poverty in developing countries.3 However, there are increasing
concerns over the practice of how FDI works, especially due to drawbacks faced or likely to be
1
International Monetary Fund (IMF) (1993), “Balance of Payments Manual”, Fifth Edition, Washington Publishing,
DC, < https://www.imf.org/external/np/sta/bop/BOPman.pdf>, accessed on 19 August 2016.
2
Mallampally P. and Sauvant K. P. (1999), “Foreign Direct Investment in Developing Countries”, A quarterly
magazine of IMF, Volume 36, Number 1,
<http://www.imf.org/external/pubs/ft/fandd/1999/03/mallampa.htm> accessed on 20 July 2016.
3
Organisation for Economic Co-operation and Development (OECD) (2002), “Foreign Direct Investment for
Development: Maximising benefits, Maximising costs”, OECD Publications,
<www.oecd.org/investment/investmentfordevelopment/1959815.pdf>,accessed on 20 July 2016.
3
faced by host economies. For instance, negative balance of payments which results due to huge
repatriation of profits from the host country to abroad or loss of state sovereignty in the domestic
country as well as social and environmental disruptions have been experienced in some FDI host
countries. In addition, the environmental consequence of trade and FDI has caused great
concerns in China as the level of pollution in the country has increased with the expansion of the
economy.4 As Professor Meyer (2005) rightly pointed out that since the FDI project is usually
closely interacted with local businesses of the host nation, other aspects of the host country
economy are also affected in terms of its institutional framework, the natural and social
environment.5 Yet, in spite of the associated negatives and due to the aforesaid perceived
importance which FDI entails, policy makers are undertaking various legal and policy
approaches to attract large multinationals and foreign investors to set up or invest in their
countries.
To attract FDI, the developing world undertakes numerous efforts to create the right investment
climate so that investors will flock in to build new projects as stated by Chowla (2005),6 and the
main aim behind such initiatives is to create growth for the tier-world countries. On the other
hand, investors have the profit-making objective of exploiting the host economy’s resources at
low costs and extracting high level of profits in return. The two distinct motives leave a gap
4
Liang F. L. (2008), “Does FDI harm the host country’s environment? Evidence from China”,
<http://dx.doi.org/10.2139/ssrn.1479864> accessed on 20 July 2016.
5
Professor Meyer K. E. (2005), “Foreign Direct Investment in Emerging Economies”, 2005, Policy Discussion Paper,
Emerging Markets Forum, <http://www.klausmeyer.co.uk/publications/2005_meyer_EMF_Templeton.pdf>,
accessed on 12 August 2016.
6
Chowla P. (2005), “Comparing Naughty BITs: Assessing the development impact of variation in bilateral
investment treaties”, Working Paper Series, Development Destin Studies Institute, ISSN 1470-2320, No. 05-67.
4
between expectations and realisation of the investment flows, which this study will analyse in
depth.
1.3 Objectives and Research Questions
The study of the role of IIAs in promoting FDI aims to analyse the issues that may arise in the
context of international approaches to investment rulemaking and their impact on development.
In addition, since international agreements have a vital role in attracting foreign investors in the
host country, it is important to set out the role which such treaties play and whether the impact of
the agreements depends on the specific type of IIAs concluded.7
For the analysis part of the research, the selected country is Mauritius. In a contextual approach,
the study sets out the various endeavours put forward by the Mauritius legislator to encourage
FDI in Mauritius with a view to boost the economic welfare of the country. There is an abundant
literature available with regards to the econometric side of FDI in Mauritius, but very little
studies have been portrayed to focus on IIAs, legislations, trade policies, labour dynamics, stock
exchange which are all vital determinants for pooling foreign investment in the country. This
research is set to analyse the legal, policy and institutional approaches for attracting FDI in
Mauritius with a particular attention on the IIAs to which the country is party to and to explore
the prospect of FDI in Mauritius. The main questions to which this study seeks to address are:
1) What are the key determinants to attract FDI in host developing countries?
2) Are IIAs effective in promoting FDI in developing countries?
3) How IIAs are helping Mauritius to attract foreign investment?
7
UNCTAD (2009), “The Role of International Investment Agreements in attracting FDI to developing countries”,
United Nations and Geneva, <unctad.org/en/docs/diaeia20095_en.pdf>, accessed on 13 July 2016.
5
4) Apart from IIAs, what are the other legal and policy approaches to attract FDI in
Mauritius?
5) What is the prospect of FDI policies in Mauritius for the future?
1.4 Research Methodology
The research methodology has adopted the black letter approach by analysing the main IIAs
which are aimed at creating preferential treatment for developing countries and how the
provisions of such agreements are applied to give effect to the main objective of attracting FDI to
the host countries. In focus, will be bilateral investment agreements, Investor Protection
Promotion Agreements (IPPAs), taxation treaties and arbitration conventions amongst others.
Apart from setting out the legal provisions of the relevant IIAs, the black letter approach has also
examined the application of the treaties’ provisions by the signatory countries. The socio-legal
analysis has been used to consider the key determinants in attracting foreign investors apart from
IIAs such as the local political or legal framework, the literacy rate and climate considerations
amongst others. Each of the determinants has been assessed as to its effectiveness in attracting
FDI. Journal articles, books, commentaries and the relevant legislations are key resources for this
purpose.
The study has also made use of the comparative and historical approach with a view to analyse
the success story of China in attracting FDI. The legal and policy endeavours undertaken by the
Chinese government are examined, some of which may be relevant for Mauritius to adopt and
apply.
1.5 Structure
6
This rest of the paper is organized as follows: Section 2 reviews the previous literature theories
and gives an overview of the emergence of IIAs as key determinants of FDI, Section 3 provides
an analysis of the present situation in Mauritius, Section 4 provides recommendations to address
to loopholes in the Mauritius system and Section 5 concludes the paper.

