British Institute Article Explores Foreign Investment Protection

British Institute of International and Comparative Law
The Protection and Promotion of Foreign Direct Investment in Developing Countries:

Interests, Interdependencies, Intricacies
Author(s): Jrgen Voss
Source: The International and Comparative Law Quarterly, Vol. 31, No. 4 (Oct., 1982), pp.
686-708
Published by: Cambridge University Press on behalf of the British Institute of
International and Comparative Law
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THE PROTECTION AND PROMOTION OF FOREIGN DIRECI
INVESTMENT IN DEVELOPING COUNTRIES: INTERESTS,
INTERDEPENDENCIES, INTRICACIES
By
JORGEN VOSS*
I. INTERESTS AND INTERDEPENDENCIES
A. Investment Protection versus Investment Promotion
Direct investment means the investment of money, goods or services in a project

for entrepreneurial commitment, especially establishing subsidiary companies
or take-over of enterprises; capitalising branches and plants (endowments)
securing equity holdings in corporations with powers of management and
control (generally of 25%7o); making long-term loans with low or partnership-
type interest rates in conjunction with equity holdings.
Such investments are thus characterised by their direct use for a specific
project (not through the capital market), amortisation and profit dependent
upon the success of the project (entrepreneurial risk), long-term or unlimited
period and an enduring entrepreneurial commitment to the project
accompanying the investment. This is in contrast with "portfolio investments"
which are placed through the capital market without entrepreneurial
commitment, are relatively short-term and made only for the sake of capital
yield (fixed interest securities, capital shares of enterprises without controlling
interest, bank loans, etc.), and other capital investment (purchase of real estate,
etc.). In contrast with these types of investment, the direct investor also
provides a package of business and technical know-how for the project.'
Thus, a protection and promotion policy concerning direct investments
exclusively does not aim at a general protection of assets abroad, but
specifically at a functional protection of direct investments as a special type of
economic cooperation. Accordingly, it is not primarily a concern of
*Counsel, the World Bank, Washington, D.C.; Regierungsrat, Ministry of Economics, Federal Republic of
Germany (on leave). This article was written on the basis of the author's experience in the administration of the
German investment insurance scheme. Nevertheless, the views expressed therein are personal to the author and do
not necessarily represent those of either the German Ministry of Economics or the World Bank.
1. Cf. First Directive of the Council of the European Communities for the implementation of Art. 67 of the
Treaty of Rome, dated July 12, 1960; "Definitions", Official Journal of the European Communities, pp. 932-960;
OECD Report, "Investing in Developing Countries"(4th edn., 1978) pp. 5 and 6; ss 55(1); 56(1) of the Deutschen
Verordnung zur Durchfiihrung des Aussenwirtschaftsgesetzes, BGB1 1973 1 1970; para. 5 of the Deutschen
Allgemeinen Bedingungen fur die Obernahme von Kapitalanlagegarantien; Jittner, "Forderung und Schutz
deutscher Direktinvestitionen in Entwicklungslandern", 1975, pp. 38 et seq.; Alenfeld, "Die Investitions-
f6rderungsvertrdge der Bundesrepublik Deutschland" (1971) p. 30.
686
OCTOBER 1982] Investment Protection and Promotion 687
international law - realisation of a diplomatic protection of assets - but of

