Foreign investment is an investment made by foreign nationals/corporations/governments in
the domestic economy of a country, by the purchase of physical/financial assets in the
domestic economy.
Commercial loans – They primarily take the form of bank loans issued to foreign
businesses/governments.
Official flows – These refer to forms of development assistance that developed
nations give to developing ones.
Foreign direct investment (FDI) – This pertains to international investment where
the investor obtains a lasting interest in an enterprise in another country. This typically
includes opening plants, buying buildings/machines/factories/other equipment, acquiring
controlling stakes in businesses elsewhere. Organisation for Economic Co-Operation and
Development (OECD) defines FDI ‘when an entity has equity that gives it voting power of
10% or more in the enterprise’.
Foreign portfolio investment (FPI) – These are investment instruments more easily
traded, less permanent, do not represent controlling stakes in enterprises. They include
investments via equity instruments (stocks)/debts (bonds) of foreign enterprises, which do not
necessarily represent a long-term interest. Sometimes FDI and FPI may overlap regarding
investment in stock.
Why do companies invest abroad?
Market seeking – Firms may go overseas to find new buyers for goods and services. A
company may realise its product is unique/superior to competition in foreign markets and
seek to take advantage. Also, producers may have saturated sales in their home market or
believe investment overseas will bring higher returns than additional investments at home.
This is common with technology goods where the market size for supporting technological
development is often larger than the largest national market.
Resource seeking – A company may find it cheaper to produce its product in a
foreign subsidiary to sell either at home or in foreign markets. The foreign facility may obtain
superior/less costly access to production inputs (land/labour/capital/natural resources) than at
home.
Strategic asset seeking – Companies may seek to invest abroad to build strategic
assets like distribution networks/new technology. They may establish partnerships with other
existing foreign firms specialising in certain production.
Efficiency seeking – Companies may seek to reorganise overseas holdings in
response to broader economic changes. They could create new free trade agreements between
countries to make facilities in those countries more competitive due to access for facility to
lower tariff rates within the group. Fluctuations in exchange rates may change profit
calculations leading firms to shift allocations of its resources.
What is the historical context of foreign investment?
Before 2500 BC, Sumerian merchants discovered that trade with other countries required
men stationed abroad to receive/store/sell their goods1. Egyptians also mined tin and other
metals beyond their borders. Phoenicians built harbours for trading ships around the
Mediterranean, establishing trading centres, and then colonising areas like Carthage. They are
1
Mira Wilkins, The History of Foreign Investment in the United States to 1914 (Harvard University Press 1989)
, known to have made a significant investment in ancient Israel in the reign of Solomon,
providing the skilled craftsmen and lumber to build his temple. Ancient Israel is thought to
have invested in areas as distant as Spain2.
In medieval times, Byzantine Emperors Basil II and Constantine VIII granted Venitian
merchants through ‘Chrysobul’ (document) the right to trade in ports of Byzantine Empire
without paying customs duties and the right to quarter in Constantinople (embolum) for
dwelling and trading. This was a form of FDI3.
During the 17th century, England invested in India and Canada through establishing new
business associations (charter companies like British East India Company and Hudson Bay
Trading Company). The Dutch created their own East India Company. In the 19 th century, the
most prevalent form of FDI was indirect through loans and government bonds. FDI took
shape in the middle of the 19th century stimulated by technological innovation growth and
corporations as well as other business associations in raising/accumulating/deploying capital.
For example, railroads and telegraph companies in Europe and US were contracted to
construct necessary infrastructure to operate railroads and telegraph systems in Latin
America, Asia and Africa. Given the scale of their investments and the local market’s
insufficiency to provide economic returns, the markets they sought were necessarily
worldwide in scope. Other FDI included operation of plantations for cultivating export crops,
exploiting natural resources like mining for minerals and drilling for oil. Then came the
construction of telephone systems, electrical power systems, street lighting, automobile
factories and road-building projects. Most were built and operated, rather than financed, by
foreign investors4.
Who are the key parties in investment arbitration?
Investor
Investors invest to make profit and due to their concern over risks affecting their proposed
investments. Risk can include the probability that expected returns from investments will not
be realised. A greater risk requires a potential higher rate of return to justify an investment.
Thus all investors conduct risk assessments before deciding to invest. Most investors
distinguish between two types of risks.
Commercial risks – These are negative effects derived from ordinary commercial
activities affecting the enterprise. For example, market sales may be less than expected,
management may be inefficient, or the enterprise’s technology may prove more costly or less
effective than planned.
Political risks – These are negative events derived from political actions. For
example, there were unexpected changes in government, expropriation of enterprises by the
State, price controls by regulatory authority, or riots that damage investment assets.
To maximise returns and minimise risks, investors make contracts with agencies in host
country governments to obtain new special privileges and benefits. Foreign investors may
2
Reisman and others (eds), ‘Chapter 1: Foreign Investment Disputes’ in Foreign Investment Disputes: Cases,
Materials and Commentary (Kluwer Law International 2014) 1-20
3
JW Salacuse, The Law of Investment Treaties (2nd edn, OUP 2015) 89
4
Reisman and others (eds),‘Chapter 1: Foreign Investment Disputes’ in Foreign Investment Disputes: Cases,
Materials and Commentary (Kluwer Law International 2014) 1-20
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