7
2. THE EFFECTIVENESS OF IIAS IN ATTRACTING FDI
2.1 Literature Review: The main FDI driving factors
There exist various theoretical frameworks which set out the determinants as to why foreign
investors invest abroad, one amongst which is the “Eclectic Paradigm” as stated by Dunning
(1977).8 This particular theory categorises investment determinants into three main types, being
Ownership (O), Location (L), Internalisation (I), and together, the OLI framework. Foreign
investors usually look for the effective Ownership advantage prior to investing their capital. For
instance, ownership of rights, assets, intellectual property or other intangible assets encourage a
foreign enterprise to implant itself in the host country because of the advantage to be treated as a
domestic firm and hence, to have access to and exploit resources that are available to the
foreigner in its capacity as owner of the respective assets. The Location advantage, on the other
hand, refers to particularities in the host country’s natural endowments, cultural factors, strategic
advantages through intangible assets or other types of benefits that make the chosen country an
attractive site. Anyanwu (2011) explains that the Internalisation advantage emanates from
exploiting imperfections in external markets, including taking benefit of low transaction costs or
benefit from reduction of state-generated imperfections such as tariffs, quotas, other barriers to
trade as well as subsidies.9
8
Dunning J. H (1977)., “Trade, location of economic activity and MNE: a search for an eclectic approach in B. Ohlin
and P. O. Hesselborn”, The International Allocation of Economic Activity, London, Macmillan, 395-418, available at
<www.elgaronline.com/view/1840647000.00007.xml>, accessed on 15 July 2016.
9
Anyanwu J. C. (2011), “Determinants of FDI inflows to Africa, 1980-2007”, Working Paper Series, African
Development Bank, No 136-September 2011.
8
Further to the OLI theory, Fedderke and Romm (2006) state that driving forces of FDI can also be
identified through policy and non-policy factors.10 Policy factors, as the name suggests, refers to
governmental intervention to implement measures favourable to attract FDI including, inter alia,
low corporate tax rates, reduction in trade barriers, improved infrastructure in terms of road and
communication networks. Non-policy factors refers to determinants which are outside human
control, for instance, the market size of the host country, resources endowments, political and
economic stability, climatic conditions amongst others. On the same line of reasoning,
Fernandez-Arias (1996)11 and Montiel (1996)12 have presented a two-fold categorisation for FDI
driving forces, being the push and the pull factors. Pull factors are the characteristics of the FDI
host country that helps to induce foreign investments in terms of a stable political and economic
stability, favourable climatic conditions and proper legislative measures whereas push factors
relates to repellant characteristics that reduce the attractiveness of the host country as a recipient
of FDI.
Various studies have been undertaken by several scholars to confirm the direct link between the
aforesaid driving forces or determinants, and FDI. For instance, a research study carried out by
Musila and Sigue (2006) concluded that FDI in Africa is highly reliant on the level of
infrastructure prevailing in the host country.13 A further study by Reiter et al (2010) found the
10
Fedderke J. W. and Romm A. T. (2006), “Growth impact and determinants of FDI into South Africa, 1956-2003”,
Economic Modeling, Volume 23 No 6, 738-760.
11
Fernandez-Arias E. (1996), “The New Wave of Capital Inflows: Push or Pull?”, Journal of Development Economics,
Volume 48, 389-418.
12
Montiel P. J. (1996), “The Surge in Capital Inflows to Developing Countries: An analytical overview”, The World
Bank Economic Review, Volume 10, No 1, 51-77.
13
Musila J. W. and Sigue S. P. (2006), “Accelerating FDI inflow to Africa: from policy statements to successful
strategies”, Managerial Finance, Vol. 32(7), Page 577-593.
9
positive relationship between FDI flows and good quality labour14, while Dupasquier and Osakwe
(2006) found that factors such as poor governance, foreign ownership restrictions and strict
repatriation of profits policies are all found to be deterrents of FDI.15 In an attempt to clarifying
the rules underlying foreign investment, countries have begun to conclude bilateral investment
treaties with the primary motives to provide security to foreign investors and to put in place
favourable terms of trade so as to make the host country more attractive to FDI.
2.2 History and the emergence of IIAs
2.2.1 History
The first type of IIAs was in the form of a bilateral investment treaty concluded between
Germany and Pakistan in 195916 and since then, the number of IIAs to promote investment has
flourished, attaining around 3,000 investment agreements currently in place.17 The history of
IIAs dates back prior to the second World War when FDI was not seen as a priority in
international covenants but instead, the international community favoured provisions concerning
the protection of assets of citizens of one country located in, or transferred to the jurisdiction of
another state. For example, the conclusion of the FCN18 treaties by the Unites States, which
14
Reiter S. L et al (2010), “Human Development and FDI in developing countries”, World Development, December
Volume 38, Issue 12, 1678-1691.
15
Dupasquier C and Osakwe P. N (2006), “FDI in Africa: Performance, challenges and responsibilities”, Journal of
Asian Economics, Vol 17, page 241-260.
16
Vandevelde Kenneth J. (2005), “A brief history of international investment agreements”, U. C. Davis Journal of
International Law and Policy, Volume 12: 157, page 1, <http://jilp.law.ucdavis.edu/issues/volume-12-1/van5.pdf>,
accessed on 18 July 2016.
17
UNCTAD, International Investment Agreements Navigator, <http://investmentpolicyhub.unctad.org/IIA>,
accessed on 18 July 2016.
18
FCN stands for Friendship, Commerce and Navigation.
10
relied on a system of strict reciprocity in the sense that each contracting country would only
demand what it was willing to give in return, thereby regulating trade relations.
Following the second World War, the United States found it difficult to conclude FCN treaties
with other nations and thus, the country turned towards the bilateral investment treaty approach
which is focused on mainly investment protection matters. Further to this evolution, countries
began realising the importance of trade liberalizing which had therefore led to the negotiation of
multilateral agreements amongst which is the conclusion of GATT. GATT however, catered for
trade relations but not specifically investment protection. The Havana Charter was drafted to
establish an investment framework for both trade and investment, but the Charter never entered
into force. GATT was thus regarded as the sole forum providing a platform whereby
international trade negotiations were conducted leading to a diminishing importance of FCN
treaties.
During the year 1995, the WTO was established to administer GATT and investment related
issues. The conclusion of the General Agreement on Trade in Services (GATS) further acted as
impetus to empower the WTO to deal with investment protection matters. For instance, GATS
provides for the possibility of foreign direct investment by defining trade in services in its Article
I(2) as the supply of a service by one member state, through the commercial presence in the
territory of another member state. Therefore, the WTO has been given the jurisdiction over FDI
protection in the service sector through GATS. In addition to GATS, the Agreement on Trade
Related Investment Measures and the Agreement on Trade Related Intellectual Property Rights
further expanded the jurisdiction of WTO to deal with investment related matters by providing
certain investment protection for FDI.
2.2.2 Emergence
11
The explosion in the number of IIAs has been attributed mainly to two reasons, the first being the
economic success of some Asian countries which benefitted from an influx of FDI and hence
succeeded in increasing their exports level.19 Secondly, the 1980’s debt crisis reduced the level
of credit available to developing countries, which also experienced a reduction in the level of
government assistance. Developing economies thus had no alternative but to turn to FDI for
funds inflow. Consequently, countries negotiate bilateral, multilateral or regional agreements that
include preferential trade and investment provisions.

2.3 An analysis of IIAs in attracting FDI
2.3.1 The domestication into national law
The main gist for concluding IIAs is to provide assurance to foreign investors that their
investments in developing countries are legally protected under international law and such
treaties address investment issues in a significant manner for instance by including dispute
resolution mechanisms.20 However, despite the conclusion of IIAs, some investment agreements
do not create legally binding obligations of the host country towards foreign investors.21
Although such agreements stipulate that the provisions will come into force and effect upon
signature by the respective parties, the host country’s domestic law policy may require it to ratify
the treaty by its national parliament and provide notification of the ratification to the other treaty
parties. It is only after notification that the treaty provisions become legally binding and thus,
19
Vandevelde K. J. (2005)., “A brief history of international investment agreements”, U. C. Davis Journal of
International Law and Policy, Volume 12: 157, page 22, <http://jilp.law.ucdavis.edu/issues/volume-12-
1/van5.pdf>, accessed on 19 July 2016.
20
Sachs Lisa E. and Sauvant Karl P., (2009), “The Effect of treaties on FDI: Bilateral Investment Treaties, Double
Taxation Treaties and Investment Flows”, Oxford University Press,
<http://ccsi.columbia.edu/files/2014/01/Overview-SachsSauvant-Final.pdf>, accessed on 20 July 2016.
21
UNCTAD (2006), “The entry into force of bilateral investment treaties”, United Nations New York and Geneva, IIA
Monitor No. 3. UNCTAD/WEB/ITE/IIA/2006/9.
12
investors may rely on the investment protections afforded by the IIAs22. Apart from the costs
associated with ratification procedures, domestication into national laws is a lengthy process and
may not always receive the favourable vote of all members of legislature. As such, there is the
risk that despite a contracting state has signed an international convention, the country in
question does not give effect to its provisions.
Further to the above, some IIAs may not have monitoring procedures, which do not motivate the
respective signatories to abide by the treaty provisions. Other treaties may include reporting
procedures which are lengthy and costly, which in turn adds on additional burden on host
countries.
2.3.2 The protection of investor’s rights
Recent trends in bilateral investment treaties or double taxation agreements (DTAs) demonstrate
that the purpose of IIAs has been extended from investment protection to also include provisions
of national treatment or MFN principles, environmental or labour standards and intellectual
property protections in the investee country or the prohibition to impose certain requirements on
foreign investments by host countries.23 However, the inclusion of such provisions in IIAs may
be construed as limiting the independence of the host nations to pursue their own economic
policies and other public policies.24 In other words, while on one hand, efforts are being made to
22
This process is often referred to as indirect implementation.
23
Ginsburg T. (2005), “International Substitutes for Domestic Institutions: Bilateral Investment Treaties and
Governance”, International Review of Law and Economics, Volume 25 of 2005, Illinois Law and Economics
Research Paper No LE06-027, <file:///C:/Users/user/Downloads/SSRN-id916351.pdf>, accessed on 20 July 2016.
24
United Nations (2009), “The role of international investment agreements in attracting FDI to developing
countries”, UNCTAD Series on International Investment Policies for Development, United Nations Publication,
UNCTAD/DIAE/IA/2009/5, <http://unctad.org/en/pages/PublicationArchive.aspx?publicationid=432>, accessed on
20 July 2016.
13
provide investors an all-inclusive type of protection for their investments, the host country is
being constrained on the other hand to follow policies put forward by developed nations who are
contracting parties to such IIAs in the form of provisions imbedded in the investment treaty. This
situation can in turn be paralleled to the loophole of strings attached with aid for trade procured
to developing nations by the rich states. Therefore, attracting FDI inflows through IIAs may
entail costs to the host country.