economic policy - increasing industrial cooperation. Foreign trade policy and
international law have a relationship of purpose and means: diplomatic
protection is achieved according to specific foreign trade interests and
requirements. Investment policy must start with the freedom of individuals in
regard to investment which characterises the economic systems of all Western
industrial nations, i.e. their autonomous decision-making competence in
regard to investments according to their estimate of "risk and return"
prospects.2 Governmental investment dictates are neither compatible with the
basic tenets of the market economy of Western industrial nations3 nor with
their constitutions.4 In addition, a global investment control would
interfere with the market economy allocation mechanism and would lower
global economic growth because of the resulting impairment of "dynamic
allocation efficiency".5 Investment policy measures can therefore only try to
influence the risk-return determinants in order to coordinate commercial and
political allocation interests.
Investment protection policy serves the lowering of risks. It aims at a stable
and globally comparable protective framework for foreign investments. Thus
political investment barriers are to be overcome so that investment decisions are
made exclusively on the basis of economic considerations - availability of raw
materials, production cost structure, proximity to sales markets, etc.
Investment protection policy thus aims at overcoming politically engendered
distortions of competition among nations and, in particular, among developed
and developing ones, for investment capital. Thus objectives of development
policy merge with those of global economic growth in a "synergism" of
interests: the developing countries are integrated into the global economic
investment flow, and the world-wide allocation of scarce resources is optimised
and global welfare promoted thereby.
Investment promotion policy, on the other hand, aims primarily at an
improvement of the factors determining return. Through profit-increasing
government incentives the investment flow is influenced according to political
priorities. As a "corrective measure" in the market economy allocation
mechanism, investment promotion policy represents an element of regional or
sectoral structure policy. 6 Promotion measures are therefore justified only by
2. Cf. expert opinion of the Advisory Council to the Minister of Economics of the Federal Republic of Germany
(Wissenschaftlicher Beirat) and Staatliche Interventionen in einer Marktwirtschaft (1979) (hereinafter cited as
"Wissenschaftlicher Beirat, 'Interventionen "'), para. 66.
3. Wissenschaftlicher Beirat, "Interventionen", para. 67.
4. Cf., e.g., Arts. 14(1), 2(1), 12(1), 19(1), 22 of the Grundgesetz of the Federal Republic of Germany;
unconstitutional encroachments on the essence of entrepreneurial freedom; Wissenschaftlicher Beirat,
"Interventionen " para. 82.
5. See expert opinion of the Wissenschaftlicher Beirat, Fragen einer Neuen Weltwirtschaftsordnung (1976)
(hereinafter cited as "'Wissenschaftlicher Beirat, 'Neue Weltwirtschaftsordnung' ") p. 25.
6. Wissenschaftlicher Beirat, "Interventionen " paras. 89 et seq.
688 International and Comparative Law Quarterly [VOL. 31
a cost-return analysis considering the entire economy, which weighs the

impairment of the market economy allocation mechanism against the
realisation of the concrete promotion goal. From this arise the necessity for
selective promotion policy, as well as the subsidiary nature of investment
promotion policy to investment protection policy.
An active investment protection and promotion policy exists only in relations
with Third World countries. In all the industrial countries there is a comparable
and sufficiently stable protection framework so that investments flow freely to
their optimal economic use. Governments are therefore well advised to leave
investment allocation to the free market mechanism ("laissez faire, laissez
passer"). Problems of stability in the Third World and gaps of confidence
resulting therefrom erect, however, investment barriers specific to developing
countries. Their removal, and thus integration of the developing countries into
the global flow of private resources, is the common objective of the investment
protection and promotion policies. While the former try to decrease the
obstacles per se, the latter want to compensate for them through financial
incentives.
B. Investment Protection and Promotion within the System of

Economic Policy
Foreign investment policy touches upon development, raw materials, trade,
industry, employment, currency and fiscal policy goals - sometimes
supplementing them and at other times conflicting with them.
1. Interaction with Development Policy

Foreign direct investment constitutes an opportunity and, at the same time, a
danger for development policy objectives. On the one hand, it transfers to the
Third World private capital which refinances itself from the projects to which it
is directed. Also, and even more importantly, it injects a permanent input of
technical, managerial and marketing know-how into the projects concerned. So
it is that direct investment contributes to the industrialisation and economic
growth of the host country and its integration into the world economy. 7
In this, the industrialisation effect of foreign direct investment may exceed
the capital transfer involved many times over, as is indicated by the following
ratios. Between 1975 and 1979 German foreign investment amounted annually
to an average of only 1.1 per cent. of German exports, while production by
foreign subsidiaries of German companies, as early as 1973, constituted about
one-third of German export trade. Even more impressive are the ratios for the
7. See United Nations Economic and Social Council (ECOSOC) study, "Transnational Corporations in World
Development: a Re-examination", (1978, E/C.10/38); Kebschull et al., Wirkungen von Privatinvestitionen in
Entwicklungsldndern (1980) a study undertaken on behalf of the German Minister for Economic Cooperation.
United States: from 1975 to 1979, U.S. outward investment averaged

