THE IMPACT OF CONCEDING HIGH LEVEL OF INVESTMENT

PROTECTION IN INTERNATIONAL INVESTMENT AGREEMENTS:

PROMOTING INVESTMENT OR FORFEITING SOVEREIGNTY

by

Natnael Fitsum Tekeste

10528350

Assignment 01
Unique no. 667672

Assignment submitted in accordance with the requirements

for the degree of

MASTER OF LAWS

In the subject
International Law on Foreign Investment
at the

University of South Africa

Supervisor
Ms L Mhlongo
Table of contents
Declaration of academic honesty ............................................................................................. iii

Keywords ................................................................................................................................. iv

Abbreviations and acronyms ..................................................................................................... v

1. Introduction .................................................................................................................. 1
2. Definitions .................................................................................................................... 1
3. Problem statement....................................................................................................... 2
4. Research questions ..................................................................................................... 2
5. Aims and objectives ..................................................................................................... 2
6. Literature review .......................................................................................................... 3
7. Significance of the study .............................................................................................. 4
8. Research methodology ................................................................................................ 4
9. Conclusion ................................................................................................................... 4
Bibliography .............................................................................................................................. 5

ii
Declaration of academic honesty

1. I understand what academic dishonesty entails and am aware of UNISA’s policies in this
regard.
2. I declare that this assignment is my own, original work. Where I have used someone else’s
work, I have indicated this by using the prescribed style of referencing. Every contribution
to and quotation in, this assignment, from the work or works of other people has been
referenced according to this style.
3. I have not allowed, and will not allow, anyone to copy my work with the intention of passing
it off as his or her own work.
4. I did not make use of another student’s work and submitted it as my own.

Name: Natnael Fitsum Tekeste

Student number: 10528350

Module code: MIL5903

Signature: ________

iii
Keywords
Bilateral investment treaties, Foreign direct investment, International investment agreement,
Investment protection

iv
Abbreviations and acronyms

BIT Bilateral Investment Treaty

FDI Foreign Direct Investment

FET Fair and Equitable Treatment

FTA Free Trade Agreement

IIA International Investment Agreement

MIT Multilateral Investment Treaty

v
 1. Introduction

Developing countries desire to attract foreign direct investment (FDI) by providing legal
safeguards that stabilizes the legal conditions under which an investor can operate.1 In addition
to their national legislations, those countries protect FDI by means of international investment
agreements (IIAs) and customary international law.2 IIAs, however, have also been regarded
by some developing countries as the main instrument to attract foreign investors.3

The most prominent type of IIA are Bilateral Investment Treaties (BITs).4 Since the early 1960s,
with the failure to successfully negotiate Multilateral Investment Treaties (MITs), BITs were
proliferated and become the primary international legal mechanism for the governance of FDI.5
Although this spread was globally touted by capital exporting countries as relevant to attract
FDI, evidence on the impact of BITs on promoting FDI inflow to the host state remains
controversial.6 There exist a legal controversy in a form of an ongoing debate regarding the
existence of a correlation between offering high level of protection to investors under IIAs and
its impact on the promotion of FDI inflow. The initiatives by host states to guarantee their right
to regulate as well as imposing obligation upon the foreign investor to respect certain national
standards, is also becoming the centrepiece of the debate.7 This paper, therefore, sets out to
analyse the ongoing debate and provide a reasoned legal opinion on the matter.

2. Definitions
IIAs are legal instruments signed at the bilateral, regional or multilateral level by two or more
countries to protect investments made by one country's investors in the other country.8 In this
study, much reference will be made to BITs as they are the most commonly used type of IIAs.

1 Schreuer, Christoph. ‘Investments, International Protection’ Max Planck Encyclopaedia of Public International
Law (2011), 2.
2 Strydom H (ed), International Law (Oxford University Press 2016), 853.
3 Carlos M Correa, 'Investment Protection in Bilateral and Free Trade Agreements: Implications for the Granting
of Compulsory Licenses' (2004) 26 Mich J Int'l L 331, 332.
4 Zoltan Vig, 'The Importance of Foreign Direct Investments and Instruments for Their Protection' (2018) 59 Hung
J Legal Stud 443, 447.
5 Zachary Elkins and Andrew T Guzman and Beth Simmons, 'Competing for Capital: The Diffusion of Bilateral
Investment Treaties, 1960-2000' (2008) U Ill L Rev 265, 265; According to a UNCTAD report, by the end of
2019, 2654 International investment agreements (IIAs) were entered into on the supposition that they attract
investment and that investment leads to development. See, UNCTAD, UNCTAD Investment Policy Hub
International Investment Agreements Navigator (2020) available at <https://unctad.org/system/files/official-
document/diaepcbinf2020d4.pdf> (accessed on 10 June 2021).
6 M. Sornarajah, The International Law on Foreign Investment (3rd edn, Cambridge University Press 2010), 229.
7 ibid at 187; the national standards relate to, inter alia, human rights, health and environmental concerns.
8 Prabhash Ranjan, 'International Investment Agreements and Regulatory Discretion: Case Study of India' (2008)
9 J World Invest’t & Trade 209, 209.
1
Investment protection refers to the protection accorded to investors in relation to their
investment in the host state through domestic legislation, bilateral or multilateral IIAs,
investment chapters of FTAs and under customary international law.9