Furthermore, it has been observed in majority of instances that IIAs put emphasis mostly on
investor protection but are silent with respect to matters concerning investor obligations. In
addition, most bilateral investment treaties have a tendency to focus on the obligations of the
host nations who are in a less well-off situation when it comes to negotiating with developed
countries for fear of not concluding investment agreements with the latter. In this attempt,
developing countries often adopt policies which harm domestic investors or which entail special
privileges to foreign investors, thereby representing a discriminatory approach. The negotiating
process may also affect other sectors of the host nation by imposing rules on technology transfer,
employment or environment, which may have adverse consequences on the sustainable
development of the host country.
2.3.3 Dispute Settlement Procedures
The majority of IIAs contain the procedural rights which enable investors to resort to in the event
that their investment in the host nations is unlawfully and wrongly affected. Typically, it has
been observed that arbitration proceedings are chosen as the desired dispute settlement
mechanism since such designation frees investors the need to rely on local judicial remedies of
the host nation which are sometimes inefficient due to the lack of competent resources especially
in developing countries. In other words, the conclusion of IIAs is somehow bypassing domestic
14
avenues of justice of the host nation to instead having resort to contractual means of dispute
settlement. Due to the confidentiality of arbitration proceedings, statistics and data regarding
investment arbitrations and awards are difficult to evaluate. Out of a study of 52 cases based on
investment treaties which contained arbitration clauses, the investors were awarded nothing in 31
cases and in the remaining 21 cases, the host country being the respondent was ordered to pay
damages to the investors.25 The huge amount of arbitral awards granted to investors provide
further assurance to the latter and thus enhance their interest to invest in the host country.
Arbitration clauses have now become a key determinant when deciding on locations for FDI.26
However, on the other hand, the financial costs, the risk of uncertainty for investor success and
the time spent with arbitration proceedings may outweigh the benefits which IIAs intend to
procure to both the investor and the host country.
In practice, the actual functioning of the dispute settlement clauses in IIAs has led to concerns
about systemic deficiencies and adverse consequences to developing countries. For instance, the
public international law instrument Investor-State Dispute Settlement (ISDS) which provides an
investor the right to use dispute settlement procedures against a foreign government in private
tribunals, has been subject to various controversies.27 It has been observed that ISDS is a regular
feature embedded in IIAs since foreign investors benefit from reassurance to protect their
investments whereby they can have resort to other means of redress instead of merely relying on
the host country’s local courts. Through ISDS, dispute settlement procedures are tailor made to
25
Franck S. D. (2007), “Empirically evaluating claims about investment treaty arbitration”, North Carolina Law
Review, Vol. 86, p. 1 of 2007, <http://ssrn.com/abstract=969257>, accessed on 26 July 2016.
26
Franck S. D. (2007), “FDI, Investment treaty arbitration and the rule of law”, Mc George Global Business and
Development Law Journal, Vol. 19, p. 337, <http://ssrn.com/abstract=882443>, accessed on 26 July 2016.
27
UNCTAD (2014), “Investor-State Dispute Settlement – A Sequel”, UNCTAD Series on Issues in international
investment agreements, United Nations, UNCTAD/DIAE/IA/2013/2.
15
each specific IIA with the objective of offering investors the possibility of a fair hearing without
any political interference. Based on the concept of ISDS, the International Centre on Settlement
of Investment Disputes (ICSID) was established under the 1965 Convention on the Settlement of
Investment Disputes, to administer disputes between investors and host states. However,
questions arise on the legitimacy and transparency of the ISDS awards in cases whereby
measures adopted by the host countries have been challenged on the basis of social,
environmental or health basis. This is because 3 individuals are appointed on an ad hoc basis
without proper defined parameters on their qualifications and legitimacy to assess the validity of
the host country’s acts.28
Furthermore, the costs of defending an ISDS case average US$8 million and the tribunals may
impose an award which may pose a particular threat to developing countries likewise in the case
of Re The Republic of Ecuador29, the ISDS tribunal ordered Ecuador to pay US$1.77 billion in
compensation to US company Occidental Petroleum and the interest and legal costs further
increased the total penalty to US$2.4 billion, a sum which is equivalent to Ecuador’s annual
expenditure on health case for its citizens.30 Such awards may be detrimental to host developing
countries and it is therefore important for the government of IIA signatory countries to fully
understand the features and implications of ISDS provisions and to enter into negotiations before
signing the respective IIAs.
28
Ibid, page 25.
29
Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of
Ecuador, 2012, ICSID Case No. ARB/06/11.
30
Fritz T. (2015) , “International investment agreements under scrutiny – bilateral investment treaties, EU
investment policy and international development”, Traidcraft and European Union,
<www.s2bnetwork.org/wp-content/uploads/.../IIAs-report-Feb-2015-2.pdf>, accessed on 26 July 2016.
16
3 FDI AND THE CASE STUDY OF MAURITIUS
3.1 Introduction
The aim of this chapter is to discover whether the various endeavours undertaken by the
government of Mauritius has been successful in attracting FDI in the country and to analyse the
associated loopholes of such approaches.
3.2 FDI in Mauritius