cent. of its exports but already by 1973 its foreign production was four tim
amount of U.S. exports.8
Promotion of foreign direct investment by industrial countries in deve
countries is therefore a cornerstone of the action programme decided up
the Second General Conference of the United Nations Industrial Developm
Organisation in Lima for an increase of the Third World share in
industrial production from seven per cent. in 1975 to 25 per cent. in
("redeployment").9 On the other hand, foreign direct investments can h
the development of the host countries by misdirecting their resources i
investor's interests, and in particular by substituting domestic econ
activities (project financing in the local capital market, supplantin
competitive local enterprises); by worsening the employment structure th
the introduction of capital-intensive production; by aggravating th
country's balance of payments through exorbitant profits'0 or by comb
direct investment with the mandatory import of expensive techn
packages;" by bringing about the production of goods which are
"inadequate" in terms of demand (luxury items instead of articles satisfying
basic needs). 12
The effects of foreign direct investment on developing countries cannot
therefore be judged as a whole; in every individual case they depend on
coordination with the economic and political interests of the host countries.
They must therefore be selected according to the requirements of the host
country and integrated into its development planning. By its nature, this falls
under the competence of the host government.
Host governments' attempts to regulate the flow of inward foreign direct
investment must be viewed against this background. Such attempts are
8. Halbach, Die deutschen Direktinvestitionen in der Dritten Welt im internationalen Vergleich, Ifo-
Schnelldienst 6/81, p. 13(14).
9. Second General Conference of the United Nations Industrial Development Organisation (1975) "Lima
Declaration and Plan of Action on Industrial Development and Cooperation", paras. 28 et seq. Developed
countries doubt the realism of this objective but support its general tendency (cf., e.g., Entwicklungspolitische
Grundlinien, July 1980, para. 44).
10. Empirical analyses have shown that the aggregate transfer of profits derived from direct investments in the
Third World far exceeds the amount of the investments (see Bos-Sanders-Secchi, Private Foreign Investment in
Developing Countries (1974) p. 31). Such studies overlook, however, the "indirect effects" of direct investment
(export promotion, import substitutions, etc.). If these are taken into account, foreign direct investment does, on
average, improve the balance of payments of the respective host countries (see Kebschull, "Ausldndische
Privatinvestitionen in Entwicklungslainden-Betrachtungen zur unterschiedlichen Interpretation der Wirkungen",
Hamburger Jahrbuch far Wirtschafts-und Gesellschaftspolitik (HWWA 1980) pp. 227, 235-236 and references
cited therein).
11. See The Acquisition of Technologyfrom Multinational Corporations by Developing Countries, ECOSOC
paper No. ST/ESA/12 (1974).
12. For references, see supra n. 7.
undertaken by providing "incentives" 13 for welcome investments, subjecting

investments to "performance requirements",14 and combining incentives with
performance requirements. Whilst such measures may well pursue the tangible
interest of the respective host country, they can impede the efficiency of the
international investment allocation process and may, in some cases, even have
adverse effects on international trade. This problem area is at present being
studied under the aegis of the International Finance Corporation (IFC)'5 as well as
by the Committee on International Investment and Multinational Enterprises of
the OECD (CIME), and is being discussed within the OECD and GATT
frameworks. 16
The need for a selective policy, however, concerns only the admission and
promotion of foreign direct investment - not its protection. Since protection
requires the existence of an investment, it can only play a role after selecting out
"undesirable" investments through admission decisions by the host
government. Thus the issue of legal protection solely arises with regard to
"welcome" investments. With respect to such investments, host countries'
interests dictate that they be attracted at the lowest economic cost possible. The
economic costs of investment consist primarily in the resulting capital outflow
in the form of profits or divestiture proceeds, and host countries must seek to
minimise investors' profits. Hence investment-importing countries have to
strive towards a "bi-polar" margin where, on the one hand, foreign
entrepreneurs are sufficiently motivated to invest and are, on the other hand,
satisfied with very modest profits. Inadequate investment protection, however,
runs counter to that optimum margin. Since enterprises make their investment
decisions on the basis of a risk-return analysis, 17 any increase in risk must be
balanced by a higher return; conversely, a lessening in risk permits a lower
return. If host countries offer below average legal protection, they can attract
"desirable" foreign direct investment (if at all) only at the price of an extra
premium for above average risks. This extra amount is included in costs like an
insurance premium: the "premiums" for numerous foreign investments
finance, almost like special reserves, occasional losses occurring from such risks
13. Investment incentives are government measures taken in order to stimulate investment. Six categories have
been identified: fiscal incentives, front-end cash grants, preferential access to local capital markets, public provision
of infrastructure specific to a particular investment project, provision of protective trade barriers to a sector in
which new investment is sought, and provision of an operating subsidy to the investor.
14. Performance requirements are restrictions on foreign investors to foster policy objectives and take two
forms: (i) structural controls such as limitations on foreign ownership of equity and (ii) performance requirements
relating to maximum levels of imported components and minimum levels of exports, domestic input and domestic
labour.
15. See Voss-Stoll, "The World Bank Group and Foreign Direct Investment in Developing Countries", C. T.C.
Reporter, No. 13 (Fall 1982), p. 47 et seq.
16. For the position of the United States which calls for a "GATT on Private Investment", see hearings before
the U.S. Senate Subcommittee on International Economic Policy of the Committee on Foreign Relations (97th
Congress, 1st Session).
17. See supra n. 15.
(principle of self-insurance through risk-spreading). 1' These "risk

