INTRODUCTION TO

INTERNATIONAL INVESTMENT
LAW
‘‘WE HAVE THE KNOWLEDGE, RESOURCES AND CAPABILITIES TO
MAKE GLOBAL CAPITALISM WORK IN A MORE INCLUSIVE AND
SOCIALLY RESPONSIBLE MANNER WHILE RETAINING, INDEED
ENHANCING ITS ECONOMIC BENEFITS’’.

-BY JOHN H. DUNNING

FATHER OF INTERNATIONAL BUSINESS
• General meaning of investment :- It is the application of money or other assets
(something of value) in the hope that in the future it would appreciate or
generate more income.
• Economics defines investment as the utilization of resources in order to increase
income or production output in the future.
• According to business theories, investment means the activity where a
manufacturer buys any physical asset, eg.- stock or production equipment in the
expectation that this will help the business to prosper in the long run.
• Legally, investment is the outlay of money that is mainly for income or profit.
• Foreign investment or FDI includes transferring tangible (real and not
imaginary) and intangible (having no physical existence)
assets from one state to another to generate wealth under the owner's complet
e or partial control.
• Foreign direct investment is when an individual or business owns 10 percent or
more of a foreign company.
• Foreign investment usually describes foreign residents’ ownership of asse
ts for the purpose of monitoring the use of such assets .

• WHO IS AN INVESTOR? ------ The term investor includes individuals,

enterprises, share holders and states. An investor is
a person or organisation who puts cash into economic systems, real
estate, etc. with the expectation of a profit.

• In the current situation, FDI is not only a source of capital, but it also
enhances the national economy's competitiveness by transferring
technology and helping to strengthen infrastructure, create jobs and
increase productivity.
• FDI plays a multidimensional role in the general growth of the host state as
it is a debt-free source of assets that helps to keep the equilibrium of
payments and foreign exchange on the worldwide market.
• The host state (A nation in which representatives or organizations of
another state are present because of government invitation and/or
international agreement) should ensure efficient security of FDI within
their state territory, both within the global and national legal
framework, before anticipating investments.
• Foreign investment protection is one of the main problems for those i
nvesting outside the jurisdiction of their state.
• The main area of development in the current situation is FDI
protection through global tools such as treaties, agreements,
conventions, contracts enforced by nations that designed to assure
investors that their investments are better protected in the land of
the host state.
• The state which exports capital is identified as home state and state
where capital is invested is identified as host state.
• A number of bilateral investment treaties (BITs) and national
agreements such as the North American Free Trade Agreement
(NAFTA), Asia Pacific Economic Cooperation (APEC), the Association of
South-East Asian Nations (ASEAN), the South Asian Association for
Regional Cooperation (SAARC) and Trade Related Investment
Measures (TRIMs) are currently growing among nations.
• These agreements are integrated with clauses to safeguard investor
freedoms that believe that investments are poorly handled in host
countries and that their investments are subject to multiple hazards
such as political danger, foreign exchange risk, export risk, import risk,
etc.
• In order to safeguard investors’ interest from the above hazards, the World Trade Organization (
WTO) has framed TRIMs (Trade Related Investment Measures) consisting of mea-
sures to be integrated into host state national investment policies and laws.
• According to the OECD ( Organization For Economic Cooperation and Development), FDI means
and includes all types of tangible and intangible assets owned and controlled directly or indirectly
by the investor and includes:-
i) a company that includes MNCs, companies, private and government joint ventures with
legal personality.
ii) Company shares, stocks or capital stocks (an equity investment that represents part
ownership in a corporation and entitles you to be a part of that corporation’s earnings and assets),
and other forms of shareholding and related rights.
(iii) Bonds (loan agreements between the bond issuer and an investor where the bond
issuer is obligated to pay a specified amount of money at specified future dates), debentures (a type
of loan often used by companies to raise money that is paid back over a long period of time and at a
fixed rate of interest), loans and any kind of debt and debt arising from them.
iv) Business or contractual rights.
