International Efforts to Regulate Foreign Investment

Introduction

Stretching back millennia, the earliest international legal developments revolved around investment and trade.  Foreign Investment Regulations, unlike trade regulations, remain a patchwork quilt of bilateral and multilateral treaties, without regulation bu international treaty or universal charter.

Role of the UN

While many efforts have been made to have the United Nations as the primary oversight of international relations and law, investment law has largely escaped UN regulation.  While the UN hasn’t had the ability to date to provide comprehensive regulation in this area, several resolutions have had significant impact on the development of investment regulation in recent decades. These include:

  • The Resolution of Permanent Sovereignty of States over their Natural Resources and Wealth (1962)
  • The Charter of Economic Rights and Duties of States (1974)
  • UN Commission on Transnational Corporations (1970’s to 1990’s)

As capitalism ascended following the fall of the Soviet Union, and the goals of the NIEO passed, the UN’s willingness and focus shifted away from regulation in this area.

Changing Nature of Foreign Investment

As the 1990’s dawned, the WTO, World Bank and IMF backed off the idea that multinational corporations required regulation to protect host states.  Further, as the NIEO faded, the socialist elements that backstopped the movement, including additional regulation on corporations, faded with it.  Property rights became a more critical focus, and protecting foreign investment from unilateral state action. The 1992 World Bank Guidelines and the OECD’s Draft Multilateral Agreement on Investment (MAI) in 2000 set the tone for reduced government oversight and regulation in favor of corporate interests.

Between the 2001 Doha round of WTO talks and the 2004 “Mid-Point Deal” of the WTO, a balance had returned to the dialogue, including provisions on human rights and environmental protections.  However, the desire by the WTO to be the primary regulator of foreign investment was abandoned.

The Current Situation

Multinational enterprises (MNE’s) dominate the international economic landscape. Since the ascendancy of capitalism as the dominant economic form in the early 1990’s, they have enjoyed relatively open exercise of economic activity. They are able to take advantage of the patchwork quilt of regulation and market conditions to design their structure to optimize business objectives. As non-state actors, they are not subjected directly to treaties or other international legal provisions.  There are questions on the need to regulate MNE’s as their ability to manage their way through the landscape begins to cross with technological advances in areas like genetics, pharmaceuticals, GMO foods, environmental and worker protections and human rights.

As with any excesses, the pendulum appears to be swinging towards the center, with the reemergence of socialism and in the United States “Democratic Socialism”, forcing the move back towards the middle.  The question that continues to impact policy makers is how to regulate the MNE’s utilizing the existing international legal structure, and is it even practical to attempt to do so. While countries individually have been able to exert significant legal and societal influence on the behaviors of their domestic companies, the MNE is largely free to operate for the pursuit of maximum profit without the same “community ownership” or influence that domestic companies experience.

Many are looking at what they believe is a tipping point when the creation of wealth moves from facilitating innovation, freedom and civilization among humanity tilts in the direction of inhibiting those values. Additionally, because MNE’s are not regulated by any singular body of law, they are perhaps the most powerful international economic and arguably political actors in the world today.  From product design and distribution, agriculture and aquaculture to pharmaceuticals and infrastructure, the MNE is often more influential than the state, with little ability to exert effective state control.

Other challenges to MNE’s include a lack of transparency and accountability to shareholder ownership, a lack of cohesive regulations on activity, and the inability of states to effectively regulate or control their activity – allowing them to focus on profit to the exclusion of other elements – and essentially creating a “tragedy of the commons” situation where the externalities and their costs are not internalized by the MNE.

Additionally, recent strengthening of intellectual property rights through the WTO Agreement on Trade-Related aspects of International Property Rights (TRIPS) further strengthened the MNE’s by (particularly in the area of medicine), making it difficult to copy, clone or leverage discoveries or processes that may assist developing economies.

One argument from the MNE side of the equation arguing for a global regulatory environment is the challenge of tailoring operations and compliance to the patchwork regulatory environment now in place.  In many cases, the costs of maintaining multinational regulatory compliance is high in terms of both intellectual and operational capital.