are not usually calculated on the basis of objective factors, but rathe
subjective evaluations by individual investors. The reason for t
political investment risks do not lend themselves to easy quantificati
objective data. Even the political risk analyses which some institutio
United States sell at a rather high price18a hardly offer more t
guess". Because of the widespread "confidence gap" between inv
"exotic" host countries, subjective risk assessments presumably resu
generous risk premiums. Furthermore, countries regarded as "poor
well be forced to rely exclusively on large investors, since only such i
in a position to diversify their risks sufficiently."1 Smaller and m
enterprises are almost completely frightened away by insuffic
protection. This does not only mean a quantitative loss for de
countries, because a reduction in the number of investment offers r
price. There is, moreover, a qualitative disadvantage resulting from
that frequently smaller firms are in a better position than "big mul
to offer the technologies which the Third World needs most. Scari
firms away, therefore, cuts developing countries off from an especia
supply. Hence, a confidence-building investment protection system g
in the self-interest of developing countries. Only this enables them to
in the world-wide investment flow at the same economic costs as ind
nations have to bear and secures their supply with most adapted te
Lastly, the developing countries have a common interest in in
protection, because entrepreneurs hold the entire Third World
instabilities in one developing country. For example, the share of d
countries in German investments abroad decreased as a response
political disturbances in Iran from 38.1 per cent. in 1976, to 29.7 pe
1977, 20.8 per cent. in 1978, 13.9 per cent. in 1979 and 13.6 per cent.
The demand for a confidence-building protective framework
foreign investment needed in a development policy is countere
developing countries with their ideological perception of the p
"permanent sovereignty over natural resources and economic ac
18. See supra, text accompanying n. 3.
18a. The most famous of them is the "Business Environmental Risk Index" (Beri Report).
19. Cf. the statement of the European Economic and Social Committee, "Protection of Inves
Developed Countries" (Dec. 11, 1980) CES 1345/80, p. 5.
20. "Runderlass Aussenwirtschaft of the Federal Minister of Economics" (Bundesministerfiir Wi
11, March 3, 1981.
21. See, in particular, "Charter of Economic Rights and Duties of States", United Nations Gen
Resolution 3281 (XXIX), adopted Dec. 14, 1974, against the votes of most OECD countries; for furt
cf. Voss, "The Protection of European Private Investment in Developing Countries: an Appro
Concept for a European Policy on Foreign Investment - A German Contribution" (1981) 18 C
371. Many developed countries also acknowledge this principle, but deem it to be integrated withi
framework of international law; compare, e.g. Art. 1(2) of the International Conventions on "Civi
Rights" and on "Economic, Social and Cultural Rights", both of Dec. 19, 1966 to which many devel
have acceded (the Federal Republic of Germany in 1973; see BGB1 II, 1973, pp. 1534, 1570).
According to this perception, any restriction on the disposition of investment

