Concept of Foreign Investment and International Investment Law

Chapter 1. Concept of Foreign Investment and International Investment Law

International investment law is a branch of international law regulating foreign investments and relations between foreign investors and host States. It defines the legal protection of investments and provides mechanisms for dispute settlement.

An investment may be defined in two ways.

1. The legal definition comes from investment treaties or arbitral practice.
2. The economic definition refers to the OECD concept of foreign direct investment.

The term “foreign” investment describes the relationship between the investor and the State where the investment is located. Determining whether an investment is foreign depends on criteria used in legal instruments.

Investment treaties usually rely on nationality of the investor (e.g. Article 25(1) of the ICSID Convention), while the OECD definition relies mainly on residence.

Two main types of foreign investment exist:

1. Foreign Direct Investment (FDI).

FDI is the purchase or establishment of income-generating assets in another State where the investor exercises control or significant influence over management. According to the OECD benchmark definition, control normally requires at least 10% of voting shares.

1. Portfolio investment.

Portfolio investment is an investment without managerial control, typically consisting of share ownership below the control threshold.

Foreign direct investment may occur through different forms.

Acquisition investment involves purchasing an existing company or asset.

Greenfield investment involves building a new enterprise from the ground up.

Investments may also be organized through joint ventures with local or foreign partners.

Chapter 2. Perspectives of Investors and Host States

Foreign investment decisions are influenced by economic incentives. Investors typically invest abroad to obtain lower production costs, access to local markets, avoid tariff barriers, or benefit from existing local suppliers.

However, investors may be discouraged by several risks. These include the risk of expropriation, changes in the legal framework (taxation, labour or environmental regulations), and corruption or political instability.

Host States generally seek to attract foreign investment because it contributes to economic development. Foreign investment may generate employment, tax revenues, export growth, and technological development.

Nevertheless, foreign investment may also create problems for host States. It may harm local competitors, create environmental or health risks, and expose States to international legal liability under investment treaties.

Chapter 3. Legal Framework Governing Foreign Investment

Foreign investments are regulated by several layers of law.

First, domestic law of the host State plays an important role. Relevant areas include tax law, labour law, environmental law, and land law. Many States also adopt specific foreign investment legislation, regulating admissibility of investments, procedures, sectors open to foreign investors, and investor rights and obligations.

Second, investments may be governed by investment contracts concluded between a State (or State entity) and a foreign investor for specific projects, such as natural resource extraction or infrastructure development.

Third, foreign investments are governed by international investment law, which provides substantive protections and dispute settlement mechanisms.

International investment law primarily addresses two issues:

1. the substantive rights and protections granted to investors, and
2. the procedures for resolving investor–State disputes.

The main sources of international investment law include treaties and customary international law.

Important treaties include the ICSID Convention, bilateral investment treaties (BITs), regional agreements such as NAFTA, and sector-specific treaties such as the Energy Charter Treaty.

The ICSID Convention created the International Centre for Settlement of Investment Disputes and established procedures for arbitration and conciliation of investor–State disputes.

Bilateral investment treaties form the backbone of international investment law. They grant investors substantive protections and access to international arbitration. Typical protections include:

1. protection against unlawful expropriation
2. fair and equitable treatment
3. full protection and security
4. national treatment
5. most-favoured-nation treatment

BITs commonly allow investors to bring disputes to arbitration under rules such as ICSID arbitration or UNCITRAL arbitration.

Customary international law remains relevant, particularly for issues not fully regulated by treaties, such as State responsibility, attribution of conduct, and compensation for expropriation. Some treaties also refer to the minimum standard of treatment under customary international law.

Chapter 4. Investment Contracts

An investment contract (or investment agreement) is a contract concluded between a State or State authority and a foreign investor concerning a specific investment project in the territory of that State.

Such contracts commonly appear in sectors requiring significant capital investment, including natural resource extraction, infrastructure projects, and public services. They are often concluded following a tender process in which companies submit bids.

Two important contractual models are frequently used.

A BOT contract (Build-Operate-Transfer) requires the investor to build infrastructure at its own cost, operate it to recover costs and earn profit, and transfer it to the State after the agreed period.

A concession contract grants the investor exclusive rights to exploit natural resources for a specific time while paying royalties to the host State.

Investment contracts raise specific legal issues because they involve a State as a party and are usually long-term agreements, often lasting decades.

The involvement of a State creates concerns for investors because the State acts both as contracting party and legislator and may change regulations affecting the investment. Investors may also fear bias or lack of independence in domestic courts and problems related to sovereign immunity.