C7. Treaties

At the international level, governments have the option to negotiate various kinds of treaties that are supportive of OFDI and contain clauses that provide favourable conditions for MNEs entering and operating in foreign countries.

International investment agreements (IIAs) are the most common form of investment-related international treaty. They are HCMs promoting and supporting OFDI by providing investors and MNEs with stronger investment protection under international law and facilitating access to the markets of treaty partner(s). OFDI can be supported and promoted through clauses concerning the treatment of investors and investments, expropriation, investment establishment, investor-state dispute settlement, etc. For these reasons, capital-exporting and advanced economies typically conclude IIAs with the objective of promoting OFDI by their MNEs. Capital-importing and developing countries, on the other hand, tend to conclude IIAs to attract inward investment, by offering greater protections to foreign investors.

It should be noted, however, that the empirical literature has not provided conclusive evidence on the impact of IIAs on investment flows (UNCTAD 2009). Large MNEs with bigger investments and in sensitive sectors (e.g., energy, mining) are more likely to consider the existence of investment treaties when making their investment decisions. This is because larger companies tend to have bigger legal teams, and problems in host countries are more likely to arise with more sizeable investments and in sensitive sectors.

A distinction can be made between two types of treaties:

1. Bilateral Investment Treaties (BITs) are concluded between two countries for the purpose of protecting, promoting and facilitating international investment. They only focus on investments.
2. Trade agreements with investment provisions (TIPs) are broader trade agreements or economic partnership agreements that include chapters on many aspects of economic cooperation between two or several countries. One chapter in this larger treaty deals specifically with investment.

In addition, countries signing IIAs need to consider their membership in dispute resolution institutions. Many IIAs include dispute settlement clauses that refer to dispute resolution institutions for the settlement of investment disputes. The institution that IIAs most commonly refer to is the International Centre for the Settlement of Investment Disputes (ICSID), a dispute resolution institution at the World Bank offering arbitration, mediation and conciliation services to support the settlement of investment disputes. Many countries thus become a member of ICSID.

The government agencies negotiating investment treaties tend to be either the ministry responsible for foreign affairs or for economic, commerce and trade affairs.

Some emerging economies are now shifting from being primarily a destination for foreign investment to becoming both capital importers and exporters. Their governments therefore increasingly conclude IIAs not only for the purpose of attracting investments, but also in order to offer greater protections for multinationals undertaking OFDI. This increases their interest in incorporating clauses aimed at strengthening investment protection into any newly-or re-negotiated treaties.

In addition to formally negotiating IIAs, governments might engage in market entry negotiations with other governments to reduce market entry barriers faced by MNEs in host countries. These negotiations occur through government-to-government commercial diplomacy and other international forums (Stephenson and Perea 2018).

Finally, governments conclude double taxation treaties (DTTs) to avoid double taxation. This supports MNEs in dealing with matters of international taxation, by reducing the burden of double taxation and facilitating the provision of fiscal support.

In drafting and negotiating IIAs and other treaties, governments can promote OFDI and the associated generation of home-country effects.

Key insights

• IIAs enhance the protection and market access of MNEs investing abroad, thereby promoting OFDI. The extent of the investment protection and market access provided by an IIA depends on the outcome of the treaty negotiations, especially on issues of treatment, investment establishment, expropriation and investor-state dispute settlement.
• To reduce investment barriers in host countries, governments can also use commercial diplomacy and other channels to negotiate improved market access with host country governments.