Market access of foreign investors is the ultimate step for the entrance of foreign capital into a host country. Most countries today regulate the admission of the foreign direct investment through a special legal framework agreed with other countries and entities on a bilateral and sometimes multilateral level. By entering into such treaties, States agree on giving away a part of their sovereignty and accept certain rules and conditions upon which they will treat the foreign capital, foreign legal entities and foreign citizens.
Bilateral Investment Treaties (“BIT”s) regulate the mutual relations of two different sovereign countries in the matter of promotion and protection of foreign investments on their territory. They are usually concluded between countries of different economic standard where one of them is in the most cases a developing country. The rationale of such association is the mutual interest of both countries to promote its economy and industry in another, completely different market, which might otherwise be unattainable or uncompetitive.
Still, States are inclined to impose certain levels of protection and standards regarding the promotion of foreign investments which might not always be entirely attainable. They are free to agree on lower or higher levels of protection of foreign investments that what is usual, as long as the other party agrees. This way the States keep certain margin of manoeuvre and protect perceived vital State interests.
The notion of market access could be understood as the combination of two intertwined terms – admission and establishment of foreign investment.[1] While admission covers the issues such as the “definition of relevant economic sectors, geographic regions, the requirement of registration or of a license and the legal structure of an admissible investment”[2], the notion of establishment comprises the issues of “expansion of an investment, payment of taxes or transfer of funds”[3]. Still, these terms are deeply interrelated and comprise the two aspects of the same issue from different angles – the perspective of the investor and of the State.
The glimpse of this concept is visible usually in the initial articles of BIT’s where countries agree on the mutual interest of promoting foreign investment and grant certain standard of treatment to foreign investors in the host State. The standards in question are either the standard of the most-favoured nation (MFN) or the national treatment where the host State obliges to treat the foreign investor equally as all its nationals or to apply the best possible treatment applicable to the foreign investors, which is usually not as good as the national one. Such a difference is crucial when the openness of one country market is discussed. It could be understood that national treatment represents a level up from the most-favoured nation treatment since the State agrees to treat all investors equally, regardless of their provenance.
Another characteristic of modern BIT’s is the almost unified reference to the applicable dispute settlement mechanism. The vast majority of today’s BIT’s opt for international arbitration proceedings and directly define the applicable rules of procedure. In this manner, in case of violation of the standards embodied in a BIT, the parties can turn to expedient dispute settlement before a neutral forum.
While theory recognizes the possibility of a country deciding to entirely open its doors to foreign investors (the so-called “open door” economies)[4], in reality, it is quite rare that a country would allow the interference of foreign capital in certain sectors. Every State in fact restricts, if not entirely closes, certain areas of importance for its interests. Such sectors are usually linked to the production of arms, energy, drugs or the chemical industry. By imposing additional requirements which potential investors must fulfil or prescribing special authorizations and licensing procedures, States narrow the capacity of persons which could be involved in such businesses. The most common way of defining such sectors and industries is the composition of a negative list of sectors which require fulfilment of additional conditions or are entirely banned from entering. Such lists are usually provided in national legislation.
However, even such behaviour depends on the actual economic health of a country and it follows certain patterns. Namely, developing countries and countries in transition are usually in dire need of foreign investments which are usually the principal manner of increasing GDP. To the contrary, developed countries, due to their established position in regional and world market, can restrict the market access to the foreign investors and entirely ban or narrow the possibility to enter the market in certain sectors considered to be of vital interest.
Therefore, even though granting an elevated standard of treatment to foreign investors within a BIT can be reassuring, national laws have the final word since reference to national legislation can be made. Even granting national treatment to foreign investors might be problematic when there is a list of additional administrative requirement which restrict actual access to the market.
Hence, foreign investors must be cautious – national law should always be consulted since it effectively narrows the accorded standards of treatment. Violation of BIT’s can be remedied by pursuing an arbitration procedure, but such an option does not always grant the reimbursement of every and all assets invested in particular case.
Katarina Grga, Aceris Law
[1] R. Dolzer, C. Schreuer, Principles of International Investment Law, 2nd ed, Oxford University Press, p.88; See also P. Julliard, “Freedom of Establishment, Freedom of Capital Movements and Freedom of Investment”, 15 ICSID Review-FILJ 322, 2000, p. 323.
[2] R. Dolzer, C. Schreuer, Principles of International Investment Law, 2nd ed, Oxford University Press, p.88.
[3] R. Dolzer, C. Schreuer, Principles of International Investment Law, 2nd ed, Oxford University Press, p.88.
[4] UNCTAD, Admission and Establishment, Series on issues in international investment agreements, UN New York and Geneva, 2002, p.3.