Multilateral Investment Rules: Achieving

a Balance in the Rights/Obligations of

Companies and Countries
 

Stephen Young & Ana Teresa Tavares-Lehmann

 
 

WTI, Berne, 8th April 2008 1

 Introduction
• History of international investment agreements (IIAs): radical shifts in
the public policy pendulum (forces for regulation vs. for liberalisation)

• Recent past: forces for liberalisation dominated

– Strong bargaining power of MNEs vis-à-vis host countries

• Last decade: new wave begun to emerge - obligations of companies

and rights of countries back on the agenda

• Papers’ aim & contribution: to review these developments and discuss

options for progress both within and outwith the WTO

• Paper starts by reviewing state-of-play with IIAs

– Focusing on distinct levels and on the current ‘patchwork’
– And on the shifting policy pendulum (since the 1940s) between forces for
liberalisation and for regulation 2
 State-of-play with IIAs
• International investment regulation: controversy
– Agreement on multilateral rules never reached, and does not seem
likely in the near future (Young & Tavares, 2004)
– A tale of successive disappointments (Brewer & Young, 2000)

• Issue debated since the 1940s (Havana Charter - ITO)

– FDI provisions included – & among the least consensual items

• FDI vastly neglected in the multilateral agenda

– Especially of the GATT - only in the context of the Uruguay Round FDI
issues brought again to the fore: TRIMs, TRIPs, GATS, SCMs, DSU
– However, investment addressed still in a collateral way

• More recently: Doha Round explicitly included FDI themes

– Negotiations related to GATS, TRIPs, Antidumping & Subsidies
Agreements 3
 State-of-play with IIAs
• Doha Round: special working groups set up to study
– Relationship between trade & investment, between competition &
investment, and transparency in government procurement

• Doha ‘Development’ Round: major setback in Cancún (2003)

• Investment issues keep being mentioned, but prospects for a

multilateral IA seem as unlikely as ever

• State-of-play is a patchwork
– Complex architecture with overlapping levels: multilateral, regional,
national, subnational
– Highly variable level of depth & sophistication among & within levels
– Lack of systemic coordination
– Most important instrument: BITs (obligations of countries…)
– Context of tough competition (‘race’) for FDI 4
The Shifting Policy Pendulum

forces for regulation

weak strong
strong

Early late 1990s-

1980s- early 2000s
mid
1990s

forces for
1940s-
liberalization late
1960s

Late
1960s-
early
1980s

weak

5
Source: Brewer and Young 2001
 Issues for inclusion in IIAs to balance
rights/obligations of companies/countries

• Very encompassing range of issues entering debate recently

• Recent initiatives (MAI, UN Global Compact) and the rise of

NGOs called attention to some of these ‘new issues’
– eg UN Global Compact: promotion of global corporate citizenship
(10 principles eg human rights, environment, anti-corruption)
– Resulted from reality, & questioning simple truths like FDI spillovers
are always positive

• In the past rights of firms & obligations of countries were

focus of FDI-related framework
– leading to increasing bargaining power of companies and growing
uneasiness of countries (esp. developing nations)

• Current sensitivities and scepticism: changes 6

 Issues for inclusion in IIAs to balance
rights/obligations of companies/countries

• A range of ‘new’ issues, absent from the traditional

agenda, gained prominence:

– Balance between efficiency and equity

– Economic development and poverty reduction
– Sustainable development
– Environmental rules e.g. climate change
– Labour and employment rights
– Human rights
– Competition policy and restrictive business practices 7
 Balance between efficiency and equity /
Economic development and poverty reduction

• Doubts whether allocation of resources promoted by

globalisation is leading to a more equitable outcome

• Active debate – potential widening gap gainers & losers

– Countries, distribution of income between social groups, …

• Contribution of FDI to development

– FDI impact/spillovers (development, income distribution, wages, …)

8
Environmental rules (particularly climate change) /
Sustainable development
• Though not specifically a FDI-related issue

• Growing consciousness of potential impact

• Impact on the way MNEs operate

– E.g. environmental compliance rules

• Need for fairer balance rights/obligations of firms/countries

• Kyoto Protocol and NGOs/consumer lobby putting pressure

on MNEs
– MNEs responding to this pressure, as they did with CSR
9
Labour and employment rights / Human rights

• Another controversial area

– Obsession with cost reduction, social dumping
– Impact of M&A ‘waves’
– MNEs and protection of workers’ rights debate

• Studies reach mixed results

– Companies not typically attracted preferentially to countries with
low labour standards, some studies defend
– Others: MNEs pay higher wages
– Others: case examples of exploitation

10
Competition policy & restrictive business practices

• MNEs often accused of anti-competitive behaviour

– Building strong market power
– Undertaking dumping & predatory pricing practices

• A cause for concern, especially in countries with weak

domestic structures (particularly developing nations)

• Active debate

• Recent proliferation of national and regional

competition authorities
11
 Options for Progress
 

•Rules-based approach through multilateralism (eg

sector-specific approach, GATS), but limited progress
likely
•Multilateralising regionalism (incorporating RIAs within
WTO mechanism)