The decline in trade preferences in the textile (due to the end of Multi Fibre Arrangement
(MFA)31 and the new era of global competition with giants like China, India and others)32 and
sugar sector (due to the drastic cut of 36% in the European Union’s price of sugar)33 has left
Mauritius out of the competitive arena and the country started to face severe economic crisis
during the year 2005 when the Government of Mauritius decided to resort to other means aimed
at re-opening the economy and improving the business climate. Such efforts comprised of
diversification of the economy including the creation of new sectors, enactment of new
legislations34, empowerment of the labour market and encouraging foreign investment as a
source of income amongst others. To promote investment and for monitoring purposes, the
31
MFA was introduced in 1974 as a short-term measure to allow the imposition of quotas on the imports of
textiles and garments from developing countries which usually have an absolute advantage in textile industry
because of their low labour intensity and labour costs. The MFA expired on 1 January 2005.
32
Tandrayen-Ragoobur V. (2011), “Facing the global financial crisis – policy lessons and recovery from small
Mauritius”, International Research Journal of Finance and Economics, ISSN 1450-2887 Issue 66(2011), EuroJournals
Publishing, Inc. 2011, <http://www.academia.edu/619568/Facing_the_Global_Financial_Crisis_-
_Policy_Lessons_and_Recovery_from_Small_Mauritius>, accessed on 28 July 2016.
33
Mauritius Chamber of Agriculture (2009), “Towards a competitive and modern industry”,
<http://www.mchagric.org/php/int_main.php?rub=4>, accessed on 30 July 2016.
34
Such as the Securities Act 2005, the Financial Services Act of 2007, the amended Non-Citizen Restriction
(Property Restriction) Act 1975 which now caters for the development of real state scheme amongst others.
17
government of Mauritius has established the BOI which acts as facilitator for all categories of
investment. All the endeavours undertaken by the Mauritius authorities aimed at enhancing the
economic environment have contributed to the successful transformation of the island from a
mono-crop based economy to a more diversified driven economy and this has been evidenced by
some of the well-known worldwide indices. However, the extent to which such initiatives are
effective in practice and the role of BOI in promoting investment in Mauritius remain to be
ascertained.
The World Bank Report on “Investing Across Borders” which relates to indicators of FDI
regulation in 87 economies classified Mauritius amongst countries most open to foreign
ownership and amongst the highest FDI recipients in 2010.35 Moreover, Mauritius performance
has been remarkably noted in areas of competition, investment climate and governance and this
is evidenced by the island’s ranking in the World Economic Forum’s global competitiveness
index 2014-2015 which ranked the island 39th out of 144 countries ahead of all African
countries.36 Similarly, Mauritius is ranked as the first country by the 2014 Mo Ibrahim Index in
terms of good governance37 and the 2014 World Bank Doing Business Report classified the
country as the 20th internationally for its business friendly environmental climate.38 Such
35
World Bank (2010), “Investing across borders 2010 – Indicators of FDI regulation in 87 economies”, Investment
Climate Advisory Services, World Bank Group, <http://iab.worldbank.org/~/media/FPDKM/IAB/Documents/IAB-
report.pdf>, accessed on 30 July 2016.
36
Klaus S. (2014), “The Global Competitiveness Report 2014-2015”, World Economic Forum,
<http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2014-15.pdf>, accessed on 7 August 2016.
37
Mo Ibrahim Foundation (2014), “2014 Ibrahim Index of African Governance: Summary Report”,
<http://www.moibrahimfoundation.org/downloads/publications/2014/2014-iiag-summary-report.pdf>, accessed
on 7 August 2016.
38
The World Bank Group (2014), “Doing Business 2014: Understanding Regulations for SMEs”,
<https://openknowledge.worldbank.org/bitstream/handle/10986/16204/19984.pdf?sequence=1>, accessed on 7
August 2016.
18
significant performance has attributed to portray Mauritius as one of the preferred source of
destination for FDI flows.
In 2013, FDI amounted to 2.6% of the Gross Domestic Product of Mauritius and it is expected
that more FDI will flow in the economy so as to enable Mauritius to transit to a high income39
country.40 Investment in the service industry of the economy represents the highest proportion of
FDI followed by investment in the real estate sectors and in financial services. It has also been
observed that European investors were the main contributors of FDI representing 51% of total
FDI.41 Apart from investments from European countries, FDI in Mauritius also originated from
Asia (due to the existence of DTAs with several Asian countries) and Africa (due to the
geographic proximity with Mauritius) and a very mild percentage of FDI inflows came from
North America, Latin America and the Caribbean.42
With respect to FDI in the financial services sector, investors are willing to use Mauritius as a
platform to in turn transmit their monies to other countries in other investment projects. Such
practice in turn leads to the problem of treaty shopping which is elaborated below and round-
tripping. Round-tripping occurs when investors channel their local funds abroad to be invested in
entities which in turn repatriate the same funds to the local economy of the investors in the form
of foreign investment. Round-tripping is considered to be problematic since it leads to a
reduction of taxable income for the local economy of the investor and also, it has been observed
39
For the 2015 fiscal year, the World Bank has defined a high income economy as countries with a Gross National
Income per capita of USD 12,746 or more.
40
Board of Investment (2014), “An analysis of FDI in 2013”, National Investment Promotional Agency, Government
of Mauritius, Board of Investment E-Newsletter, Issue No 63,
<http://www.investmauritius.com/newsletter/2014/march/article4.html>, accessed on 7 August 2016.
41
Ibid.
42
Ibid.
19
that there is a strong correlation between round-tripping and FDI.43 For instance, a foreign
investor having obtained funds from illegal sources has a strong motive to send the money
abroad so as not be suspected in his country of domicile and to camouflage its origin. In this
attempt, round-trip investors tend to invest in less developed countries which have poor level of
regulatory infrastructure or in countries which offer investment opportunities in various sectors.
The issue of Mauritius of being a safe haven for money laundering activities has been subject to
intense debate despite the fact that Mauritius is well-equipped with anti-money legislations and a
solid regulatory framework44 to deter illegal activities.45 In addition, to combat the problem of
round-tripping, in cases whereby it is observed that a shareholder is investing his money in an
investment vehicle set up in Mauritius to in turn re-invest in the country of domicile of the same
shareholder, the FSC has as a matter of practice required for a legal opinion to the effect that the
money being injected in the Mauritius special purpose vehicle is not derived from a country
which has round tripping legislations in place.
3.3 Mauritius and the IIAs concluded
3.3.1 Bilateral Trade Agreements
Mauritius has signed several bilateral trade agreements with countries like Madagascar,
Zimbabwe, Turkey, India and Egypt amongst others. It has been observed that such treaties
include provisions on low level duties or non-reciprocal duty exemptions on certain specific
43
Ledyaeva S., Karhunen P. and Whalley J. (2013), “Offshore jurisdictions (including Cyprus), corruption money
laundering and Russian round-trip investment”, Niber Working Paper Series, National Bureau of Economic
Research, <http://www.nber.org/papers/w19019>, accessed on 28 July 2016.
44
For instance, the FSC has put in place a due diligence process whereby evidence is required in respect of the
source of income of the investor and to find out the identity of the ultimate beneficial owner of such investment
vehicle proposed to be set up.
45
The Economics Times, India (2015), “No round-tripping in Mauritius”, <http://africamoney.info/no-round-
tripping-in-mauritius-fsc/>, accessed on 5 August 2016.
20
products, free restrictions on certain trade activities and quality standards procedures. For
instance, the bilateral trade agreement in the form of a free trade agreement between Mauritius
and Turkey signed in 2011 aim to provide duty concessions and market access to each signatory
country. However, whether this particular treaty has benefited Mauritius or not, remains to be
analysed. Statistics from the Ministry of Industry, Commerce and Consumer Protection reveal
that total exports to Turkey amounted to MUR 168 million whereas total imports from Turkey
reached MUR 1,463 million during the year 2013.46 The Turkish-Mauritius treaty has led to
more money outflows from Mauritius rather than cash inflows, which may in turn affect the
country’s BOP position adversely. Therefore, IIAs concluded by Mauritius may not necessarily
be beneficial to the country in practice especially in the event that Mauritius exports have not
been able to secure a market in the other contracting state, despite the preferential treatment
afforded by such treaties in theory.
Also, as argued by the preceding Director General of WTO, the conclusion of bilateral trade
agreements can create an incentive for future discrimination which may eventually be adverse to
all trading countries.47 In other words, every country will want to conclude bilateral trade
agreements, if not multilateral trade agreements, for fear of being excluded. Therefore, even
though the provisions of such agreements may have little or no effect to the signatory country,
countries engage in bilateral trade negotiations and the consequence is the conclusion of various
agreements with less meaningful trade preferences.
46
Observatoire de L’Industrie, Ministry of Industry, Commerce and Consumer Protection (2015), “Bilateral
Agreements”, <http://www.industryobservatory.org/bilateral_agreements.php>, accessed on 7 August 2016.
47
Lamy P. (2007), “Regional agreements: the pepper in the multilateral curry”, Speech at Confederation of Indian
Industries Partnership Summit 2007, <http://www.wto.org/english/news_e/sppl_e/sppl53_e.htm>, accessed on 8
August 2016.
21
3.3.2 Investment Promotion and Protection Agreements
As of September 2016, Mauritius has signed 41 IPPAs with various countries, out of which 16
IPPAs are awaiting ratification.48 Since Mauritius follows a system of transposition of
international rules49 via domestic legislation, only 28 of the executed IPPAs have been
transposed into regulations made by the Minister of Finance and Economic Development under
the Investment Promotion Act of Mauritius. Each IPPA concluded by Mauritius with other
signatories contain specific provisions but the majority IPPAs contains standard clauses on
promotion and protection of investments, national treatment and MFN, expropriation and
repatriation of capital amongst others.
It has been noted that the revised definition of “investment” under recent IPPAs concluded has
evolved to also include other forms of investment such as debentures, corporate rights and any
other kind of shareholdings, including minority or indirect ones in companies constituted in the
territory of the contracting state. It is also observed that the pattern in almost all bilateral
investment treaties is extending the definition of investment to include intellectual property
rights50 and the inclusion of sustainable development provisions as well such covering
investments made in areas of agricultural land or other property not used for a business
purpose51. IPPAs encourage the contracting parties to grant assistance to nationals of each other
48
Board of Investment Mauritius (2015), “Investment Promotion and Protection Agreements”,
<http://www.investmauritius.com/downloads/ippa.aspx>, accessed on 7August 2016.
49
The international treaties and conventions signed by Mauritius have to be translated into national legislation
before they can be applied by national courts in Mauritius, referred to as the “dualist” system of implementation.
50 rd
Sornarajah M. (2010), “The International Law on Foreign Investment”, 3 Edition, Cambridge University Press,
New York, ISBN 978-0-521-74765-3, page 45.
51
VanDuzer J. A., Simons P. and Mayeda G. (2013), “Integrating sustainable development into international
investment agreements”, Commonwealth Secretariat Publishing, ISBN 978-1-84929-086-9, page 97.
22
such as a relaxation of the domestic procedures of each country in terms of visa and work
permits for activities concerned with FDI in the respective contracting party. From a Mauritius
law perspective, it is vital that domestic legislations of the country be amended to give effect to
the preferential treatment to investors as afforded by IPPAs. For instance, the Non-Citizen
(Property Restriction) Act of Mauritius was amended in 200752 to allow for non-citizens to
purchase or invest in luxury villa, apartment or other similar properties from a company under
the real estate development53 scheme without the requirement for the Prime Minister’s approval
which would otherwise be compulsory for any other acquisition by a foreigner. While the aim
behind such amendment was to encourage FDI in the country at a cost-effective and efficient
manner, the development of real estate projects or similar properties has led to various
controversies in respect of the agricultural sector in Mauritius. This is mainly because
agricultural land basically used for sugarcane plantation was taken away from Mauritius farmers
in return for a low compensation amount to be developed into real estate projects. The impact of
such evolution has been the loss of potential income to farmers from the agricultural land and in
cases whereby such projects have not been successfully implemented, the economy has suffered
at the national level. For instance, the Government of Mauritius had taken over some huge acres
of land in 2012 to be developed into industrial and real estate projects amongst which is the Jin
Fei project which was expected to create around thirty thousand jobs in Mauritius.54 The project
did not go ahead and hence, around 500 acres of land are being left unoccupied while an
52
Section 3(3)(c)(iii) of the Mauritius Non-Citizens (Property Restriction) Act 1975, Act No 22 of 1975.
53
The real estate scheme was introduced under the Investment Promotion Act and the Investment Promotion
(Real Estate Development Scheme) Regulations 2007, under which landowners are allowed to develop and sell any
mix of residences to non-citizens.
54
Island Crisis (2011), “JinFei and Tianli Project in Mauritius – Disappeared?”, http://www.islandcrisis.net/jinfei-
tianli-mauritius/, accessed on 9 August 2016.
23
opportunity cost of 180,000 tons of sugar cane is being accounted.55 In addition, Mauritius
farmers have experienced some sort of social disruptions since they had initially invested their
efforts in making Mauritius an “Ile Durable” and now they have been snatched of their land and
production.56
In order to provide further assurance to investors with respect to their investment, IPPAs also
provide that the contracting party will indemnify investors of the other signatory state for any
loss in their investments due to war, revolt, insurrection or riot in the territory of the country
where the investment is situated. This in turn is of much more relevance for investors who inject
capital in high risk countries such as those situated in the African region. Furthermore, IPPAs
address the concern of utmost relevance and importance for investors being the guarantee
provided by one state to transfer the returns from their investments to the other country subject to
domestic laws of the transferor state. On the other hand, such guarantee provisions embedded in
IIAs may be controversial in respect of the determination of the compensation/indemnity amount
to be given to investors especially if the IIAs do not have any express provisions for the
calculation of such amounts and the end result may be that the developing country will be
obliged to disburse large sums of money to indemnify investors. Such repayment obligations in
turn are likely to constitute an economic burden on the host developing country.
Apart from protection and promotion provisions, IPPAs also cater for the settlement of disputes
between contracting parties and therefore enable states to resort to arbitration. Such type of
dispute settlement mechanism comforts investors who do not have confidence in the domestic
55
Dr Ramhota P. (2013), “The call of the sweat”, Le Mauricien, <www.lemauricien.com/article/call-sweat>,
accessed on 10 August 2016.
56
Ibid.
24
avenues of justice of the host country, which is in the majority of cases a developing country and
hence, may not always have efficient system of justice. However, as stated in Section 2 above,
dispute settlement provisions may prove costly to the developing state likewise the case of Re
The Republic of Ecuador cited earlier, and hence there is a need for the governments of the
contracting states to the IIAs to consider thoroughly the implications of the dispute resolution
clauses prior to signing the international treaties and conventions.