• ICSID (International Centre for Settlement of Investment Disputes) plays a vital role in
protection of investors’ interest.
• WTO’s Definition of FDI: - FDI occurs when investors’ base is in one
state (home state) and with the intent to manage the assets through
acquisition or establishment of an enterprise in another state and
exercising control over its business activities.
• OBJECTIVES OF INVESTMENT :-
➢ Preservation of capital
➢High income
➢Safety
➢Liquidity (asset that can be readily converted to cash)
➢Exemption from cash
• TYPES OF INVESTMENTS:-
➢Equities :- Type of security that represents the ownership in a
company. They are bought and sold in stock markets.
➢Mutual funds :- It allows a group of people to pool their money
together and have it professionally managed, in keeping with a
predetermined investment objective.
➢Bonds
➢Deposits
➢Cash equivalents
➢Real estate
➢Precious objects . Eg:- Gold.
 IMPORTANCE OF INVESTMENT
• Instead of just lying in our bank account, we can invest money in
several financial avenues which ensures that our money can grow.
• Provides financial stability to our loved ones.
• Encouragement of economic growth through fixed capital and
variable capital
• Both long term and short term distant financial goals can be well
planned and fulfilled by making relevant and intelligent investments.
• Tax minimization --- achieve ----- by investing our money in mutual
funds, etc.
• ICSID’s (International Centre For settlement of Investment
Disputes) Definition of FDI :- Foreign investment implies,
according to the ICSID Convention, a global transaction that adds
to financial collaboration and promotes the economic
development of a contracting state.
The definition of ICSID investment is very wide and suggests
that anything and everything needed under the sun for global
economy growth can be called FDI.
• Int. Invest Law is designed to promote and protect the activities
of private foreign investors.
• This does not necessarily exclude the protection of government-
controlled entities as long as they act in a commercial rather than
in a government capacity.
• Whether non-profit Organizations may be regarded as investors is less clear and will depend on
the nature of their activities.
For Example :- Art13(a) (iii) of the MIGA (Multilateral Investment Guarantee Agency)
Convention requires that an eligible investor operates on a commercial basis.
• Investors are either individuals or companies.
• In the majority of case, the investor is a company but at times individuals also act as investors.
• The foreignness of the investment is determined by the investor’s nationality.

DEFINITION OF FDI ACC. TO OECD (Organization for Economic Co-operation and Devt.):-
FDI is a category of cross-border investment made by a resident in one economy (the direct
investor) with the objective of establishing a long-lasting interest in an enterprise (the direct
investment enterprise) established in an economy other than that of the direct investor.
FOREIGN INVESTMENT – ITS EVOLUTION
• Earlier, the foreign investment notion had a very limited significance that included only
money transfer, real resources, and foreigners’ physical property.
• The evolution of global investment law can be traced in the concept of “ state
accountability” that would occur if the state did not treat the alien in accordance with
the minimum treatment standard and it would also apply to its physical property.
• The genesis of global investment law was in favour of the duty to safeguard aliens and
their physical property and the responsibility of the state arose from the inability to fulfill
this duty.
• The notion of foreign investment has been expanded to include intangible assets as time
has changed.
• Initially, the intangible assets consisted of contractual rights in which overseas investors
slowly transferred their property to the host state.
• Subsequently, property rights such as rental, mortgage and lien were included as well.
• Later, also included the contractual rights that the overseas investor would obtain as a
consequence of their connection with host nations.
• The next stage is the inclusion of intellectual property rights within
the significance of foreign investment, the reason for this is the
extensive imitation of inventions produced in developed countries
that also included intellectual property rights.
• If a new invention is to be produced in a developing country or a new
technology is to be transferred by a foreign investor to a local partner
in a joint venture, the protection of the intellectual property rights
connected with the venture would have to be provided.