3. Problem statement

The problem statement of this study mainly focuses on the legal controversy that exist in a form
of an ongoing scholarly debate regarding the correlation between offering high level of
protection to investors under IIAs and the promotion of FDI. While some scholars argue that
there is a positive correlation between those two, other scholars argue that there is no evidence
showing high level of protection will promote FDI. Another problem to be addressed in this study
is the issue of rightly balancing the need to protect investments and the need to preserve the
host state's interests under IIAs, as there is growing literature on that issue and certain countries
like South Africa, India, Indonesia and even the EU, are taking a various approaches towards
reforming investment protection rules so that it can guarantee the host state’s right regulate.10

4. Research questions

The main research question of this paper is, ‘does providing high level of protection to foreign
investors under IIAs influence foreign investors to invest in the host state?’. In answering the
above main research question, the following sub-research questions will also be addressed.
1. Are foreign investors entitled to a high level of protection or should they have equal rights
and obligations as the host state under an IIA?
2. Is there adequate evidence that show offering high level of protection will influence
foreign investors to invest in a particular state?

5. Aims and objectives

The main objective of this study is to examine whether providing high level of protection to
foreign investors under IIAs influence foreign investors to invest in the host state. The sub-
objectives of this study will be to,

9 Schreuer (n 1) 2.
10 Tania Singla, 'A Multilateral Framework for Investment Protection: The Missing Piece in the Puzzle of ISDS
Reform?' (2020) 2 NLUD J Legal Stud 131, 159; See also, Akshat Agarwal, 'Rethinking the Regulation of
International Foreign Investment: Recent Developments in Brazil, South Africa and India' (2019) 10 Indian J
Int'l Econ L 1, 9; Other areas of reform also exist beside guarantees host state’s right regulate namely, reforming
the FET standard of protection, protection against expropriation and reforming the Investor-state dispute
resolution mechanism.
2
 1. assess whether foreign investors are entitled to a high level of protection under IIA or
whether they should have equal rights and obligations as the host state.
2. examine whether there is credible evidence that indicates offering high level of protection
will influence foreign investors to invest in a particular state.

6. Literature review

Scholars in the area of investment have conducted a number of studies regarding the
contribution of investment protection in IIAs in promoting FDI inflow and came up with results
that are inconsistent and contradictory.

Neumayer and Spess11 report that developing countries that sign large numbers of BITs can
expect to see their shares of FDI nearly double. Salacuse and Sullivan12 questioned why

developing countries enter into IIAs knowing the limitations it exerts on their sovereignty. They
argued that investors care greatly about protections in BITs and that host states deem awarding
protections through BITs is necessary to promote the increase in capital inflow as well as
technological knowhow.13 Elkins et al.,14 also studied the question why developing countries
inter into BITs and concluded that they sign BITs under the assumption that it will lead to greater
FDI inflow.15

On the other hand, Hallward-Dreimer16 and Tobin and Rose-Ackerman17 find that BITs do not
have much, if any, positive effect on FDI. Tobin and Rose-Ackerman also found that BITs may
actually reduce FDI to high-risk countries.18 Jason Yackee19 responds to the study by Elkins et
al. by saying that the basis of their assumption is flowed and that the issue should be examined

11 Eric Neumayer & Laura Spess, ‘Do Bilateral Investment Treaties Increase Foreign Direct Investment to
Developing Countries?’, (2005). 33 World Dev. 1567, 1568.
12 Salacuse J W & Sullivan N P ‘Do BITs really work? An evaluation of Bilateral Investment Treaties and their
grand bargain’ (2005) 46 HILJ 67, 77.
13 ibid; In their model, a developing country that enters a BIT with the United States can expect to see an additional
$1 billion in FDI per year.
14 Zachary Elkins and Andrew T Guzman and Beth Simmons (n 6) 265.
15 ibid.
16 Mary Hallward-Driemeier, ‘Do Bilateral Investment Treaties Attract Foreign Direct Investment? Only a Bit and
They Could Bite’ (2003) 3121 World Bank, Dev. Research Grp 36,19.
17 Jennifer Tobin & Susan Rose-Ackerman, ‘Foreign Direct Investment and the Business Environment in
Developing Countries: The Impact of Bilateral Investment Treaties’ (2005) 293 Yale L & Eco Res 74, 34.
18 ibid.
19 Jason Webb Yackee, 'Bilateral Investment Treaties, Credible Commitment, and the Rule of (International) Law:
Do BITs Promote Foreign Direct Investment' (2008) 42 Law & Soc'y Rev 805.
3
by asking whether BITs promote FDI by creating a formal and strong international ‘rule of law’.
His study concludes that BITs have little or no impact on investment decisions.20

