The Potential Impact of Multilateral Framework on Investments (MFIs)

The development of an Multilateral Framework on Investment (MFI), if such a framework were to be negotiated, would  represent a change in the policy-framework cluster of determinants. Although  such a framework might also affect some elements of business facilitation (such  as investment incentives), it would not involve significant and direct changes in  the principal economic determinants. Indeed, by making Foreign Direct Investment (FDI)  policies potentially  more similar, an MFI would underline the importance of economic (and  business facilitation) factors in determining FDI flows.  The precise effect of an MFI on the policy-framework cluster of determinants  would depend on its content, including definitions, scope and safeguards.  Because an MFI is only a hypothesis, three scenarios, based on differing  assumptions, are discussed below for purely analytical purposes. The specific  implications of each scenario would vary from country to country in accordance  with specific economic and developmental conditions and specific national  stances vis-a-vis FDI.  If there were an MFI, how would it affect the volume and pattern of FDI flows?

  1. One conceivable outcome of an MFI is that, it would help to increase FDI  flows and perhaps affect other features of such flows as well. Such an outcome  is based in part on the assumption that a multilateral agreement would not only  consolidate recent changes towards more liberal policies by many countries but  would incorporate “rollback” provisions requiring countries to commit  themselves to reducing or eliminating existing barriers to FDI and strengthening  investment protection and the proper functioning of markets. Even in the  absence of further  liberalization   a multilateral framework could facilitate  investment by providing stronger assurances as compared with unilateral or even  bilateral measures when it comes to the protection of FDI and the stability of  domestic FDI regimes. The presumably greater stability, predictability and  transparency resulting from an MFI would create a generally more  favorable  climate for investors. The impact on inflows might be greatest for those  countries that we not already signatories to bilateral, regional, multilateral or  multilateral investment agreements, and countries whose current policies, even  if  favorable  to FDI are not considered sufficiently predictable by investors. At  the same time, whether or not FDI flows would actually increase and whether  there would be a change in the quality and patterns of flows would depend on  the precise content of an agreement, the nature of national commitments and  exceptions to the  generalized  multilateral rules and, of course, the other FDI determinants that would come into play at that point.
  2. A second conceivable outcome of an MFI is that it could actually reduce the  quantity and quality of FDI flows, because the negotiation of an MFI would take  several years creating uncertainties about the investment climate worldwide and  thereby discouraging foreign investors. Further, even if negotiations did produce  an agreement, the MFI that would result could conceivably enshrine a less  liberal multilateral environment than has already evolved unilaterally or  regionally. Such an MFI could also alter the patterns of FDI flows across  geographic regions and industries. In particular, an MFI might reduce FDI flows  to countries that gain from the currently restrictive policies of their competitors  for such investment and increase flows to otherwise desirable locations that are  receiving little inward FDI because of uncertainties about policies.
  3. A third conceivable outcome of a possible MFI is that it would have little or no  impact on the quantity and quality of FDI flows, as it would not materially alter  the policy framework for FDI. One reason why this might be the result is that  there has already been significant  liberalization  in many countries, in particular  in many developing countries and countries in transition, and this liberalization has contributed to surge of FDI flows that reached  a new record. Therefore, an MFI that contains, for example, standstill  provisions requiring countries to commit themselves not to introduce new  barriers to FDI, lower standards of investment treatment or measures likely to  impair the proper functioning of markets would essentially maintain the status  quo, as far as the openness of economies to FDI, their treatment of foreign  affiliates and the functioning of their markets are concerned. Moreover the  extensive network of bilateral investment treaties  would provide protection for investors and could be easily  extended to additional countries. Finally, on this view, there would be no  significant effects on the geographic patterns of FDI flows, as they are largely  influenced by other FDI determinants.

On balance, these considerations suggest that an  Multilateral Framework on Investment (MFI) would improve the  enabling environment for FDI, to the extent that it would contribute to greater  security for investors and greater stability, predictability and transparency in  investment policies an rules. This, in turn, could encourage higher FDI flows  and potentially some redistribution of those flows particularly to countries  whose investment climates would newly reflect the multilateral framework.  How much difference an MFI would make, however in terms of the quantity,  quality and patterns of actual FDI flows difficult to predict and is precisely the function of enabling framework to allow other  determinants, and especially economic determinants to assert their influence.

