Originally from Investment Treaty Arbitration and International Law - Volume 10

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Until the turn of the 21st century, the definition of “investment” had generally enjoyed a consistently understood, forty-year history in international investment agreements (IIAs) and international jurisprudence.  Nevertheless, the writing is on the wall—and on the IIAs—that a new era has arrived.  Numerous States have enacted—or are in the process of enacting—significant changes to the definition of “investment” in their IIAs.

Understanding the foundation of this change requires a review of (i) the purpose of IIAs generally, (ii) how the definition of “investment” serves that purpose; and (iii) the current conundrum presented by the simple question, “what is an ‘investment?’”  With this foundation—or even just a bit of common sense—it becomes clear that States are redefining the scope of what constitutes an “investment” to limit their liability to foreign investors at the expense of protections for their nationals investing abroad.  Going one step further, this article outlines the potential pitfalls and far-reaching consequences of States’ redefining what constitutes an “investment.”

I.    EXECUTIVE SUMMARY

The late 1980s and first half of the 1990s was a time of extremely slow growth in international bank lending.  The debt crisis of the 1980s resulted in diminishing or non-existent available capital in many parts of the world, especially in developing nations.  In an attempt to secure capital investment funds, developing States looked to foreign investors to fill in the gaps left by the lack of available funds from international banks.  Foreign direct investment (FDI) presented one of the only options for developing nations to borrow or obtain capital in this period of stagnant bank finance. 

To encourage foreign direct investments, developing States entered into IIAs with developed States that provided the developed States’ investors with certain assurances regarding their “investments.”  As an example, developing States’ governments would agree to treat a foreign investor’s “investment” no differently than a domestic enterprise.  Each IIA also contained a dispute resolution clause providing the foreign investor with an independent venue to decide disputes between the foreign investor and the State—to control for potential bias that the international investor might face with the developing State’s domestic legal system. 
Because many developing countries were competing for this relatively small pool of FDI, each was incentivized to make their assurances of protections to these foreign investors as broad as possible.   Accordingly, the types of foreign “investments” protected in these IIAs included “every kind of asset” the foreign investor might own or control in the State hosting the investment (the “host State”).