• When a need arose for the recognition of intellectual property rights,
the agreements expanded the significance of foreign investment to
include intangible intellectual property rights by extending the scope
of foreign investment that had so far been restricted solely to physical
resources.
• The word investment originates in financial terminology which, when used in
investment contracts, must be understood and described as a legal notion.
Economic discussion has often presumed that direct investment includes:-
a) fund transfer,
b) long-term project and
c) company risk.
• BIT between the parties must define investment, otherwise the task of defining
the term foreign investment will be complex for the tribunals while interpreting it
during the disposal of investment disputes.
• Capital-exporting countries adopt a approach to define treaty-protected foreign
investment based on the following three principles :-
a)Protecting foreign investors’ physical assets.
b) extend protection to intangible rights by including such protection within
the scope of foreign investment.
c) Include administrative privileges given by States in the form of intangible
rights needed to carry out investment projects.
• The roots of contemporary foreign investment treaty regulations can
be traced back to 1778 when the United States and France concluded
their first trade treaty, and many treaties in America in the 19th
century followed.
• Initially, these treaties discussed only trade issues and also slowly
other issues linked to foreign property expropriation & compensation.
• The US negotiated a sequence of “Friendship, Commercial and
Navigation” (FCN) contracts after 1919, followed by 21 treaties from
1945 to 1966.
HISTORICAL DEVELOPMENT
OF IIL
• Earlier --- concept of Foreign investment --- narrow meaning ---- included
only tangible assets, transfer of money , and physical property of
foreigners.
• Evolution ---- from the concept of “State Responsibility”.
• State responsibility arise if State doesnot treat the alien in accordance with
the minimum standard of treatment.
• Law grew ---- the state obligation was extended to protect tangible assets
of foreigners from governmental interference by way of expropriation.
• The concept of ‘taking away the property’ ----- narrow.
• States could take only the tangible assets.
• With passage of time ---- intangible assets included too--- which included
initially contractual rights in pursuance of which, the foreign investors took
their assets slowly into host state.
• Slowly, the rights associated with property such as lease, mortgage, etc ----
included.
• As a result --- contractual rights which the foreign investor would acquire as
a result of their relationship with host states were also included .
• Upon violation of agreement by State, a global obligation was imposed on
the State against which the investor may seek remedies under the treaty.
• As a consequence, the violation of contract can be remedied by
approaching arbitration at the global forum, provided the agreement
includes an arbitration clause.
• The internationalized scheme allows foreign investors to resort to the
remedies given to them in the case of infringement of their rights under
the treaty that will result in more burdens on the host countries.
• Because of these issues, including everything in the notion of foreign
investment is a delicate problem.
• Next phase --- inclusion of Intellectual Property Rights.
• This is due to the extensive imitation of inventions produced in advanced
countries, including intellectual property rights.
• When a need arose for the recognition of intellectual property rights,
the agreements expanded the significance of foreign investment to
include intangible intellectual property rights by extending the scope
of foreign investment that had so far been restricted solely to physical
resources.
• “Administrative rights” were included in the scope of foreign
investment in 1970 as the host countries’ administrative
organizations that screen foreign investment underwent a conversion
for economic liberalization policy and administrative measures
including both enabling and regulating FDI.
• In Mihaly v. Sri Lanka it was held that the cost of tendering and
negotiating a project will be regarded as an investment, but it will be
taken into account if it is included in the treaty and not otherwise.
• DEVELOPMENT OF IIL INCLUDES THE FOLLOWING PHASES:-
(a) The Colonial period :-
• It is possible to trace the history of foreign investment in Europe to early
times. Such investment has certainly occurred in Asia, the Middle East,
Africa and other parts of the world.
• In the field of foreign investment law, early European institutional texts on
the treatment of aliens by their host countries set the stage for subsequent
controversy.
• One opinion was that aliens should be treated equally with citizens.
• The alternative perspective needed some internal standard, which was
greater than the national standard, to treat aliens.
