International investments

Significant changes in international investments have improved relations between the government and business. Foreign investments were controlled by a small number of large multinational businesses, who were driven by a stronger need to develop stable markets for their finished goods as well as secure sources of raw material supply. Colonial growth in the past drove foreign investment. The listed companies in the OECD stock markets eventually grew to be substantial international corporations with economic ties to other nations, confounding the conventional wisdom that direct investment is essentially a trade-off (Dolzer and Schreuer 2012, p.16).  Towards the end of the nineteenth century, large as well as small enterprises gained much interest in the foreign direct investments increasing its popularity but surprisingly widening the potential influence from multilateral international institutions. Individual investors were more than willing to integrate foreign investment strategies into their enterprise development plans due to easy access to mutual funds for upcoming investors. However, the foreign direct investment, being an economic adventure, is flawed by uncertainties. Present multilateral institutions obligated to govern such massive economic enterprises bows to the internal as well as external pressure leaving investors with little policy options.

It is, therefore, important to note that existing multilateral international institutions, although have the best policies to regulate foreign direct investments, are functionally absent to govern such trades (Åslund 2013, p32). The scope of this paper, thus, is to evaluate the reasons for the absence of multilateral institutions to regulate foreign direct investment. The paper will begin by defining concepts that will shape the general direction paper will take. After concept definition, a background view of the history of multilateral institutions will be undertaken which will provide a glimpse into what is expected in the subsequent sections of the paper. A literature review of the supporting evidence will follow suit and a conclusion that provides a snapshot of the findings from the reviewed literature. Possibly, there will be a conclusion as well as recommendations drawn from the paper findings.

Concept definition

By definition, John Gerard Reggie describes multilateralism as composed of three principles not limited to nondiscrimination, indivisibility as well as diffused reciprocity. Indivisibility refers to a security arrangement where an attack on a single state translates into an attack on all the allies (Dixit 2009, p14). Non-discrimination principle, on the other hand, refers to equal treatment to all parties under the banner of most-favored-nation methodology in trade agreements. Further, diffused reciprocity is an affirmation that states have alternatives and do not solely rely on a single, quid-pro-quo.

Foreign direct investment, on the other hand, refers to purchase or introduction of an economic adventure in by investors beyond their native countries and enjoys full ownership rights. The organization of Economic Cooperation and Development equates control to company ownership of more than 10% (Dixit 2009, p9).

Background information

Direct foreign investment debates have been in existence for quite some time. One of the reasons resonates with the increase in the overall global financial flow increasing to $315 from the previous $60 between the years 1985 and 1995. The DFI is also associated with persistent growth in the foreign direct investment stocks with the trends projecting a reduction in the overall world trade in tangible goods as well as services when compared to the excess sales realized by such multinational corporation foreign affiliates. One-third of world trade, for instance, accounts for the intra-firm trades. The second one-third of the world trade is as a result of multinational corporations trading with non-affiliates with the remaining third equated to trading among national firms.

Another reason for a focus on the foreign direct investment can be attributed to the pressures that result from the ongoing world economy integration (Bayne and Woolcock 2011, p. 105). The less or more consistent rise in the ratio of GDP to world trade, the significance of foreign-owned distribution as well as production tools in the home and foreign countries are held as evidence for globalization. Foreign direct investment is also conceived as a strategy of enhancing efficiency in the utilization of the world’s scarce resources. The recent example is its role in economic stimulus growth in the world’s underdeveloped and developing countries partially due to the declining reliance on development assistance that has been exploited to uplift such countries economically. Most significantly, the foreign direct investment can act not only as a source of the much sort after capital but also as avenues for new technological advances as well as intangibles such as effective market networks and managerial skills. Direct foreign investment is also a proviso for spillover in innovations, stimulates competitive advantage, a capital formation which in the long run contribute to positive economic growth as well as the creation of employment opportunities.

Reasons for nonexistence of multilateral institutions

Multilateral institutions face lots of discrimination in the manner governments treat foreign investors as compared to their local investors. The bias towards foreign investors has been in existence since the inception of globalization. In the early 1800s, for instance, Latin Americans (who had achieved independence) provided trade incentives to attract foreign investors with disregard to the effect that the approach might cause to their local economies. Their constitution, in addition, encouraged an influx of foreign investment with a promise of equal treatment with natives despite the existing tensions between the country and the European nations that did not favor such arrangements but relied on the Calvo doctrine provisions (Asiedu 2006, p. 64).