Host Country versus Home Country Regulation

One of the key challenges faced by MNE’s and nation-states is the need to determine the regulatory framework in light of differing regulations state to state.  MNE’s must legally conform to the laws of the nation in which it is operating.  However, this creates an incentive to pick and choose the regulatory environment that best suits the business objectives of the MNE.

It is difficult for the home state of the MNE to regulate its activities using long arm provisions in its regulatory structure.  The challenges include the costs and ability to enforce regulations in other nations, the willingness of the nation-state to serve as the “world’s policeman” in this context, and the creation of an incentive for nations to “race to the bottom” to attract corporate home offices.  As a result, this approach, while often suggested, is not likely to work in practice.

Additionally, the WTO, IMF and World Bank, as part of their mandates approach when extending aid, have often required the deregulation of state controls, and use the need for foreign investment as the rationale.  Arguably, the weakening of the regulatory environment in these developing nation states not only encourages MNE investment, but also shifts economic control from domestic enterprises to MNEs.

Attempts to regulate “long arm” the behavior of MNE’s with regulations such as the US Foreign Corrupt Practices Act of 1977 and the OECD Convention to Outlaw Bribery and Corruption of 1997 have had limited but positive success in trying to balance out the influence of MNE’s on foreign governments.

Self-Regulation

Alternatively, MNE’s may choose to self-regulate as their activities broadly are covered by treaties on human rights and environmental protections as enforced through their host and home states.  Arguing for this point, the International Chamber of Commerce points out that community and international pressures will cause industries and organizations to self-regulate fearing stronger government action.  While several examples of self-regulation at work appear successful, the implementation may have challenges as the MNE’s become their own judge and jury – subjected only to the court of public opinion.  Cynics point to the mission statements and ethics codes of MNE’s and their actual actions as a real world example of why self-regulation will be challenging, and unlikely to work on its own.

International Law Regulation

The general approach to regulate with international law has its own challenges.  Enforcement is always conditioned on a state actor to mete it out. Because of sovereignty principles, international law is only binding on those states who voluntarily choose to be bound by it.  There is some question as to how this would work for the MNE. In there areas, Postal Service, Aviation and Telecommunications, however, a framework exists for international legal enforcement extended to the MNE – and generally in a successful manner. The Basel accords in banking are another example where international regulations may be able to effectively assist in the MNE environment.

Additionally Bilateral Investment Treaties (BITs) exist between nations that provide a regulatory framework as to between the signatories. Nearly 6,000 such treaties (trade and tax) currently are in place.  There are concerns about negotiation, leverage, enforcement and the “patchwork” nature of the BIT system.  However, it does provide for regulation to address some of the largest concerns as it pertains to societal and legal impacts of MNE’s.

As part of the PSNR and the NIEO movements, many of these treaties tie back to nationalization and similar property rights/due process approaches to the MNE.  Generally, the ability to nationalize must be in pursuance of a good faith public purpose, must be without discrimination, and must be compensated.  because much of the litigation and legal development from 1960-1990 was in this area, many of the treaties work to define terms such as “just compensation”.  As the 1990’s dawned, the focus shifted from nationalization concerns to attracting foreign investment, and recent treaties – particularly tax treaties – focus in these areas.

Regulation of the Multinational Corporation

In the 1990’s, pressure came on the OECD to develop a Multilateral Agreement on Investment (MAI).  The need for an MAI arose from a wave of foreign direct investment (FDI) generated following the fall of the USSR, and was pushed by constituents like the World Bank.  The purpose was to liberalize and make consistent the mechanisms governing FDI to encourage continued investment and consistency in approach to enforcement.

Article II of the MAI granted, in effect “most favored nation” status on investors, not allowing a bias for domestic versus foreign investment, and Article IV of the MAI significantly enhanced the property rights of the FDI.  Designed to be MNE friendly (and derided by some as a “Bill of Rights for Big Corporations”), the MAI began to garner significant opposition in the late 1990’s, before ratification.  In 2000, the OECD abandoned the MAI and adopted a much watered down version. the 1999 failure of the WTO Session in Seattle, Washington was endemic of a sea change from laissez-faire capitalism of the early 90’s, and back to a middle ground.