by national law-makers in their sovereign territory contradicts the right of hos
countries to national self-realisation. Permanent sovereignty thus has
quashing effect on commitments entered into under international law.22
Foreign direct investment, because of its resultant control of production plant
by foreigners, is seen as an instrument for perpetuating the economi
dependence of the Third World. Politically and historically, the call for
"permanent sovereignty" is rooted in developing countries' demands for
economic decolonisation23 and is directed against investments forced upo
them through foreign political rule. However, the historic justification - the
removal of the after-effects of colonial rule24 - does not apply to post-
colonial investment which an independent host government has selected by an
independent admission decision. The significance of "permanent sovereignty"
does not stop with its historic function, however. The great waves of
nationalisation in recent years have always gone hand in hand with basi
domestic political upheavals in the host countries and have also hit post-
colonial interests - and in particular U.S. interests (Chile, Libya and Iran)
"Permanent sovereignty" is intended to establish firmly the right of host
countries to correct their own policies which have (allegedly) admitted private
investment against national interests - frequently in (real or pretended
collusion with the investor.
This demonstrates the interdependence between the admission/promotion
and the protection of foreign direct investment. An irreproachable admissions
policy - implementing national interests - removes justification from the
latent proviso of government encroachments under the cover of "permanent
sovereignty", and thus establishes the political prerequisites for stable
investment conditions. These, in turn, establish for the host countries the
prospect of foreign private investment on "fair" terms.
For the investment exporting countries, the correlations shown here suggest
22. See in particular U.N. G.A. Res. 3281, supra, Art. 2(a) of which calls for the right of every State "to regulate
and exercise authority over foreign investment within its national jurisdiction in accordance with its laws and
regulations and in conformity with its national objectives and priorities". As to the development and legal analysis
of "permanent sovereignty", see "Permanent Sovereignty over Natural Wealth and Resources", in
Miller/Stanger, Essays on Expropriation (1967); Bannerjee, S.K., "The Concept of Permanent Sovereignty over
Natural Resources: An Analysis" (1948) 8 Indian Journal of International Law 515; Brehme, Gerhard,
"Souverdnitdt der jungen Nationalstaaten aber Naturreichtamer (1967); Fischer, G., "La souverainete sur les
ressources naturelles" (1964) 13 I.C.L.Q. 398; Hyde, James N., "Permanent Sovereignty over Natural Wealth
Resources" (1974) 8 Journal of World Trade Law 239; Mughraby, Muhamad A., Permanent Sovereignty over Oil
Resources (1966); Kemper, Ria, Nationale Verfagung aber naturliche Ressourcen und die neue Weltwirt-
schaftsordnung der Vereinten Nationen (1976).
23. Cf. Kemper, op. cit. supra n. 22, and further references quoted therein.
24. This might explain the fact that 65 per cent. of all nationalisations and expropriations registered between 1960
and 1969 relate to British (53 per cent.) and French (12 per cent.) corporations (Statement of the Expert Group on
Foreign Relations of the European Economic and Social Committee on "Protection of Investment in Developing
Countries" (Nov. 14, 1980) CES 261/80, p. 12 and Annex (e)).
the following guidelines for investment policy: the host countries' decision
the admission and promotion of foreign private investment should be resp
and should not be influenced by private sector pressures or counteracted
government measures. Promotion policies should centre on and tie in wit
decisions and measures of the host countries.
Within the framework of development policy cooperation, in particular
technical cooperation, with developing countries, the latter should be made to
realise the importance of "confidence-building" investment protection as a
postulate of their own self-interests; they should have advice in defining their
foreign investment policies; their capability of duly representing their national
interests in negotiations with private investors should be strengthened, and the
foreign investment policies of capital export and capital import countries
should be coordinated with each other. Finally, efforts on a multilateral level
should be supported to create a framework of confidence for fruitful
cooperation between countries and private economic entities. 25
2. Interaction with Raw Material Supply Policy

A growing world economy requires increasing exploration and exploitation
of natural resources; these in turn attract global investment of risk capital and
technical know-how primarily from private enterprises in industrialised
nations.
Especially in ore mining, mobilisation of the needed risk capital appears as
the central problem for the future. Studies have shown that the present rate of
investment in mining and expenditure on exploration will be totally inadequate
for securing the raw material supplies needed at the end of the eighties. 26
The financing problem is aggravated by a growing tendency in recent years to
concentrate private endeavours in industrialised mining countries27 (U.S.A.,
Canada, Australia and South Africa) although in some developing countries -
including African countries - there are outstanding deposits (for example, in
Zaire, Guinea, Angola, Namibia, Zimbabwe). European mining concerns
25. For the German position with respect to direct foreign investment within the framework of development
policy, see Federal Ministry for Economic Cooperation, Die Entwicklungspolitischen Grundlinien der
Bundesregierung (1980) para. 43-46; Sanne, "Entwicklungspolitik als Aufgabe von Staat und Wirtschaft",
German Federal Government Bulletin, Nov. 4, 1980, No. 116, 985.
26. See, Commission of the European Community, "Instruments of Mining and Energy Cooperation with the
ACP 'Countries' ", COM(29) 130, March 14, 1979, pp. 2 etseq., and "Development of Private Investment from
EEC Countries into Developing Countries", COM SER (79) 194, Feb. 13, 1979, pp. 8 et seq.; Statement of the
European Economic and Social Council, supra n. 24, pp. 10, 11 and tables; German Federal Ministry of
Economics, "Bericht uber die Versorgung der Bundesrepublik Deutschland mit mineralischen Rohstoffen "(1980)
pp. 2104 et seq.; Halbach, "Die deutschen Direktinvestitionen in der Dritten Welt im internationalen Vergleich ",
Ifo-Schnelldienst 6/81, pp. 13, 20, table 9; Widyono, Benno, Preliminary Findings of Case Studies undertaken by
ESCAP, ECLA and ELA (1980) p. 28; DEG Deutsch-Afrikanische Industriekooperation in der
Rohstoffwirtschaft (1980) p. 61; Raymond Mikesell, unpublished study on behalf of the British-North American
Committee (1977).
27. Cf. United Nations Centre on Transnational Corporations Study, "Salient Features and Trends in Foreign
Direct Investments" (unpublished), tables 15 (p. 78) and 26 (p. 101).
show themselves especially reluctant to operate in developing countries.28