However, there was a significant economic meltdown in the US markets with the American bond issue experiencing default exposing foreign direct investors into major economic loses. The inability of the US judicial institutions to effectively protect foreign investors from such occurrences provoked the investor to seek support from their home country. Compared to the local investors who were compensated, foreign investors suffered major financial setbacks amidst diplomatic interventions worsened by their home government use of force in recovery efforts. The international organizations have in the recent past become objects of severe public criticism to the extent that member countries lack faith in their capacity to govern foreign direct investments. Following the Brexit, for instance, the world governing body, the International Monetary Fund as well as the European Union has faced massive criticism from their opponents over the proactivity in addition to withholding crucial information that might aid in making consideration on where it is economically wise to invest. The “Mexico crisis” is another example that points to the weaknesses of multilateral organizations regulations of direct foreign investment. Due to pressure and intense criticism, the International Monetary Fund, as well as other multilateral institutions, has resorted to revising their policies that regulate the accessibility of financial information in various countries. Bowing to pressure can flaw the institution’s roles in foreign policies as they might be used by economically dominant nations to propagate their retrogressive economic agendas on weaker states. The ensuing discussions on the financial architectures comprising of a proposal to ensure that IMF should strive to offer financial and moral support to those countries fond of suspending repayments of debts as well as imposing capital controls.

Weaker respect for the law as well as massive corruption reduces the viability of and establishment of multilateral institutions to govern foreign direct investment. According to Brunetti & Weder (1997, p16) research, the duo blames the high tolerance to corruption, among other economic vices, to the continued assistance of weaker states by the multilateral institutions. The less developing countries design viable economic stimulus programs to attract foreign direct investment taking the opportunity to squander the donor funds. The research continues to compare two countries experiencing moderate and extreme corruption deducing that had a higher corruption country such as Nigeria able to emulate the low corruption practices in Hong Kong, her investment rates could witness a substantial increase, 5% more from the current 16% to over 21% in gross domestic product when it can direct the low rate grants into their intended projects (Poulsen and Aisbett 2013, p.274). Such practices limit the establishment as well as the sustainability of foreign direct investment and the subsequent responsible multilateral institutions.

The initial trade was based on the Mercantilism theory which designed a country’s economy thought patterns (1500 to 1800 periods) with nations gauging their wealth with regards to how strong they can hold their treasures (Bonnitcha, Poulsen & Waibel 2017, p. 92). Subsequently, they imposed a lot of bottlenecks in ensuring that their treasures remain in the confines of their territory. With such mindsets, it has become an uphill task for a universal body to regulate the flow of commodities as well as factors of production from one region to the next. In the current socioeconomic and political set up, host countries have integrated Mercantilism into Neomercantilism where governments strive to undertake certain trade balances to attain certain political or social gains through the use of investors. The establishments of a multilateral institution to govern such activities are viewed as obstacles by economically dominant states and thus work to frustrate the activities of the organizations.

The foreign direct investment in Africa, as well as other less economically endowed nations, is perceived as motivated by the investor’s craving for its large market size and exploitation of natural resources (Tobin & Busch, 2010 p35). The perception influences the establishment of a multilateral institution to govern direct foreign investment in three ways: the less naturally endowed resource countries attracts little, to, no foreign investors regardless of economic policies the country is in pursuit of. Secondly, the sub-Saharan countries are small with regards to the overall income. The 2002 World Bank report, for instance, records the collective Sub-Saharan African gross domestic product at US $ 214 billion exclusive of South Africa (UNCTAD, 2006 p130). This GDP forms a quarter of Brazil’s gross domestic product and half of Mexico’s. With a small GDP, foreign direct investors, thus, enjoy a monopoly of capital resources hence dictates their trade preferences as well as the established multilateral institution that regulates such trades. Thirdly, the foreign direct investment in countries that are endowed with massive natural resources are more natural resource-concentrated and thus undertaking investment in such countries has the capacity to attract more spillovers. Establishment of multilateral institutions to regulate foreign investments in such scenarios would be viewed as an effort to benefit the less resource endowed nations at the peril of the resource-rich countries (Pandya 2012, p76). With such a mindset, even when the institution is constituted, it will achieve little objectives due to lack of political goodwill.