• The concept that the law should be intended to further the free movement
of trade and investment across state borders was based on both opinions.
• They were meant to serve the interests of nations capable of
expanding their trade abroad.
• 18th and 19th centuries ---- colonial expansion (A nation’s policy of
extending or retaining its power over other individuals or territories,
usually for the purpose of financial dominance).
• Such investment did not need protection because the colonial legal
systems were integrated with those of the imperial powers and the
imperial system provided adequate protection for the colonial assets.
• Power was the ultimate arbiter in this early era of foreign investment
conflicts.
• A common occurrence was the use of force to settle investment
conflicts outside of the colonial framework.
• But doctrine had to be built to justify the use of force.
• Capital exporting countries, operating outside the colonial framework,
were eager to devise some legal justification to pursue their nationals’
demands and use force when such use became essential.
• It was in the relationships between the United States, still a new power,
and its Latin American neighbors that the need to develop an
international law on foreign investment played a part in the era prior to
World War II.
• However, after its emergence as a regional financial force, it insisted that
its neighbors in Latin America should treat foreign investors according to
global norms.
• The Latin American countries strongly followed the debate by insisting
that the provision of equal treatment for foreign investors fulfilled the
demands of international law.
• But the law generated in the early era of this conflict between the
U.S. and the Latin American countries had little to do with taking alien
property for economic reform.
• Instead, it involved instances of mobs or political vendettas being
attacked by juntas in authority for profit.
• The takeovers of foreign assets engaged in these early disputes differ
qualitatively from the takeovers resulting from later economic
reforms in Latin America as well as elsewhere.
• Later, the Russian revolution and the spread of communism in Europe
resulted to the seizure of foreign assets on the grounds of financial
philosophy that was justified.
• But, concept of protecting alien property rights ---- failed in the
Colonial period.
 INDIVIDUAL’S NATIONALITY
• It serves 2 purposes :- (a) The substantive standard assured in a treaty that
applies to the citizens concerned.
(b) The competence of a global tribunal shall be determined on the grounds
of the nationality of the applicant.
• If investors want to depend on BIT (Bilateral Investment Treaty), they must
demonstrate to be the citizens of one of the BITs two state sides.
• If investors want to depend on regional treaties such as NAFTA( North
American Free Trade Agreement), ASEAN (Association of South East Asian
Nations), etc., they need to demonstrate that they have signatory
government citizenship.
• If investors want to depend on the ICSID Convention, they must
demonstrate to be citizens of one of the ICSID Convention’s State Parties.
• Nationality of an individual is determined mainly by the law of the state in
which the investor normally lives.
• A Nationality Certificate issued by the state’s competent authority is
powerful proof of the presence of a specific state’s nationality.

(b) The Post – colonial period :-

• It was only after empire dissolution that the former imperial powers felt
the need for a scheme to protect foreign investment.
• The era instantly after the end of colonialism experienced the hostility
and antagonism produced by nationalist fervor towards foreign
investment.
• There was also a need on the part of the newly autonomous nations to
recover control from international investors, mainly nationals of the former
colonial powers, over essential areas of their economies.
• The outcome was a wave of foreign property nationalizations.
• As the rearrangement of the economies of the newly autonomous nations
has been finished, these sentiments of hostility have now been mainly
supported.
• The developing countries took a more selective and measured attitude to
foreign investment in the second period.
• Dramatic changes have taken place in the natural resource sector,
especially in the petroleum industry, as a consequence of the collective
intervention by the oil-producing countries that put an end to the
industry’s dominance by the main oil firms.
• The set of standards that came to be called the “New International
Economic Order” (NIEO) included the newly independent states’ favored
standards.
• One significant shift in this era was the growing recognition that
nationalization will not be deemed unlawful in international law in pursuit
of economic reform or reorganization.
• Later, period of rationalisation by the State --- emerged.