Neglecting ore deposits in the Third World, however, is in contradiction to the
global economic supply interest and in particular the interests of the European
Community. The latter is, in contrast to the United States, Canada and
Australia, almost completely dependent on imports.29 In almost all known
mining deposits, the large international and especially Anglo-American mining
concerns hold rights to them already as a result of a policy of long-term
"stockpiling" by these companies. The most promising possibilities for
European enterprises to acquire mineral deposits worthy of exploitation exist in
developing countries rich in natural resources, which up to now have been
shunned by international mining concerns because of their (supposed) political
instability, especially in African countries which only recently gained their
independence, such as Guinea, Angola, Namibia and Zimbabwe.
The supply interest of the European Community in mining activities in
countries with potential political risk is countered by a marked insufficiency of
European mining concerns. Their equity basis and earning power are relatively
weak, in comparison with the investment demands for efficient mining
projects, as well as in relation to their international, especially U.S.,
competitors. For example, the two private German associates in the largest
mining project with German participation - the copper/gold project Ok Tedi
in Papua New Guinea - have an equity capital of US$300 and 297 million,
respectively, according to their balance sheets for 1978-79. By comparison, the
balance sheets of the two international associates in the project, American
Standard Oil of Indiana and Australian Broken Hill Pty. Co. Ltd., show an
equity capital of US$7,146 and 2,562 million respectively. 30
The clear-cut and still increasing tendency of mining companies to
concentrate on "safe" industrialised and threshold countries and to avoid
geologically and economically exploitable deposits in politically "dubious"
countries, shows the outstanding importance of investment protection for this
sector. This is due to the special situation of the mining industry. A small
number o f projects require unusually high investment volumes; "economies of
scale" call for ever larger projects with investment amounts which exhaust the
capabilities of even international concerns and frequently overtax European
firms. 31 As a rule, about ten years elapse between exploration and the start of
28. See supra n. 26.

29. EC, COM(29) 130, supra n. 26, pp. 3 et seq., EC, COM SER (79) 194, supra n. 26, p. 6.
30. For a detailed comparison of the financial structures of mining companies, see Sames-Wellmer, Das
Explorationsprogramm der Bundesregierung-Bilanz nach 10-jihrigem Bestehen, Gluckauf 116 (1980) No. 24,
1296, 1297 and table.
31. Cf., for the Federal Republic of Germany, Federal Minister of Economics, supra, n. 26, pp. 4 et seq., 108.
For the immense cost increase in recent years, see e.g. M. Radetzki, "The Rising Costs of Base Metals - The Case
of Copper", Mining Magazine, April 1979.
OCTOBER 19821 Investment Protection and Promotion 695
production from a mine. 32 It is during this "lead time" that the essen
has to be invested. This means pre-financing of ten or more years u
beginning of amortisation and interest. The project is tied to a geol
the investor cannot therefore move in the case of political unre
projects are subject to particularly high political risks which th
European enterprises especially cannot diversify. Thus, their supply i
vital natural resources on the one hand, and the disadvantages o
investment conditions on the other hand, demand that the E.C. cou
particular pursue an active foreign investment policy in the area of
resources. 33 To achieve this, they must use their combined political i
the countries with raw materials to work towards a protection f
specifically tailored to the demands of mining investment. They
reduce the risk for European mining operations through supp
government measures and, if necessary, improve the risk-return ratio f
investments through government promotion measures. Finally, they
opportunities for common action - spreading risks by combining in
and towards this end they must cooperate with each other, as well as
raw material importing countries.
3. Interaction with Trade Policy