International poverty alleviation strategies include bilateral aids that flow to poorer countries from richer states through multilateral institutions which can take the form of grant provision below the prevailing market rates, debt forgiveness, and technical assistance. The intentions of such aids are not only to reduce poverty but also reward honest governments and good policies. The World Bank, to be precise, has openly discussed reasons for promoting good governance that takes into account low corruption levels and reduced governance bureaucracies in the receiving states (Haftel, 2010 p348). Nevertheless, the foreign aid programs critiques hold that the moral as well as the financial assistance extended to the economically deprived countries by multilateral institutions support inefficient bureaucracies and corrupt states. Eichengreen and Tieleman (2000 p62) research, for example, suggest that one of the economic setbacks that less developed countries are facing involves continuous financial aids making them “lazy” to generate their own resources.

Finding a balance in conflicting policy goals has been a major challenge to already existing multilateral institutions where they experience more rigid economic conditions (Salacuse, 2010 p427). Without proper innovational and dynamic rearrangements in institutional management that are capable of manipulating the conditions to suit its bid of achieving specific policy objectives, the mandates of the multilateral institutions become blurred. On the same note, striking a balance between public goods and private interest has always been beyond the scope of the majority of multilateral institutions. The agenda for international investment alongside the desire to achieve a more sustainable economy will never be comprehensively addressed when the institutions to do so are incapacitated. Investment consumes a lot of time in making the relationship between the host country and the individual or corporate investor (Sauvant & Sachs, 2009, p. 660). It also differs from those who import goods or services and the countries where they import from. That is to mean, investors have exclusive rights in the host country, and through rights acquisition, the obligation becomes a duty.

The investment timeframe and the investors’ legal rights in the host country favor a dynamic regime. To be precise, the trade liberalization determinants as well as the outlined dispute settlement system of the World Trade Organization, as a form of multilateral institution, falls short of the legal infrastructure to effectively govern foreign direct investment unless adjustments are put in place to incorporate the shifting demands of issues that need to be institutionally addressed. The adjustment should also be accompanied by major “architecture” in institutional scope capable of enhancing flexibility and faster implementations (Balding, 2012 p95). These proposals suggest that a stronger multilateral institution needs to draw its mandate outside international organizations and where possible should start with a frame-work convention that should be immediately followed by one protocol after another which address specific policy issues.

In the current globe, where there is a stiffer competition among governments in a bid to attract a lot of direct foreign investors, they have exploited the use of fiscal incentives. Responsiveness FDI to tax variation analysis research undertaken by Büthe and Milner (2008) concluded that there was little to no significant tax concessions effect in determining federal direct investment. The same sentiments are shared with other investor surveys that found that what motivates investors more are political and market structures than the perceived policies on tax. Further research by Pirnia and Morisset (2002) affirms that the foreign direct investments witnessed major growths in excess of $200 billion in the 1985-1994 periods in South Pacific and Caribbean: regions that are considered tax havens. These researches suggest that foreign direct investments are self-evaluating and are sustainable without the influence of multilateral institutions to govern them (Woolcock, 2011 p117).

A multilateral institutional regime is all about fairness and efficiency. Uncertain or intensely distorted investment conditions pose major threats to the deteriorating rates of returns. Those countries that have been earmarked as high risks will only attract investments in those projects that can attract abnormal profits. In such countries, significant projects won’t receive funding, and the available funds will, in turn, be used in ways that are less efficient as it could have been in normal socioeconomic and political conditions. That is, to say the least, that unpredictable political environment makes the movements of goods and services difficult and multilateral governance are likely to fail under such political uncertainties (Adam, 2016 p116). The member countries expect assistance from the umbrella institution thus remain helpless and feel let down when they witness the institution adopting a bystander role in such time of need.. They thus become reluctant to join such institutions rendering them inadequate to govern global financial agenda resorting to direct foreign investment that can be an ally in times of distress. If more than one country shares the same sentiments, then the adoption of such trade organization bodies might be confined to few countries.

The Moran (2012) research deduces that the issue of fairness becomes buoyant due to conflicting goals as well as an unequal power of the various investment stakeholders. For example, investors from countries that are economically poor worry about the safety of their foreign investments. The same case applies to countries that are relatively weaker than huge corporations; a relationship that might make the country unable to enforce its economic policy agendas. Such are the situations that call for the establishment of a multilateral institution to defend less secure investments from being exploited by established investors.