However, the IPPAs which Mauritius has concluded miss out some basis fundamentals such as
they do not explicitly provide that investments shall comply with international standards such as
labour standards under the relevant conventions of International Labour Organisation,
environmental standards such as the requirement to carry out environmental impact assessment
amongst others or the social environment of the host country. In this way, investment is being
promoting while neglecting other aspects of the society and environment likewise the case of Jin
Fei stated above. To address to this discrepancy, Mauritius should have negotiated for IPPAs to
endorse international code of conduct for signatories such as disclosure and reporting
requirements and other standards of responsible investment.
In addition to the above, while on one hand, the IPPAs which Mauritius has concluded has
undeniably guaranteed foreign investors the free repatriation of their returns arising from a
distribution of profits or sale of shares, on the other hand, the IPPAs do not provide for the
possibility for Mauritius to restrict transfers in cases of BOP and other economic crisis. The
government of Mauritius had also abolished foreign exchange controls in 1994 and
consequently, no approval is required for repatriation of income abroad. This may be
problematic if the BOP position of the country is already negative and the transfer of huge
amount of funds abroad will in turn impact adversely on the country’s BOP position. In addition,
25
the Mauritius domestic legislations do not incorporate provisions to restrict transfer of returns to
foreign investors for the purposes of protecting creditor’s rights, to avoid criminal offences and
money laundering or to comply with court orders or arbitral awards.
3.3.3 DTAs
DTAs are another form of bilateral investment treaties concluded for the purpose of facilitating
repatriation of investment returns from one country to the national of the contracting party. As
stated earlier, DTAs are intended to reduce double taxation and the majority of DTA which
Mauritius has concluded with other countries is based on the OECD model, which in turn
follows the residence concept of taxation. The domestication of DTA provisions into national
law is required so that such treaties are given force of law in Mauritius. DTAs once ratified, are
transposed into Mauritius laws through regulations made by the Minister of Finance and
Economic Development under the Mauritius Income Tax Act. As of September 2016, 48 DTAs
have been signed by the Mauritius authorities, out of which 5 await ratification. Some other 5
DTAs await signature with Burkina Faso, Cape Verde, Cote D’Ivoire, Ghana and Jersey whereas
18 additional DTAs are being negotiated with other countries.57
The main gist behind the conclusion of DTAs is to avoid the double taxation of income.
However, DTAs have been one amongst the reasons for accusing Mauritius of being a tax haven
since they lead to a loss of fiscal revenue to other jurisdictions like India and Africa.
It is to be noted that tax avoidance may occur through the network of DTAs, known as treaty
shopping. This concept refers to the practice by a resident of a state that is not party to the DTA
of establishing an entity in a country that is party to a DTA to in turn re-invest the money in
57
Mauritius Revenue Authority (2016), “Double Taxation Agreements”, <http://www.mra.mu/index.php/taxes-
duties/double-taxation-agreements>, accessed on 20 September 2016.
26
another contracting state to the DTA so as to benefit from the tax advantages of the treaty. The
main problem with treaty shopping is the improper use of DTAs mainly because the beneficial
owner of the investment does not reside in the country where the entity was created and that the
entity has very little economic activity in its jurisdiction. In the same line of reasoning, Turkey
representatives of the trade division have been indulged in negotiations with Mauritius
authorities to use Turkey as a platform to integrate the European market.58 In this case, treaty
shopping would flourish causing enrichment and wrongful gains to the treaty shoppers and loss
of taxable income to the investee country.59 To address to the issue of treaty shopping, the OECD
intends to establish a “three-pronged” approach which are as follows:
1. to include the avoidance of tax avoidance and creation of opportunities for treaty
shopping in the preambles of tax treaties;
2. to include limitation-on-benefits provisions so as to provide for restrictions for residents
of a contracting state; and
3. to add a general anti-abuse rule.60
3.3.4 Regional trade agreements
In an attempt to benefit from trade and investment preferences, Mauritius has acceded to various
regional blocks such as the COMESA, SADC, African Union, African Economic Community,
Indian Ocean Rim-Association for Regional Cooperation and Indian Ocean Commission
58
Africa Money (2015), “Mauritius and Turkey expand their business and economic partnership”,
<http://africamoney.info/mauritius-and-turkey-expand-their-business-and-economic-partnership/>, accessed on
20 September 2016.
59
Eliot T. S. (2015), “Supreme Court on Treaty Shopping, Lord McNair view examined”,
<www.shivakantjha.org/pdfdocs/JRIGE/chapter_12.pdf>, accessed on 19 September 2016.
60
TreatyPro Editorial (2014), “Treaty Shopping”,
<http://www.treatypro.com/features/Treaty_Shopping__572028.html>, accessed on 19 September 2016.
27
amongst others. While the COMESA Treaty aims to promote regional integration through the
establishment of a free trade area, putting in place policies to promote the free movement of
capital and investment supported by the adoption of a common investment area, the SADC
Treaty has the objective of providing balanced economic growth, political stability and security
for all of its members. There is the ongoing debate as to whether regional trade blocks give rise
to trade creation or trade diversion effects. Nevertheless, since the COMESA and the SADC
region eliminates trade barriers and promote preferential treatment amongst member states, there
is the possibility for foreigners to establish their businesses in Mauritius so as to in turn gain
access to preferential treatment which the country has with other member states of the regional
blocks or to secure a market through Mauritius in a member state of the regional block whereby
direct investment in such country may be difficult or not possible. In such a case, the island not
only benefits from an inflow of foreign direct investment but also from an increase in its exports
to the regional blocks members. Nevertheless, the net effect of such type of investment may be
adverse in the event that huge amount of profits are repatriated from Mauritius to the foreign
investor’s country of residence thereby creating a BOP deficit.
3.4 The domestic approaches to attract FDI
3.4.1 Business Facilitation
The government of Mauritius aims to portray the island as one among the top 15 of the most
attractive investment and business friendly locations worldwide.61 In this attempt, several pieces
of legislations have been enacted, for instance the Business Facilitation Act of 2006 provides for
accessible and straight forward mechanisms to enable foreign investors to set up their businesses
61
Board of Investment, “Investment Climate Statement – Mauritius” (2013),
<http://photos.state.gov/libraries/mauritius/196472/josephan/2013%20ICS-Final%20Report%20_Mauritius_.pdf>,
accessed on 19 September 2016.
28
in Mauritius and to start their operations without any delay after incorporation. The aforesaid Act
also provides for the possibility for foreign investors to obtain an occupation permit and
residence permit to be able to conduct business in Mauritius. In addition, the Investment
Promotion Act was enacted in 2000 in line with the provisions of the WTO Agreement on Trade
Related Investment Measures. However, for certain types of business activities, additional
regulatory procedures are required so that foreign investors can be indulged in such line of
business which apart from being lengthy and time consuming, may be considered to be
discriminatory towards foreign investors. This is because Mauritius nationals are free to invest in
the tourism, sugar and broadcasting services sector unlike foreigners who need to apply for the
relevant authorization or licence to able to conduct such activities.
The BOI is the coordinating agency for business registration and has been designated by the
government of Mauritius to act as facilitator for all forms of investment in Mauritius. Foreign
investors may channel their queries to the BOI who will in turn guide investors on the necessary
procedures to be able to conduct business in Mauritius. The BOI also provides incentives to
attract foreign investors from time to time for instance, the Film Rebate Scheme which involves
a cash rebate of 30% on local qualifying production expenditures, was introduced in 2013 in
order to make Mauritius more attractive to foreign film producers, thereby enhancing the film
industry in Mauritius. Similarly, a foreign investor wishing to carry out an economic activity
which is specified in the Investment Promotion Act (such as financial services, banking and
construction amongst others) has to be registered with the BOI prior to starting operations in
Mauritius. However, the BOI has often been criticised for not being equipped with the necessary
facilities to respond or attend to foreign investor’s queries and lacks openness to foreign
29
investors.62 In addition, the BOI has often been accused of political interferences since the BOI is
managed and controlled by political nominees.63 Such interferences may not always be beneficial
to the aim of promoting investment in Mauritius.
Apart from the BOI, foreign investors also have the flexibility of structuring their investments in
the form of investment vehicles (such as a company, trust, limited partnerships) established in
Mauritius and for this purpose, the application is made to the Registrar of Companies and the
FSC in Mauritius. However, in order to ensure the proper structuring of investments and to
provide high quality service to foreign investors, there is a need to enhance the functioning of the
Mauritius regulatory bodies and to increase the level of coordination between all the agencies
which aim at promoting investments in Mauritius. For instance, the establishment of a special
committee (comprised of independent individuals to avoid any political interferences or conflict
of interest) to act as the coordinating body between the Registrar of Companies, the BOI and the
FSC may be considered with a view to accelerate investment structuring procedures in Mauritius.
3.4.2 Domestic legislations
The Mauritius Financial Services Act was enacted in 2007 to enable non-citizens to conduct
business outside of Mauritius while being domiciled in the island through the use of vehicles
holding either a category 1 or 2 global business licence (“GBL1” or “GBL2”) as per the
provisions of Section 71 of the said Act.
62
Business Mega (2012), “Private Equity Mauritius 2012: Mauritian Economy Weaknesses”,
<http://business.mega.mu/2012/09/18/private-equity-mauritius-2012-mauritian-economy-weaknesses/>,
63
Business Mega (2014), “Nominés Politiques: Une cinquantaine finalisée la semaine prochaine”,
<http://business.mega.mu/2014/12/29/nomines-politiques-une-cinquantaine-finalisee-la-semaine-prochaine/>,
30
Entities holding a GBL1 are considered to be residents of Mauritius and benefits from lower
rates of taxation than domestic investors, that is, they are allowed tax credits of 80% on the
normal rate of corporate taxes of 15%, which effectively reduce their tax liability to 3%.
Alternatively, GBL1 entities which invest abroad have the possibility of deducting the tax
suffered abroad against the domestic taxes levied on the same income. GBL1 entities are also
eligible to apply for Tax Residence Certificate so as to benefit from DTAs to which Mauritius is
a party. GBL2 vehicles on the other hand, are considered to be non-residents of Mauritius for
taxation purposes and are restricted from undertaking some activities such as financial services
and banking.
Among the other approaches to attract FDI, Mauritius has also relaxed its restriction procedures
for foreign investors to own Mauritius companies. For instance, the Foreign Exchange Control
Act was repealed in 1994 to allow for the free repatriation of profits abroad and for investors to
own Mauritius entities without any approval mechanisms. Since then, the SEM became open to
the public in general and as of September 2016, 100 companies were quoted on the official
market of the SEM and 49 countries on the Development and Enterprise Market (DEM) of the
SEM.64 However, the procedures for admission on the SEM is lengthy, expensive and time
consuming and since SEM works in close collaboration with the FSC for the purposes of the
listing procedures, a lot of bureaucracies is involved which further delays the admission process.
3.4.3 Arbitration
In addition to create investment or trading opportunities to foreign investors, Mauritius also
intends to become an international services center to offer legal services thereby creating a
64
The Stock Exchange of Mauritius (2016), “Listed Issuers on Official Market”,
<http://www.stockexchangeofmauritius.com/officialmarket-listedcompanies>, accessed on 21 September 2016.
31
market to resolve international disputes or to act as an arbitration center. For instance, the
ratification of the New York Convention for the Enforcement of Foreign Arbitral Awards
(Convention) and the enactment of the Mauritius International Arbitration Act 2008 (IAA) are
considered to be positive steps undertaken by the Mauritius legislators.65 The IAA is based on
the UNCITRAL Model Law for International Commercial Arbitration 1985 and the innovative
feature which the IAA has entailed is the establishment of an office of the Hague Permanent
Court of Arbitration (PCA) in Mauritius in order to enable the PCA effectively discharge its
duties under the IAA.66 The Convention implies that the Supreme Court of Mauritius may
recognise and enforce an arbitral award made in the territory of another state which is a
contracting party to the Convention unless there are reasons for refusal of such an award such as
on public policy ground. However, the Convention has been subject to criticism in terms of its
provisions since there is a possibility that the country in which the award is being sought to be
enforced and recognised, refuses the enforcement or recognition of such award despite the fact
that an arbitral award has already been delivered in respect of the subject matter.67
Furthermore, to position the island as an international dispute resolution center, the Mauritius
International Arbitration Centre Ltd (MIAC) entered into an agreement with the London Court of
International Arbitration (LCIA) thereby establishing LCIA-MIAC Arbitration Centre. In