Multilateral Framework on Investment (MFI) in International Trade

Expectations about the impact of an MFI on FDI flows (if it were indeed to be  negotiated) in comparison to the current regulatory framework and the direction  in which it is developing should, therefore, not be exaggerated. There are, of  course, other issues that need to be considered in connection with a possible  MFI especially the possible role of such an agreement in providing a framework  for intergovernmental cooperation in the area of investment.

Although the most profound shifts among FDI determinants result from  integrated international strategies, especially complex strategies, the traditional  economic determinants related to large markets, trade barriers and non-tradable  services are still at work, and account for a large share of worldwide FDI flows.  Data on the distribution of sales of foreign affiliates of United States TNCs in  host countries are indicative in this regard: two-thirds of TNC activity is still of  this type. These figures are higher in the services sector, including trading  affiliates, and lower in manufacturing bat they do not change the overall  outcome.  Some of the largest national markets remain unmatched in size by the largest  regional markets or even by entire continents. For example, the market the  European Union during most of its existence has been smaller than the United  States market; the market of the African continent (without South Africa) is  smaller than that of the Republic of Korea; and the combined markets of the 14  Central and Eastern European countries are smaller than the market of Brazil.

As regards trade barriers, even though the general trend has been towards the  reduction or even abolition of tariffs and quotas, they continue to remain in force  in several (especially developing) countries and in some industries in a much  wider group of countries, These continue to generate import FDI and discourage  efficiency-seeking FDI. In non-tradable services, as well as goods that are  perishable or need to be adapted to consumer preferences or local standards, the  market-seeking motivation, and the corresponding locational attractiveness of  host countries, remain as strong as ever. In fact, there has been an explosion of  FDI in the services sector as a result of the general trend towards the  liberalization  of FDI frameworks for services.

Still, although FDI remains strongly driven by its traditional determinants, the  relative importance of different locational determinants for competitiveness enhancing  FDI is shifting. For example, again using United States data for  foreign affiliates in manufacturing though it is still true that these affiliates are  predominantly oriented towards domestic markets, their domestic sales have  dropped from 64 per cent in 1982 to 60 per cent in 1993. A similar trend can be  observed in tradable services (e.g. computer and data-processing services) in  which domestic sales declined from 85 to 81 per cent over the same period.  Perhaps more telling are data for United States foreign affiliates in the European  Union, as the evolving policy framework there is more indicative of the FDI  policy framework emerging globally, sales to local markets in that region  declined from 76 per cent to 64 per cent between 1966 and 1993, while exports  increased from 24 per cent to 36 per cent.

In their quest for competitiveness, TNCs assign a particularly important role to  obtaining access to created (or strategic) assets, the principal wealth-creating  assets and a key source of competitiveness for firms. Created assets can be  tangible like the stock of financial and physical assets such as the  communication infrastructure or marketing networks, or intangible. The list of  intangible assets is long, but they have a common denominator knowledge.  They include skills, attitudes (e.g. attitudes to wealth creation and business  culture), capabilities (technological, innovatory, managerial and leading  capabilities), competencies (e.g. to  organize  income-generating assets  productively), relationships (such as interpersonal relationships forged by  individuals or contacts with governments), as well as the stock of information,  trade marks, goodwill and brainpower. These assets can be embodied in both  individuals and firms and the can sometimes be enhanced by clusters of firms  and economic activities.  The importance of created intangible assets in production and other economic  activities has increased considerably. A large proportion of the costs of many  final goods and services, ranging from simple products such as cereals through  books computers to automobiles, consists of the costs of such created assets as  R&D, design, advertising, distribution and legal work. Less than 10 per cent of  the production of automobiles now consists of  labor  costs; the rest relates to the  contributions various created assets. Moreover, international competition  increasingly takes place through new products and processes and these are often  knowledge based. R&D activities leading to new products and processes are  costly and risky. At the same time, markets for knowledge-based resources and  assets are becoming more open and enterprises embodying these assets can be  bought and sold. The result is that TNCs have taken advantage of these  opportunities and used FDI as a major means of acquiring created assets and  enhancing corporate competitiveness.

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