• Quasi rules-based approach, with gradation of rules:

       Legally-binding core principles
 EU-type system of Regulations and Directives
 Gradation of rules according to principles, such as level of
economic development
 
•Combined rules-based and voluntary approach
   Legally-binding core principles 12
 Voluntary approach for wider range of corporate citizenship/
 Concluding remarks
• Major challenge in improving rights of countries and
obligations of companies lies less in multilateralism than in
country-specific initiatives (outside remit of WTO)

• New proposals on Special & Differentiated Treatment within

WTO may be positive, especially for developing countries
– Country-specific programmes a step too far for the WTO

• Greater integration, coordination and transparency needed

• Need for an ‘alliance compact’ between MNEs and

developing country governments as an evolving partnership
– Non-binding, semi-formal agreement
– MNE affiliate-government agreements on a company basis, starting
with a few MNEs (eg Business Action for Africa) 13
 Concluding remarks

• Our view about ways of achieving a balance in the rights/

obligations of firms/countries

• These go beyond the WTO’s remit and require

voluntarism alongside regulation

• It is important that the WTO remains central institution

for liberalising and regulating the global trade &
investment system

• Therefore, reporting mechanisms have to be found to

ensure that MNE-host country partnership activities are
not totally divorced from the WTO
14
 Voluntary Initiatives in Corporate
Citizenship/ Corporate Social Responsibility

Individual MNE MNE

MNE Alliance Populations

Many examples
National (often business-
led) e.g. Linkage
development

Level
Business
of
Action
Regional
Initiative for
Africa

UN

Global Global
Compact
15
 Voluntary Initiatives at Global Level
OECD Guidelines for Multinational Enterprises
(Source: www.oecd.org/dataoecd/56/36/1922428.pdf)
 
Non-binding initiative launched in 1976, but regularly updated.
Prevailing philosophy is ‘regulation-oriented’.
Directed at but limited participation by multinational enterprises.
 
Coverage
• Disclosure
• Employment and industrial relations
• Environment
• Combating bribery
• Consumer interests
• Science & Technology
• Competition
• Taxation
16
 Voluntary Initiatives at Global Level (cont.)
 
United Nations Global Compact
(Source: www.unglobalcompact.org)
 
Voluntary initiative launched in 1999 to promote global corporate citizenship.
About 2500 companies involved. Non-participating companies are removed from
membership. Includes SMEs (›10 employees) as well as MNEs.
Global governance principles include operation of business-led Local Networks (currently
around 50).
10 Principles:
• Human Rights (Principles 1 & 2)
 Right to collective bargaining
 Elimination of forced and compulsory labour
 Abolition of child labour
 Elimination of discrimination in employment
• Environment (Principles 7-9)
 Precautionary approach to environmental challenges
 Promote initiatives for environmental responsibility
 Develop and diffuse environmentally friendly technologies
• Anti-Corruption (Principle 10)
 Businesses to work against all forms of corruption
  17
Voluntary Initiatives at Sub-Regional / Regional Level
 
Business Action for Africa
(Source: www.businessactionforafrica.org)

International network of MNEs (8 major sponsors) - promoted by UK

Government – focusing upon southern Africa, with 3 objectives, 6 themes.
Objectives:
• Growth and poverty reduction
• Promote a more balanced view of Africa
• Develop and showcase good business practice

Themes:
• Governance and transparency
• Trade
• Business climate
• Enterprise and employment
• Human development
• Perceptions of Africa

18
 Voluntary Initiatives at National Level

(Source: Young in Dunning & Boyd (eds), 2003)

• Non-binding, semi-formal agreement between MNE

affiliates and host country governments in developing
countries, updated annually as an evolving
partnership.
• Focus upon world-class MNEs initially
• Potential range of areas for inclusion in Alliance
Compact could be quite wide, but aim to regularise
what often happens currently an informal basis
• Distinction between areas where MNE managers can
offer comment or advice or direct participation

19
 Potential issues for inclusion in alliance compact
and MNE affiliate involvement
MNE affiliates
Policy area in host country

Macroeconomic policy    
Monetary, fiscal, exchange rates, demand  (C)
Regionalization and globalization (A)

Macro-organization policy  
Market reform and privatization  (C)
Trade and FDI (liberalization and removal of barriers)  (A)
Transport and communications (infrastructure improvements)  (A)
Competition and regulation (privatized monopolies)  (C)
Education and training (school, vocational, university, firm and  
sector) (P)
Environmental management  (C/A)
Regional policy  (C)
Microeconomic policies and measures   
Investment promotion and after-care (including support for  
 
Investment Promotion Agency) (A/P)
Trade promotion and facilitation  (A)
Entrepreneurship and SME development  (A/P)
Innovation and technological development  (A/P)
Supplier linkages and clusters  (P)
Regulatory reform (removal of administrative barriers;  
institutional reform)   (A)
Stakeholder participation (internal marketing, e.g. promoting   
benefits of FDI and of privatization; private sector advocacy)  (A)
20
   
NOTE: C=comment; A=advice; P=participation Source: Young 2003