65
National Investment Promotion Agency of Mauritius (2011), “Invest Mauritius – Your Investment and Business
Hub”, BOI Newsletter Issue No 36, <http://www.investmauritius.com/EEE3F310-ED5A-4B33-B5EE-
3A20D60AC966/FinalDownload/DownloadId-CDB5CB3E7FACA47E564E0A4C44AA6E31/EEE3F310-ED5A-4B33-
B5EE-3A20D60AC966/Ezine_Nov11/eng.pdf>, accessed on 3 September 2016.
66
Permanent Court of Arbitration (2009), “PCA Mauritius Office”,
<http://www.pca-cpa.org/showpage.asp?title=Mauritius&pag_id=1492>, accessed on 3 September 2016.
67
Professor Patchett K. W.(1981), “The New York Convention on the Recognition and Enforcement of Foreign
Arbitral Awards”, http://www.uncitral.org/EEE3F310-ED5A-4B33-B5EE-
3A20D60AC966/FinalDownload/DownloadId-38B247BF8678405320DF6AA31FAC133A/EEE3F310-ED5A-4B33-
B5EE-3A20D60AC966/pdf/english/texts/arbitration/NY-conv/New-York-Convention-Commonwealth.pdf, accessed
on 3 September 2016.
32
parallel, the Mauritius Chamber of Commerce and Industry (MCCI) Arbitration and Mediation
Centre has entered into a strategic partnership with “Le Centre de Médiation et d’Arbitrage de
Paris (CMAP)” working under the aegis of “La Chambre de Commerce et d’Industrie de Paris”
for the purpose of making Mauritius the venue appealing to countries and investors in
francophone Africa as well. However, despite Mauritius has a strategic location advantage and a
well-educated work force for the conduct of arbitration proceedings amongst others, the country
still faces a few obstacles that need to be dealt with in order to achieve an international or
regional arbitration center. In other words, Mauritius lacks the required resources for instance, an
institution to administer arbitration proceedings in the country and to act as facilitator to parties
of a dispute and a stenographic reporting system68 of arbitration proceedings which would have
made the conduct of arbitration proceedings more efficient.69 In addition, since Mauritius is not
classified as a developed country, it is unlikely that high net-worth clients or institutional
investors have complete faith in the logistics of the island required for the conduct of arbitration
proceedings such as expertise or efficient arbitration rules to select Mauritius as the arbitration
centre.
68
Stenographic reporting is a system of recording court proceedings having the aim of recording the spoken word
verbatim.
69
Erriah D. (2011), “International Arbitration in Mauritius”, <http://www.corporatelivewire.com/top-
story.html?id=international-arbitration-in-mauritius>, accessed on 4 September 2016.
33
4. POLICY OPTIONS AND RECOMMENDATIONS
4.1 Introduction
The discussion of the role of IIAs in attracting FDI until now has been based solely on the legal
and policy approaches of Mauritius with regards to FDI. However, in order to provide a more
complete analysis of the subject matter, it is useful to compare legal and policy approaches from
at least one other jurisdiction which is amongst the well-known destinations for FDI. The
comparison will be made with China mainly because of the aggressive approach undertaken by
the Chinese government both in terms of negotiations with contracting states of the respective
IIAs and the various endeavours to improve the domestic environment with a view to attract FDI,
which will be addressed in the first part of this chapter.
4.2 The case study of China
For the purpose of the comparative analysis, it is noteworthy to provide a review of China’s
approach to FDI in this part of the research paper which may act as recommendation for
Mauritius to increase the FDI inflows. Several factors have contributed to China’s success as
amongst the preferred destination for FDI, one among which is the conclusion of international
treaties.70
The early bilateral investment treaties concluded by China did not cater for dispute settlement
procedures and contained very few restrictive provisions which would protect foreign
investment, however, over the years, Beijing insisted on the inclusion of certain specific
provisions which portrayed China as one of the preferred destination for foreign investment. For
instance, China has concluded IIAs which included provisions on arbitration, national treatment
70
Graham E. M. and Wada E. (2001), “FDI in China: Effects on growth and economic performance”, Oxford
University Press, <https://www.piie.com/publications/wp/01-3.pdf>, accessed on 4 September 2016.
34
clauses and more liberal policies on repatriation of funds to the home country of the investor,
which have all contributed to enhance the attractiveness of China as host country for FDI.
Furthermore, the China-Africa investment partnership strategy has prompted a large number of
foreign investors to invest in Africa via China. In the year 2011, China was responsible for USD
1.08 billion of non-financial direct investment to Africa, a figure which represented a year-on-
year growth of around 87%.71 The aforesaid partnership strategy has afforded a certain minimum
level of protection to investors in China in relation to their investment since in the majority of
cases, their monies are in turn being invested in Africa which is itself considered as a high risk
nation, or in natural resources which have volatile characteristics. Since the risk for not
recouping back the investments in such high risk countries are high, it is therefore advisable for
the host country to enter into negotiations with the investee country to find out means and ways
to guarantee protection to the ultimate investor and such provisions may be embodied in IIAs
with the investee countries.
The opening-up of China to the rest of the world has been possible due to the following
endeavours: the establishment of pilot special open economic zones, coastal cities or regions, the
setting up of Pudong New Area in Shanghai and China’s accession to the WTO.72 The separation
of special zones has enabled the Chinese government to undertake and tailor make special
favourable policies geared to each such special zones necessities. For instance, the Chinese
71
Dr Ofodile U. E. (2014), “Africa-China Bilateral Investment Treaties”, Michigan Journal of International law,
Volume 35(1),
<http://blogaila.com/2014/03/04/africa-china-bilateral-investment-treaties-a-critique-by-dr-uche-ewelukwa
ofodile/#_ftnref138>, accessed on 5 September 2016.
72
Mingming P. and Nebraska L. (2011), “Three essays on FDI in China”, dissertation and thesis from the College of
Business Administration,
<http://digitalcommons.unl.edu/businessdiss/20?utm_source=digitalcommons.unl.edu%2Fbusinessdiss%2F20&ut
m_medium=PDF&utm_campaign=PDFCoverPages>, accessed on 15 September 2016.
35
government has invested massively in the coastal areas in terms of training and education and
has liberalised the coastal port cities with a view to open such regions to FDI and trade. In some
other areas, the Chinese government emphasised on improving technological infrastructure
which has further opened the country to trade and investment. Therefore, apart from investing in
education and training, Mauritius may very well adopt the same planning strategy and may
invest in other sectors which can be exploited (such as agriculture, forestry, fishery services,
transportation and other services) which can in turn act as an area of interest for foreign investors
and create a new wave for FDI in Mauritius.
China accession to WTO has made the country known to foreign investors and by committing to
WTO standards of national treatment between domestic and foreign enterprises, WTO rules on
intellectual property rights and by further eliminating restrictions on FDI, China has made
substantial improvements in its trade and liberalisation process for FDI.73 Furthermore, in terms
of taxation policies, China has adopted a very liberal approach by introducing various tax
incentives. For instance, China introduced a five-year tax refund scheme during the year 1994 for
multinational corporations which have established in the country. The scheme involved offering
FDI firms a refund of 40% of taxes paid on such firms’ share of profit if the profit is to be
reinvested in China for at least five year and where reinvestments are made in high-technology
or export-oriented, the foreign investor may benefit from a full tax refund.74 The aim behind such
initiative is to prevent huge repatriation of profits out of China and to promote growth and
expansion of China’s economy. This can in turn stabilise the BOP position of the host FDI
73
China Business Review (2011), “China’s role in the WTO”, The Magazine of the US-China Business Council,
<http://www.chinabusinessreview.com/chinas-role-in-the-wto/>, accessed on 15 September 2016.
74
OECD (2000), “Main determinants and impacts of FDI on China’s economy”, OECD Working Papers on
International Investment 2000/04, OECD Publishing, <http://dx.doi.org/10.1787/321677880185>, accessed on 15
September 2016.
36
country. As stated earlier in Chapter 3, despite Mauritius has concluded IIAs with other
countries, the end result may not always be beneficial to Mauritius as a host country if money
outflows out of the country exceed cash inflows, which may in turn affect the country’s BOP
position adversely. Therefore, by providing for incentives for reinvestments in terms of tax
refunds likewise the case of China, this problem may be avoided especially in the absence of
domestic legislation to restrict repatriation of profits abroad.