Herdegen21 states that investment protection on its own is not enough to promote FDI. It
requires the combination of an independent and effective judicial system and legal certainty,
which is basically the rule of law and ‘good governance’.22 Sornarajah23 writes that the
assumption that concluding IIAs will promote FDI inflow is coming to be questioned as there is
a growing scepticism. He further state that the dominant view in the debate is that there is little
evidence of the treaties leading to significant inflows of foreign investment and that there is a
growing literature imposing obligations upon foreign investors in relation to their investment in
the host state.24 While the writers discussed above have drawn valid reasons to support their
studies, I agree with the argument that providing high level of protection under IIAs alone does
not guarantee inflow of FDI and that investors should assume reciprocal obligations in the IIAs
in order to respect the host state’s interests and its right to regulate.
7. Significance of the study
The significance of this study will lie in its contribution to provide a reasoned analysis of the
current academic discourse on the issue of nexus between providing high level of protection to
foreign investors and promotion of FDI inflow in IIAs and how the parties to those IIAs can
balance their interests.
8. Research methodology
This study is going to be a qualitative, desktop research. Reference will be made to relevant
primary sources such as investment treaties and other international instruments. Journal
articles, academic writing and other electronic resources will extensively be employed as
secondary sources for the analysis of the scholarly debate on the issue.
9. Conclusion
The fragility of the results in the reviewed literature on the topic leaves one to question whether
IIAs signing is in the best interest of a host states and their sovereign right to regulate.
Therefore, it is vital to analyse this particular scholarly divergence and address the problem.
This study sets out to achieve this purpose.

20 ibid.
21 Herdegen, Matthias, Principles of international economic law (Oxford University Press 2016), at 405.
22 ibid, 206.
23 Sornarajah (n 7) 187; he further stated that political and economic reasons play a role in attracting FDI.
24 ibid.
4
Bibliography

Books

Herdegen M, Principles of international economic law (Oxford University Press 2016).

Sornarajah M, The International Law on Foreign Investment (Cambridge University

Press 2010).

Strydom H (ed), International Law (Oxford University Press 2016).

Encyclopaedia

Schreuer, Christoph. ‘Investments, International Protection’ Max Planck Encyclopaedia

of Public International Law (2011).

Journal Articles

Akshat Agarwal, 'Rethinking the Regulation of International Foreign Investment: Recent

Developments in Brazil, South Africa and India' (2019) 10 Indian J Int'l Econ L 1.

Carlos M Correa, 'Investment Protection in Bilateral and Free Trade Agreements:

Implications for the Granting of Compulsory Licenses' (2004) 26 Mich J Int'l L 331.

Eric Neumayer & Laura Spess, ‘Do Bilateral Investment Treaties Increase Foreign Direct
Investment to Developing Countries?’, (2005). 33 World Dev 1567.

Jason Webb Yackee, 'Bilateral Investment Treaties, Credible Commitment, and the Rule
of (International) Law: Do BITs Promote Foreign Direct Investment' (2008) 42 L & Soc'y
Rev 805.

Jennifer Tobin & Susan Rose-Ackerman, ‘Foreign Direct Investment and the Business
Environment in Developing Countries: The Impact of Bilateral Investment Treaties’
(2005) 293 Yale L & Eco Res 74.

Mary Hallward-Driemeier, ‘Do Bilateral Investment Treaties Attract Foreign Direct

Investment? Only a Bit and They Could Bite’ (2003) 3121 World Bank, Dev. Research
Grp 36.

5
 Prabhash Ranjan, 'International Investment Agreements and Regulatory Discretion:
Case Study of India' (2008) 9 J World Investment & Trade 209.

Salacuse J W & Sullivan N P ‘Do BITs really work? An evaluation of Bilateral Investment
Treaties and their grand bargain’ (2005) 46 HILJ 67.

Tania Singla, 'A Multilateral Framework for Investment Protection: The Missing Piece in
the Puzzle of ISDS Reform?' (2020) 2 NLUD J Legal Stud 131.

Zachary Elkins and Andrew T Guzman and Beth Simmons, 'Competing for Capital: The
Diffusion of Bilateral Investment Treaties, 1960-2000' (2008) U Ill L Rev 265.

Zoltan Vig, 'The Importance of Foreign Direct Investments and Instruments for Their
Protection' (2018) 59 Hung J Legal Stud 443.

Internet Sources

UNCTAD, UNCTAD Investment Policy Hub International Investment Agreements

Navigator (2020) available at <https://unctad.org/system/files/official-
document/diaepcbinf2020d4.pdf> (accessed on 10 June 2021)