• There was a discrepancy between the stance that a state could take at the
global stage by articulating the set of standards connected with the New
International Economic Order and what it could take at the national level.
• While a state may join other states at international level in taking a
position on the international law position it supports, its domestic position
may differ as it seeks to attract foreign investment as an economic
development strategy.
• It may also sign bilateral investment agreements contrary to its global
position.
• This pragmatic stance was adopted in reaction to the need to preserve the
concept of sovereign control of foreign investment at international level
while at the same moment attracting multinational corporations to the
state by creating a suitable climate for foreign investment.
• Ideology and economic nationalism gave way to more pragmatic
attitudes whereby states that formerly saw the need to assert state
sovereignty over overseas investment now sought to make more
positive use of that sovereignty.
• This illustrates the obvious incoherence in developing countries’
positions. While promoting worldwide normative modifications that
protected sovereign control over foreign investment, they were
engaged in bilateral investment treaties that reinforced the
framework of foreign investment protection and foreign investment
codes related to tax and other incentives.
• Soon after this, Communism had fallen back, and the presence of an
ideologically based source of counter-norms hostile to the concepts
of property on which protection for foreign investment is based had
lost its strength.
• Developing countries progressively introduced more open policies on foreign
investment.
• Also blurred was the ancient difference between capital-importing nations and
capital-exporting nations. Europe and the United States have now been among
the biggest foreign investment recipients. The free movement of investment in
North America and Europe, where liberal foreign investment flow regimes have
now been developed through regional treaties, has developed tensions.
• To a large extent, the events that took place in the area of foreign investment in
the period following the end of the Cold War were also furthered by the rise to
dominance of neo-liberal policies , largely by the World Bank and the
International Monetary Fund.
• These required liberalization of foreign investment entry, domestic post-entry
treatment, protection against breach of certain guaranteed treatment norms, and
safe dispute settlement means.
• If countries were to secure economic help from international financial
institutions, these policies required to be implemented.
• States also had to sign bilateral investment treaties guaranteeing foreign
investment protection.
• Another characteristic of the law was that advanced countries are now
experiencing circumstances that have been restricted to developing
countries in the past.
• By legislation, the United Kingdom and Canada amended their petroleum
agreements on the grounds that they had become disadvantageous to
state interests.
• The United States passed legislation controlling the inflow of foreign
investments that raised concerns about national security,especially through
the NAFTA (North American Free Trade Agreement).
• Developed states like Canada, U.S. and Mexico have now become the
largest recipients of foreign investments.
• The question as to whether an environmental interference amounts to a
“taking” of land that has to be compensated has arisen in many instances
regarding Canada, the United States and Mexico (Ethyl Vs. Canada,
Metalclad v. Mexico (2000), Methanex v. United States (2003) and Santa
Elena v. Costa Rica (2000)).
• In United Parcel Services v. Canada, the issue as to whether a foreign investor
should be given the same treatment as a state corporation in a mixed economy
under the national treatment provisions of an investment treaty arose.
• The World Trade Organization (WTO), committed to a free trade philosophy, was
formally established in 1995.
• It embraced tools that impacted investments.
• Although this was discontinued in 1998, the OECD (The Organisation for
Economic Co-operation and Development) embarked on an attempt to draft a
Multilateral Investment Agreement (MAI).
• But the effort showed that the fervor for financial liberalism had achieved a high
point by the mid-1990s.
• Ideas such as entry and establishment rights dominated investment principles
debate and discovered their way into some agreements. This was a period that
usually saw the triumph of foreign investment’s liberal economic opinions and an
attempt to translate these opinions into international law.
• After this, the prevailing fervor for financial neo-liberalism rolled back by
the financial crises caused not only the flow of funds into good times
developing nations, but also a fast outflow of those resources when things
turned bad.
• The subsequent financial crises in Russia, Mexico, Asia, and Argentina have
resulted to a major rethink of economic liberalism’s prescriptions.