The success of such policies was confirmed by some scholars who argued that the Chinese
government’s initiatives have also enabled foreign investors to undertake their own
infrastructural development and other investments in China since they have been able to reinvest
funds which they have benefitted from income tax exemptions referred to above.75 However,
FDI in China has recently slumped to a minimum of USD 7.2 billion in August 2014, the lowest
monthly total since July 2010 based on Chinese Ministry of Commerce figures.76 This decline is
mainly attributed to the obscure investigation by China regulators on FDI firms which in turn
leads to large amount of fines imposed on multinational corporations. For example, Microsoft
and Qualcomm based in China have been subject to investigation for alleged price fixing and
monopolistic activity. Such kind of policies makes it difficult for foreign investors to operate in
the country and act as deterrent to an enabling environment for both trade and investment.
4.3 Recommendations for Mauritius
75
Tseng W. and Zebregs H. (2002), “FDI in China: Some lessons for other countries”, IMF Policy Discussion Paper,
PDP/02/3, <https://www.imf.org/external/pubs/ft/pdp/2002/pdp03.pdf>, accessed on 20September 2016.
76
Anderlini J. (2014), “Foreign investment into China slumps”, The Financial Times Limited,
<http://www.ft.com/cms/s/0/86808f42-3d7c-11e4-b782-00144feabdc0.html#axzz3QoFiRqIY>,
37
77
Following the recommendation of Guzman (2009) and Aslund (2013)78, by negotiating
collectively with other developing countries, Mauritius is more likely to be in a better position to
increase its bargaining power vis-à-vis rich nations when negotiating IIAs, and it is therefore
advisable for the Mauritius government to come into common accord with other developing
countries such as the establishment of a specific regional block. The regional block will
thereafter conclude IIAs with developed nations, the provisions of which will apply to each
signatory member state.