The Doha Round, in 2001, saw a middle round taken, led by the EU nations.  The framework required negotiation and the use of the WTO to help interpret, enforce and resolve disputes.  However, Doha did not tend to dictate economic terms, as the original MAI had.The WTO, being a democratic, one nation, one vote, body, assumed the mantle for looking at regulation of international trade and investment.  That role is viewed as a contradiction by some, as the agency designed to promote free trade is also charged with its regulation.  The WTO eventually abandoned this charge to regulate in 2004.

What are the Responsibilities of Multinational Corporations?

The general consensus is that MNE’s are responsible for adherence to universal human rights and environmental protections as attached to them by their host and home nations.  However, the enforcement of those obligations remain tricky.  The corporate veil may serve to protect the actual human actors and shareholders behind legal violations.

Arguably, the best course of action for MNE’s in face of criticism is to self-govern and develop sticky codes of ethics and conduct.  As discussed above, this approach has challenges in both enforcement and consistency. And while corporations may find it easier to operate under a uniform set of regulations than the current system, the ability to define and effectively enforce that set of regulations remains a significant challenge.

MNE’s have often been accused of violating human rights – including the use of exploitative labor (children, women), low wages, safety and health standards, bribery and corruption.  The willingness of some MNE’s to pay poverty level wages in developing countries has been criticized for its impacts both in the home and host nations. While the International Labor Organization (ILO) treaties provide some protections, the ability to enforce those provisions is weak and limited in scope.  The worker rights include:

• the freedom to bargain collectively
• the freedom of association
• the elimination of discrimination in the workplace
• the elimination of workplace abuse (e.g. forced labor and certain
types of child labor)
• adequate wages
• proper working conditions
• adequate social-insurance rights
• no obligatory overtime work.

However, enforcement and implementation are through host country regulations, and these are inconsistent at best.

The UN attempted to codify these in the CTC process, discussed above. However, this was eventually abandoned.  Current views that the development approach and the MNE must consider sustainability, human rights and environmental factors are generally held but not effectively implemented legally.

The new 2000 OECD guidelines step up the requirements on MNE’s, as do more recent developments in international law – holding MNE’s and individuals responsible for human rights violations.  However, the primary responsibility for enforcement continues to reside with the host or home state.

Until national laws and incentives for enforcement are harmonized, the ability of the MNE to choose environment, jurisdiction, venue and approach to achievement of business goals will remain largely unregulated.  Market rather than regulatory forces are the primary determinant of MNE behavior in the international economy.

MNE’s and Human Rights

MNE’s are generally obligated to adhere to human rights conventions by attachment to the host or home country treaty signatories.  The challenge here, however, is that the scope and definition of what “human rights” are in practice varies considerably from jurisdiction to jurisdiction, as does enforcement of those values.

Over the last 50 years, the focus on human rights has continued to sharpen, and human rights elements are now tied into mandates from the IMF and World Bank. However, MNE’s are not direct recipients of these funds or direct subjects of the mandates.  The MNE can “forum shop” for favorable legal environments in which to do business – stretching the human rights requirements significantly.

Recent legal activity in the international economic legal environment is challenging the notion that private actors are not subject to international law provisions – attempting to bring the MNE under a more consistent level of global scrutiny. Once found “guilty”, states have an obligation to impose sanctions under international law, including civil and criminal liability and recourse by others to the court system.  This has been tried, tested and enforced in the EU through the European Court of Justice among other jurisdictions.

Additionally, courts are beginning to “lift the veil” and punish parent corporations and shareholders for the actions of their subsidiaries.  Corporate officers are also in the cross-hairs, as personal liability may attach for torts and crimes against humanity. In 2011, the UN completed a multi year project to develop an implementation framework entitled “‘Guiding Principles on Business and Human Rights: Implementing the
United Nations “Protect, Respect and Remedy” Framework’.”  This document contains a set of standards and is soft law for the intersection of human rights and business, and may be a useful document for companies determining policies and courses of action for MNE operations to provide a legal and operational framework for defense.

 

 

 

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