Finally, there appears to be an overall catch-all category; a common notion involving a phobia of transferring control to an external force that might, in the long run, take overall control of the production and supplies (Walter, 2001 p153). Worst is the effect that the overly protected institutions would face if a foreign investor takes root in its sphere of influence. And with a good history of foreign investor success, there is much reluctance to allow for faster establishment of foreign direct investment governing institutions bringing in a lot of bureaucracy to give time for the juvenile local corporations to take root and gather the much-needed resource base to compete favorably.

Foreign Direct Investment and the environmental implications

A lot of debates of the environmental burden foreign direct investment post rally around the “pollution havens” analogy which states that corporations will move to less developed countries to exploit the less stringent environmental policies on their industrial activities (Poulsen & Aisbett, 2016 p74). Consequently, FDI is always described as environmentally beneficial. Economic agreement negotiators are thus encouraged to justify their arguments against any need for the establishment of a multilateral agency that will possibly regulate their activities other than their stringent government environmental laws.







Strategies to pursue multilateral approach

There is the need for negotiations where countries could express and share their views. A subsequent agreement should be open to all the members of the multilateral institutions even if they were initially reluctant to join (Allee & Peinhardt, 2014 p47). The other portion which decides to proceed should take the path of the most favored nation, or a conditional MFN or in the condition of a critical mass to agitate for the full implementation of MFN. If the member states, unanimously, make a decision to adopt the most favored nation (MFN) approach will provide an avenue for the countries with no vested interest to ultimately see the need to join as their MNCs stand a greater chance of reeving maximum benefits even if they are non-members.

Given the existing stalemate with regards to multilateral negotiations through the utilization of the Doha round, most countries take their multilateral negotiations investment and trade agreements in the context of regional or bilateral. The progress from such arrangements can in the interim period attract smaller states that in the long run might inspire future multilateral as well as plurilateral effective and efficient negotiations within or outside the established multilateral institutions that can regulate foreign direct trades (Milner, 2014 p 6). One major challenge of staying outside the multilateral organization will be associated with an agreement having no link to any dispute settlement architecture of the established international organization agreeing to be easily turned down. One merit of an agreement outside the structure of the established multilateral institution is that amicable solutions are possible in like-minded states.

Conclusion and recommendations

The available evidence suggests that business-friendly policies, as well as stronger institutions, are fodders for massive foreign direct investment that attracts spillovers, not limited to, the creation of employment opportunities; raise the general living conditions as a result of improved human capital. Therefore, the governments that are oriented to a faster economic development can achieve such objective provided they make major improvements in their institutions as well as generate sound policies. Institutional strengthening has assisted countries such as US and institutions; the International Monetary Fund, World Bank among others that have adopted the second level reforms in supplementary efforts to their first line macroeconomic reforms undertaken in the 1990s (Åslund, 2013 p56).

Governments resorting to cut and stick methods in attracting Foreign Direct Investors should expect no gains since implementing government reforms without taxing their resource requirements. All is required, nevertheless, is to gather all the vested interests to mitigate the potential effect of investors that believe that reforms will weaken socioeconomic and political powerbases or permit others to squander their profits.

Moving forward, the policy formulators should take steady steps in stemming corruption in those areas that are investment hotspots like the customs service. They should also not shy away from limiting price controls, import liberalizations as well as reducing red tapes in trade licensing requirement as the multilateral institutions continue to be incapacitated to enforce their controls in direct foreign investment (Simmons, 2014 p12). Enforcement of legal laws that don’t infringe on the investors' intellectual property rights especially in critical investment areas like pharmaceuticals, media, publishing, entertainment, software among others should also be prioritized to act as economic buffers projected towards giving credit to the original owners of business innovations.

For fear of biases in the foreign direct investment, governments should enforce economic tolerant policies that promote adherence to international trading standards to protect upcoming as well as established corporations. The protection should take the form of providing incentives to boost consistent democracies as well as rewarding nations that have minimal governance bureaucracies. Implementing such a strategy will increase global trust in the multilateral institutions as well as motivate the institutions to undertake their objectives to full completion independently.

Finally, there is a greater need and urgency for the policymakers to come up with new strategies that will make institutional reform benefits more apparent to the public to build a stronger consistency and easy adoption of such reforms. Otherwise, the chaos in the regulation of the direct foreign investments will worsen and threaten its mutual benefits.

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