Foreign Direct Investment: International Investment Law Developments

2020-05-26 17:46 GMT+8

The definition of the investment, but especially different aspects to define FDI, are fairly important to comprehend as well as the appropriate application of promotion incentives of State. Each State may have a project or sector specifics that necessitate different investment terms that will apply. FDI has a variety of meanings and definitions related to different purposes. It is fairly challenging to distinguish or extract legal terms out of various economic activities as the nature of investment includes but is not limited to trade,  products, capital contribution, and foreign capital. Therefore, when dealing with a particular legal regime governing FDI, it is important to check how FDI is defined. (Advocates for International Development, 2012).  

Generally defined by the textbook, foreign investment involves the transfer of tangible and intangible assets from one country to another for the purpose of their use in that country to generate wealth under the total or partial control of the owner of assets (Sornarajah, 2010). However, primary sources such as Bilateral Investment Treaties (BIT) also define the nature of FDI that is protected through their own provisions, and differ according to the purpose and not confined solely to the law created by treaties. The term of investment and its interpretation evolving or developing by the case by case but the main principles of investment, protection remains the same.

Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (ICSID Convention) entered into force 14 October 1966 and today with the signatory and contracting 163 membership countries. Interpretation of Article 25 is the investment will orient itself to the definitions in investment treaties which means ICSID Convention must be understood on an autonomous basis ‘the self-contained approach’ or ‘the party-defined approach’ (Dolzer and Schreuer 2012). The purpose of this lack of definition was, in the Michaly’s words, ‘to preserv[e] [the Convention’s] integrity and flexibility and allow for the future progressive development of international law on the topic of investment’(Michaly International Corp v Democratic Socialist Republic of Sri Lanka).

Because of its unexplained objective character, tribunals set forth their criteria relying upon the treatise of on the ICSID Convention who distinguishes five features ‘typical’ to ‘most operations, that have been the subject of ICSID proceedings summarised as (i) contribution  by the investor, (ii) duration, (iii) risk, (iv) development of host state, (v) regularity profit (occasionally included), (vi) legality of investment and good faith or commitment of the investor must be present to satisfy the conditions for the existence of investment (Christoph Schreuer, 2001).  In effect, the latter approach requires t separate three examinations: (i) ratification of convention and under Article 25; (ii) under BIT; (iii)   another approach is to refer its understanding in economic literature. Therefore, when dealing with a particular legal regime governing FDI, it is important to check how FDI is defined.    

As defined and consolidated based on the case law and Bilateral Investment Agreements  (Gus van Harden, 2007)  investment typically refer to every kind of asset or every kind of investment that is directly or indirectly owned by investors and specifically listed as follows:

(i)         tangible and intangible property;

(ii)        shares, bonds, and other interests in companies;

(iii)       rights to money or any performance having economic value;

(iv)       intellectual property rights, goodwill and know-how;

(v)        rights granted in law or contract, including concessionary rights;

(vi)       company (as a legal entity and a separate legal person) itself.

These are broad spectrums but these definitions of investment are the closest to legal terms and concepts of the FDI. These approaches may lead to different results in individual cases, it appears that synthesis of the different strands of interpretation may emerge. (Dolzer and Schreuer 2012). So the significance of the interpretation of the term direct investment plays a crucial role in the international dispute settlement tribunals. In other words, if there is no investment, the arbitrators will not have the competence to address the case. (Krista Nadakavukaren Schefer and others, 2013).    

In our next series on FDI, we will illustrate the international and Mongolian cases that have significant contributions to FDI concepts and definitions.

 Khaliun Gundsambuu Lawyer, Researcher 

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