How to Boost Foreign Investment

MADRID – Economic globalization, together with a rebalancing of power between the world’s north and south, has made developing countries, and many companies within them, key global economic actors. This provides a new rationale for strengthening the international framework to protect foreign investment.

Once upon a time, global foreign direct investment flowed from only a few sources: the traditionally wealthy states of Europe, North America, and Japan. But cross-border investment from countries such as Brazil, India, and China is now flowing not just to other emerging and transitional economies, but also to the “old” FDI-exporting states.

These changes have increased the complexity of the international investment regime, and should broaden interest in developing a more effective investment-protection framework. But just the opposite is happening: a progressive weakening of protection, with states increasingly flouting their treaty obligations and skirting or ignoring the outcomes of international dispute-resolution proceedings.

At the heart of the current system of investment protection is the World Bank, which created the International Center for Settlement of Investment Disputes (ICSID) in 1966 in response to requests for arbitration by the Bank’s president. But, institutionally, the ICSID has developed less successfully than other members of the World Bank Group – particularly the International Finance Corporation – owing to a deeply rooted organizational culture at the Bank that perceives the ICSID as an instrument serving Western companies’ efforts to prevail over developing states.