Results of polls, 34 as well as the sectoral and regional structure o
direct investment,35 show that sales strategy aspects are the
investment motive. The importance of investment for sales purposes
does not make foreign investment policy a part of trade polic
government actions in this field do not primarily pursue trad
objectives and do not need to do so. The very large proportion
orientated foreign investment demonstrates the adequate, aut
performance capability of the market economy; where trade interest
investment abroad, it is undertaken without government support. P
measures are therefore justified only in exceptional cases. 36 Even i
protection plays only a comparatively small role in purely sales-
32. Gries, "Providing new sources for US mineral supply", U.S. Bureau of Mines, I.C. 8789 (1
33. For proposals of specific courses of actions to be taken by the European Community within th
of cooperation with the "ACP" States, see COM (79) 130, supra n. 26, at pp. 4 et seq.
34. Most recently: Ifo-Institut, Investitionspolitik der Entwicklungslinder und deren Auswirk
Investitionsverhalten deutscher Unternehmen, a study on behalf of the German Federal Minister o
(hereinafter cited as "Ifo-Studie") pp. 167 et seq.; Deutscher Industrie und Handelstag (DIHT) In
Ausland: Was deutsche Unternehmen draussen erwartet (1980) pp. 59 et seq.
35. Worldwide, marketing-orientated sectors of manufacturing industry (chemicals, engineering
food products, motor vehicle industries) take the lead in foreign investment: see, e.g., Halbach, "D
Direktinvestitionen in der Dritten Welt im Internationalen Vergleich", Ifo-Schnelldiest 6/81, pp. 1
tables 7 to 9. Concentration on industrialised countries (75 per cent.) and a few threshold countries w
domestic markets, in particular Brazil, Spain, Mexico, Indonesia (Halbach, supra, pp. 16 et seq. and t
Ifo-Studie, supra, pp. 26 et seq.; "Salient Features", supra, n. 27, pp. 36 et seq.).
36. Cf. supra pp. 687-688.
foreign investment; the risk and return requirements on the project are offs
through trade gains induced by the investment,37 and sales interests call fo
large projects almost exclusively in "safe" industrialised and threshold
countries with attractive domestic markets.
Trade policy and foreign investment policy interests may even be in conflict
with each other, as illustrated in the following conflict situations:
(i) Foreign investment policy versus trade policy

Import restriction measures by the host countries clearly violate trade policy
interests; nevertheless, for development policy reasons, investments favoured
thereby may for once deserve protection and promotion if the restrictions
consist only of specific measures and for a limited time, in order to protect
newly established industries.
The imposition of processing conditions tied to raw material concessions or
options are also against the interests of free trade; nonetheless, their interest in
raw material supplies might dictate home countries to protect and promote
capital investment complying with such impositions.
(ii) Trade policy versus foreign investment policy

Subsequent changes in investment conditions violate investment protection
standards, yet they may be required by trade policy interests, e.g. when a host
country, in fulfilment of a self-restraint agreement with the European
Community, restricts export quotas (as in the case of textile branches in
Thailand).
(iii) Foreign investment policy within the sphere of conflicting trade policy
objectives
Trade policy is characterised by a bi-polarity of its aims: on the one hand, it is
called to bring about an international division of labour according to market
economy rules through the removal of trade barriers; on the other hand, it must
protect the domestic economy of the home country. In principle, the former
goal coincides with the aims of foreign investment policy. Investment
protection policy in particular strives for the free flow of capital resources -
"investment liberalism" - as a corollary of the free exchange of goods -
"trade liberalism". 38
Foreign investment policy can, however, work against the second goal of
trade policy by favouring capital investment which transfers production abroad
(loss of export, jobs, etc.). Yet as long as only production which cannot survive
37. Cf., supra n. 34, p. 61.

38. Cf. supra pp. 687-688.
competition in the home country is transferred abroad, foreign investmen

again promotes export by "saving" it for investment in goods, accessories a
pre-products.
Thus there exist complex interrelationships between foreign trade policy a
foreign investment policy;39 in the individual case they need selecti
coordination of the objectives sought through both trade and investment.4
4. Interaction with Industry, Employment, Currency and Fiscal Policies