• But the organizations established on the grounds of economic liberalism
may not, in the years to come, maintain their initial vigor. The World Trade
Organization continues in place despite the protests against it, but with a
group of developing countries that vociferously demand that attention be
given to economic development issues.
• The most important of the changes in the modern period is the rise of the
large developing states, Brazil, China and India. They are the homes of
large multinational corporations.
STATE RESPONSIBILITY FOR INJURIES TO ALIENS
• The system of state responsibility for injury to aliens and their property was first
created in where there was no such colonial connection, but power nevertheless
played a determining role. Many of the laws of state responsibility are
discovered in the connection between the United States and Latin America.
• Foreign investors were entitled to compensation on the basis of an internal
standard, which was outlined in Cordell Hull’s hallowed formula that
compensation should be ‘timely, sufficient and efficient.’
• If the remedies given by the host country proved inadequate, the foreign
investor was entitled to dispute resolution before an overseas court.
• The Latin American states countered this stance by focusing on the fact that the
foreign investor entered the host state voluntarily, assuming the risks of the
investment there. On this basis, they argued that the foreign investor, like any
other person in the state including their own citizens, was entitled only to a
national standard of treatment provided to both foreigner and citizen alike by the
local laws . This is enshrined in the Calvo doctrine.
• Indeed, the region of global foreign investment legislation belies the
ancient notion that only countries are efficient arbiters of global law
material. Private power, in the form of multinational corporations as
well as, more lately, NGOs, always plays a major role in shaping this
area of international investment law.
THEORIES OF FOREIGN INVESTMENT
1) The classical theory on foreign investment:-
• The classical economic theory of foreign investment takes the view that foreign
investment benefits the host economy in its entirety.
• The introduction of foreign capital into the host state ensures that the accessible national
capital for use can be diverted to other uses for the advantage of the public. Usually, the
overseas investor carries with him technology that is not available in the host state,
leading to technology diffusion within the host economy.
• New jobs are developed, while such job opportunities would be lost without foreign
investment.
• Such protection will promote foreign investment flows and lead to less advanced
countries’ financial growth. It offers a powerful, apparently altruistic policy
justification for protecting foreign investment through international law principles.
• This view promoted the idea that multinational corporations, which were the precursors
of globalization, should have unlimited worldwide movement and that their investments
should be protected in order to advance the process of global integration.
• In the field of international trade, economic liberalism’s success was
reflected in the World Trade Organization’s recognition with its new
fields of intellectual property (TRIPS), services (GATS) and
investment (TRIMS). This paved the way for the WTO to become
more involved in investment.
• The attitudes adopted by the World Bank and the International
Monetary Fund were added to this. They produced loans conditional
on accepting thoughts integrated in liberal economics.
• The theory of “financial growth contracts” was also created by
classical theory.
• This theory put forward that, unlike those produced in developed
countries, foreign investment agreements promoted economic
development and should therefore be treated as treaties-like and
protected by international law principles.
(2) The dependency theory:-
• The theory of dependency is diametrically opposed to classical theory
and believes that foreign investment will not lead to significant
economic development.
• The theory focuses on the fact that most investment is produced by
multinational corporations headquartered in developed countries and
operating in developing countries through subsidiaries. The proposal
is that the subsidiary develops its strategies in the interests of its
parent company and home state shareholders. As a consequence,
multinational corporations come to serve the interests of the
developed countries where they have their headquarters. Home
countries are becoming the world’s main markets, and developing
world countries are becoming subordinate or peripheral economies
that serve home countries’ interests.
(3) The middle path theory:-
• The theory, which accepts that multinational
corporations can engineer development, if properly
harnessed, challenges many propositions relating to
international law which have been stated on the basis
of the classical theory. Unlike the classical theory,
which favours liberalisation and the freedom of
movement for multinational corporations on the
assumption that this promotes development, the
newer theory requires the recognition of the right of
regulation of the foreign investment process by the
host state.