Foreign Investment, Transnationals and Developing Countries

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Oxford Research Encyclopedia of International Studies. Publications Pages Publications Pages. Contracts provide for a tailor-made agreement that responds to the particular requirements of each project and to the intentions of the contracting parties.

It is therefore important for countries to develop the expertise to determine the desirable level and forms of TNC involvement, to negotiate and monitor the implementation of projects. Due to asymmetries of information and experience between a TNC and a host country government, it is generally difficult for public sector staff to match the resources of the private sector when engaging in contract negotiations.

Major TNCs tend to make use of international law firms and other experts specializing in project financing transactions, but this is not always possible for developing countries.

If countries with limited experience decide to involve TNCs in infrastructure projects, it may be advisable for them to start on a small scale rather than adopting a major programme across industries. It may also be useful for them initially to concentrate on less contentious segments of an industry.

An issue that has attracted increased attention in recent years is the rise of investment disputes related to infrastructure. At the end of , some 95 disputes or one third of all known treaty-based investor-State disputes were related to electricity, transportation, telecommunications and water and sanitation figure 5. The disputes have provoked debate over the implications of international investment agreements IIAs , and especially BITs.

Others question whether BITs have been, or ever will be, able to provide the protection they were originally intended to offer investors. A review of arbitration decisions shows that less than half of the awards rendered favoured the claimant, and that damages awarded were considerably smaller than the total claims made by investors. The fact that more than 90 known disputes concerned infrastructure shows that concluding IIAs and the coexistence of IIAs and State contracts can have significant implications for host States. At the same time, the number of disputes should be seen in the light of the several thousands of IIAs, and a huge number of investment projects in infrastructure.

In addition, if renegotiations of contracts are successful, they do not reach the stage of dispute and arbitration. The complexity of related issues, together with the dynamic evolution of the IIA universe and the international case law, underline the importance of capacity-building to ensure that developing-country governments understand the implications of concluding IIAs. They also need to be better equipped to handle potential investment disputes.

It is important to consider the potential role of home countries and the international community in facilitating more foreign investments into countries that seek such inflows.

ISBN 13: 9780891588009

This is particularly relevant from the perspective of low-income countries, which lack domestic capabilities and have generally failed to attract significant TNC involvement in infrastructure. Without some form of subsidies, it is difficult to attract TNC investment into economies, communities and industry segments that are characterized by weak purchasing power and poor records of payment. In these cases, development finance institutions can act as catalytic financiers.

Especially in such industries as electricity, water and transport, there is significant potential for synergies between foreign investment and overseas development assistance ODA. While development partners have recently scaled up their ODA commitments for infrastructure development, current levels of support have not recovered from the earlier period of declining lending by multilateral banks, and they have not reached the levels promised in various international forums.

Recent assessments show that the liquidity of development finance institutions is very high. Development partners should honour their commitments related to ODA for infrastructure.

Bibliographic Information

Institutions that provide bilateral or multilateral development finance also need to become more willing to take risk and to allocate a greater share of their activities to the needs of low-income countries. In addition, they should keep all options open. In some projects, notably in water and some electricity segments, there may be strong arguments for keeping the operation of the services in public hands. But also in other industries, weak institutional capabilities may make private sector involvement too risky.

In such situations, international efforts focused on supporting existing public sector producers may be more appropriate.

Foreign direct investment in developing countries: A blessing or a curse?

Development partners should therefore give sufficient attention to financing infrastructure projects for which it may not be possible to mobilize private sector involvement. Risk-mitigation measures by home countries and international organizations can help in the short term to mobilize private financing of infrastructure projects in developing and transition economies.

Special attention may have to be given to measures aimed at mitigating three broad types of risk: political risk including subsovereign and contractual and regulatory risks , credit risk and exchange-rate risks. Despite the plethora of risk-mitigation instruments available, current programmes are insufficiently tailored to the situation of low-income countries.

For example, local currency financing by development finance institutions typically requires a well-established currency swap market. Where such a market exists, intervention by development finance institutions is less likely to be needed. At the same time, riskmitigation instruments should not be seen as a panacea. Too much risk mitigation may lead to problems of moral hazard and encourage reckless risk-taking on the part of investors and lenders. While risk-mitigation tools can facilitate the mobilization of private debt and equity, they do not make poorly structured projects more viable.

This underscores the importance of capacity-building efforts. Such efforts are especially important in LDCs.

Depending on the specific circumstances of each country, assistance may need to be provided for developing legal and regulatory frameworks, assessing different policy and contractual options, preparing project proposals, and monitoring and enforcing laws, regulations and contracts. Considering the nature of the projects, governments at all levels — national, provincial and municipal — are in urgent need of assistance.

While positive steps have been taken to meet these needs, current efforts remain vastly insufficient. Disturbingly, funds available for capacity-building are not always fully used. Advisory services should be geared to providing advice not only on how to encourage investment, but also on how infrastructure can be made to fit into larger development plans and objectives.

Most capacity-building support is currently provided by different financing institutions that often have a direct stake in the different projects. It would be worth exploring a more active role for the United Nations in this context. As a neutral party, the organization could complement existing players by, for example, helping developing-country governments in evaluating infrastructure contracts and developing negotiating skills.

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World Investment Report | Overview

Improving the ability of governments in these areas should help secure greater development gains from investment inflows. World Investment Report Previous Chapter. TNC participation in infrastructure has increased substantially, including in developing and transition economies. Developing countries have significant infrastructure TNCs and are becoming prominent investors in other developing countries. TNCs in infrastructure derive their competitive advantages from a variety of sources and invest abroad mostly to access markets. Mobilization of financial resources for infrastructure investment by TNCs is rising, but a vast gap remains.

TNC investment in developing-country infrastructure affects industry performance … …with implications for the provision of infrastructure services and universal access. Collier, P. Oxford University Press. Dunning, J. Durham, J. Fortanier, F. Transnational Corporations , 16 2 , August. Hausmann, R.

Regional trade agreements and FDI

Herzer, D. Krugman, P. Lall, S. Lall and S. Urata eds. European Journal of Development Research , 16 3 : — McIntyre, J. International Trade Journal , 10 4. Mello Jr. Mencinger, J. Kyklos, 56 4. Narula, R.

Foreign Direct Investment and its Roles in Economic Development

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