As explained earlier, the conclusion of IIAs does not necessarily imply the creation of good or
favourable conditions to the Mauritius economy. For instance, the Turkey-Mauritius treaty has
led to more money outflows than inflows. It is therefore of utmost importance before the country
executes the IIAs, to carefully analyse the impact of such treaties or conventions by conducting a
cost-benefit analysis prior to concluding such agreements. In addition, IIAs should not consider
only economic aspects but need to rather address an all-encompassing dimension by addressing
to social, environmental and sustainable development issues. For instance, in an endeavor to
enhance trade relations with China, the Jin Fei project negotiated with China failed to consider
the social disruptions faced by Mauritius planters who had to sacrifice their land for
infrastructural developments for the project. Furthermore, the project did not go ahead and a
huge amount of acres of land is left unoccupied which is definitely a wastage of resources. As
stated earlier, dispute settlement provisions may prove costly to the developing state likewise the
77
Guzman A. T. (2009), “How international law works”, University of California, Berkeley School of law,
International Theory, Vol 1, No 2, pp. 285-293, <http://ssrn.com/abstract=2176015>, accessed on 21 September
2016.
78
Aslund A. (2013), “The world needs a multilateral investment agreement”, Institute for International Economics,
Policy brief, Number PB13-01, <www.iie.com/publications/pb/pb13-1.pdf>, accessed on 21 September 2016.
38
case of Re The Republic of Ecuador79, and hence there is a need for Mauritius to consider
thoroughly the implications of the dispute resolution clauses prior to signing IIAs.
It has also been observed that the absence of foreign exchange control legislations in Mauritius
or limits on repatriation of profits in IIAs which Mauritius is party to, is likely to create adverse
effects on the country’s BOP especially when huge amount of money is being distributed abroad
in the form of dividends or capital gains. There is thus a need to consider restrictions on
repatriation of capital in certain specific circumstances such in cases of suspicions of money
laundering or for preserving the country’s BOP position.
Further to the above, it has also been seen that the regulatory bodies responsible for the financial
services sector in Mauritius are badly managed and are subject to political interferences80, and
hence there is a need for such entities to perform as efficiently as private enterprises to promote
sustainable development in the long run.81 To address to this issue, Mistry (2015) recommends
the following:
(a) for the shares of the Mauritius government in such enterprises to be transferred to a
special sovereign wealth fund (Fund) which needs to be kept statutorily separate from
government and ministers;
(b) the recruitment of the board and senior management of such Fund to be internationally
recruited on merits criteria; and
79
Occidental Petroleum Corporation and Occidental Exploration and Production Company v. The Republic of
Ecuador, 2012, ICSID Case No. ARB/06/11.
80
Since the majority of shares of such bodies are held by the Mauritius government.
81
Mistry P. S. (2015), “Mauritius has to export almost the size of its Gross Domestic Product”, L’Express,
<http://www.lexpress.mu/article/257518/percy-s-mistry-investment-banker-mauritius-has-export-almost-size-its-
gross-domestic>, accessed on 21 September 2016.
39
(c) a statutory obligation to be imposed on such Fund to ensure the regulatory bodies are run
free from political interference.82
A penalty process is also recommended in the event that the relevant regulatory body does not
achieve the objectives set, such body will be sold to the private sector. However, the creation of
the Fund needs to be properly planned and depends on the willingness of the Mauritius
government to approve such project. The establishment of the Fund is likely to take time and the
success depends heavily on the coordination of the Mauritius government to enable the
regulatory bodies to operate independently.
82
Ibid.
40
5. CONCLUSION
Throughout the course of this work, the impact of international agreements in attracting FDI in
host countries has been assessed. The focus of the research area was directed towards developing
countries by analysing the case study of Mauritius. The research has been structured such that it
comprises of both descriptive and analytical aspects of IIAs and the associated implications. The
analysis has been performed by referring to the various IIAs which have been entered into by
Mauritius and a cost benefit study of the other legal and policy approaches undertaken by the
Mauritius government. Lastly, an evaluation of China incentives in attracting FDI has been
carried out which may in turn act as recommendations for Mauritius for attracting FDI.
To conclude, it has been seen that there is a need to restructure the local agencies which are
responsible for investment promotion in the island such as more collaboration is needed between
the Mauritius regulatory bodies to help foreign investors by sharing with them with the necessary
information required for investments or to speed up the establishment of investment vehicles
with a view to facilitate investment in Mauritius. Furthermore, Mauritius regulatory bodies are
often intertwined with political interferences and hence there is a need to improve the
management and functioning of such regulatory bodies. Mistry (2015) recommended the creation
of a sovereign wealth fund to hold the shares of the government in such bodies and for the fund
to be managed by international experts. However, this process requires proper planning and
continuity of the policies set which is difficult in the context of Mauritius because of the
likelihood of the change in political parties with elections which are held after every five-year
period.83 It has been observed that the political party elected is likely to discontinue projects
83
In practice, it has been seen that elections have always had a tendency to adhere to a system comprising two
major coalitions of parties, one party forming part of the government and the other one, being the government’s
opposition.
41
which have been put in place by the preceding government mainly due to political conflicts and
differing opinions. To prevent the discontinuity of projects, it is advisable to provide for the
establishment of the fund through the enactment of a specific legislation embedding the
mandatory provision on the government (even if there is a change of political parties) to abide by
the project, and also to establish a special committee having the purpose of monitoring the
project as well as acting as coordinator between various stakeholders concerned with the scheme.
The legislation needs also to include the provision that significant proposed changes will only be
given effect upon the unanimous voting/approval of all members of parliament84 to such
amendments.
It has also been seen that there are some particularities in China’s experience that may provide
lessons for other countries, in particular, by segregating the economy into special economic
zones and adopting policies tailor-made to such regions, the country has been able to enhance its
investment climate, thereby attracting foreign investors. However, the establishment of the
special economic zones is likely to take time and again, it depends on the willingness of any
elected political party forming part of the government to continue the project.
As evidenced in this paper, IIAs are important instruments for encouraging FDI, however, policy
makers need to know the extent to which such treaties and conventions contribute to encourage
FDI and need to balance this objective with the possible associated costs of such agreements
such as restrictions which they entail on national policy space and the potential expenditures
84
Members of parliament include both the government and the opposition party and each Member of Parliament
is entitled to vote on legislation enactments.
42
involved in resolving investor-State disputes that may arise from the international agreements.85
In addition, when putting in place domestic policies and approaches to attract FDI, it is vital for
policy makers to consider such strategies from not only an economic perspective, but also from
an environmental, social and cultural point of view so as to ensure the host country’s sustainable
growth and development.

85
UNCTAD (2009), “The role of international investment agreements in attracting FDI to developing countries”,
UNCTAD Series on International Investment Policies for development, United Nations New York and Geneva,
United Nations Publication, UNCTAD/DIAE/IA/2009/5.
43

The Role of International Investment Agreements in Attracting FDI To Developing Countries: An Assessment of Mauritius

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

The Role of International Investment Agreements in Attracting FDI To Developing Countries: An Assessment of Mauritius

Uploaded by

Copyright:

Available Formats

International Journal of Law and Management

The Role of International Investment Agreements in attracting FDI to developing countries: An

*Related content and download information correct at time of download.

countries: An assessment of Mauritius

and Mauritius governmental agencies’ reports.

are applied in practice by and amongst signatory states.

developing countries with a particular focus on Mauritius. Additionally, an overwhelming

in the context of Mauritius will also be considered.

1.1 The concept of FDI

aforesaid classical definition refers to investment in buildings, machinery or other forms of

production technology, skills, innovative capacity, organisational and managerial practices

between locations as well as accessing international marketing networks.2

1.2 Problem Presentation: FDI and IIAs

1.3 Objectives and Research Questions

context of international approaches to investment rulemaking and their impact on development.

the agreements depends on the specific type of IIAs concluded.7

2) Are IIAs effective in promoting FDI in developing countries?

3) How IIAs are helping Mauritius to attract foreign investment?

5) What is the prospect of FDI policies in Mauritius for the future?

1.4 Research Methodology

an analysis of the present situation in Mauritius, Section 4 provides recommendations to address

to loopholes in the Mauritius system and Section 5 concludes the paper.

2.1 Literature Review: The main FDI driving factors

trade as well as subsidies.9

2.2 History and the emergence of IIAs

international trade negotiations were conducted leading to a diminishing importance of FCN

certain investment protection for FDI.

include preferential trade and investment provisions.

2.3 An analysis of IIAs in attracting FDI

2.3.1 The domestication into national law

question does not give effect to its provisions.

2.3.2 The protection of investor’s rights

of national treatment or MFN principles, environmental or labour standards and intellectual

entail costs to the host country.

privileges to foreign investors, thereby representing a discriminatory approach. The negotiating

employment or environment, which may have adverse consequences on the sustainable

development of the host country.

2.3.3 Dispute Settlement Procedures

procure to both the investor and the host country.

the host country’s acts.28

signing the respective IIAs.

associated loopholes of such approaches.

3.2 FDI in Mauritius

legislations34, empowerment of the labour market and encouraging foreign investment as a

regulation in 87 economies classified Mauritius amongst countries most open to foreign

destination for FDI flows.

North America, Latin America and the Caribbean.42

of foreign investment. Round-tripping is considered to be problematic since it leads to a

regulatory infrastructure or in countries which offer investment opportunities in various sectors.

round-tripping, in cases whereby it is observed that a shareholder is investing his money in an

which has round tripping legislations in place.

3.3 Mauritius and the IIAs concluded

3.3.1 Bilateral Trade Agreements

afforded by such treaties in theory.

agreements with less meaningful trade preferences.

IPPAs are awaiting ratification.48 Since Mauritius follows a system of transposition of

repatriation of capital amongst others.

investment treaties is extending the definition of investment to include intellectual property

controversies in respect of the agricultural sector in Mauritius. This is mainly because

IIAs may be controversial in respect of the determination of the compensation/indemnity amount

clauses prior to signing the international treaties and conventions.

labour standards under the relevant conventions of International Labour Organisation,