Does the Emerging Global Regime for International Investment Undermine Domestic Capital Formation in Developing Countries?
4 Pages Posted: 8 Jul 2012
Date Written: July 6, 2012
There is an emerging international investment law, mainly forged by International Investment Agreements (IIAs), which seems to afford foreign investors, and their investments, far more protections than are available to domestic investors. The goal of IIAs is to promote economic prosperity through the facilitation of international investment flows. The impetus stems from two main concerns of capital exporters, mainly from developed countries. First, a concern that the laws and political economy of many capital importing economies, mainly developing countries, do not ensure adequate protections for investments. The second is the failure, by the international community, to successfully formulate a globally agreed treaty on international investments. IIAs are aimed at assuaging these concerns so as to facilitate investment flows to developing economies, though, today, they are also used heavily between developing countries.
The differential levels of protection that result from what IIAs accord foreign investments, on the one hand, and what is available to domestic investors under domestic law, on the other, translates to differential risk profiles for the two sets of investors. Arguably, with the higher protections, foreign investors are exposed to lower risks than their domestic counterparts. This then affects their respective costs of capital and transacting, competitiveness and, ultimately, profitability. Consequently, the emerging regime has the potential to undercut domestic investors and their investments.
Worse, it is argued, the emerging regime often leads to the transfer of existing domestic capital stock to foreign ownership and control rather than increase the aggregate capital stock of developing economies.
This paper examines the available data and literature to ascertain whether the emerging regime undermines domestic capital formation in developing countries. If yes, whether steps ought to be taken to ameliorate the situation, and how.
Keywords: International Investment Agreements, IIA’s, Domestic Capital Formation, Developing Countries, Risk Profiles
JEL Classification: F02, F10, F20, F30, F40
Suggested Citation: Suggested Citation