Foreign direct investments touch upon interests pursued by industrial poli
in a similarly complex manner.41 On the one hand, the outflow of t
investment may be contrary to the industrial interests of capital exportin
States: through the transfer of production abroad which could survive in t
home country; by blocking technical innovations because of availa
alternatives; and through the withdrawal of investment capital from
domestic economy. On the other hand, foreign investment may bring abou
innovations of location desirable for industrial policy. For example, t
transfer of individual production steps to less expensive countries may per
mixed costing and thus retain international competitiveness for products fro
the capital-exporting country.
The trade and industrial aspects of foreign direct investment sketched h
are closely connected with their importance for the employment structure of
home country. Inasmuch as investments replace exports, they destroy jobs;42
the extent that they protect exports, they save jobs. Numerous studies have b
devoted to this subject, empirical studies in particular.43 It is the major
opinion that, over-all, foreign direct investment has positive repercussions
the employment structure of the home countries." For a concrete fore
investment, however, the evaluation depends on the specific circumstan
involved.
Lastly, foreign direct investment also affects currency and fiscal policies. The
numerous points of contact cannot be presented here; only one fact merits
39. See, in detail, Koch, Auslandsinvestitionspolitik und Aussenhandelspolitik im Konflikt: eine
wirtschqftspolitische Studie auf Branchenebene, a study on behalf of the German Minister of Economics
undertaken by the Research Institute for Economic Policy at the University of Mainz (1980).
40. Koch, supra n.39, pp. 183 et seq.
41. For the general problem area, see Halbach, "Produktionsverlagerung in Entwicklungslander", Ifo-
Schnelldienst No. 35/1976.
42. An empirical analysis shows that the number of jobs which were lost in the Federal Republic of Germany as a
result of shifting textile production to developing countries varied between 180,000 and 480,000 in the years 1972 to
1975 (Dicke, "Beschiftigungswirkungen einer verstarkten Arbeitsteilung zwischen der Bundesrepublik
Deutschland und den Eiltwicklungslindern", doctoral dissertation, Ttibingen 1976, p. 146).
43. For a study of the effects of foreign investment on the job markets of the E.C. States, see I.F. Bandry, "The
Effect of Changes in the International Division of Labour between the European Community and Developing
Countries on Community Employment", Centre Interuniversitaire des Recherches en Sciences Humaines (1978);
for a thorough survey of American, British and German studies of the problem, see Kebschull et al., Wirkungen von
Privatinvestitionen in Entwicklungslindern (1980) pp. 132 et seq.
44. See, in particular, Kebschull, supra n. 43, at pp. 145 and 156, with a synopsis of opinions in the United States.
particular mention. Most of the European investment protection and

promotion systems - the German one in particular - were developed in the
early sixties when it was a matter of feeding balance of payment surpluses back
into the economic cycle.
C. Foreign Investment Policy in the North-South Sphere of Interests

The pronounced demands of the developing countries for rapidly increasing
participation in world industrial production, on the one hand,45 and
widespread nationalisation tendencies at the expense of raw material industries
since the sixties, following their ideology of "permanent sovereignty over
natural resources",46 on the other hand, suggest opposing investment policy
interests between developing and industrialised countries; the former being
primarily interested in natural resources investment, and the latter in capital
investment in processing industries.47
Three observed facts challenge the validity of this suggestion. World-wide,
disproportionately large raw material investments flow into industrialised
countries, even at the cost of comparative geological and economic
disadvantages.48 Evidently, Western enterprises increasingly prefer to
"exploit" their own countries and to forego the mineral resources of the Third
World. Investment in the processing industry, that is sales and cost orientated
investment, is concentrated in a few threshold countries.49 Yet even the poorer
developing countries, especially those of Africa, participate in natural
resources investment.50 Capital investment in processing industries
presupposes a relatively high level of development (market with purchasing
power, infrastructure, human resources) which is exactly what is lacking in the
poorer developing countries, the major target group of development efforts.51
In contrast, investment in natural resources is based less on structural than on
geological prerequisites; therefore, even poorer developing countries have a
chance. A sensible development policy builds on the available potential of a
country. 52 For many developing countries this exists exclusively in their natural
resources.
Hence, the channelling of investment into natural reso

according to their geological and economic properties, and
political investment barriers, serve both developmental and r
45. 25 per cent. goal of the "Declaration of Lima", see supra n. 9, at p. 6.

46. See supra, at pp. 691 and 692.
47. According to this theory, investments in raw material projects are supposed to perpe
the Third World as a homogeneous supplier of natural resources and only the shifting of m
will gradually integrate developing countries into the world economy.
48. See supra pp. 693 et seq.
49. See, Ifo-Studie, supra n. 34, at pp. 27 et seq., including detailed statistics.
50. Cf. Ifo-Studie, at pp. 31 and 56.
51. Cf. Wissenschaftlicher Beirat, "Neue Weltwirtschaftsordnung", supra no. 5, at p
52. Cf. Wissenschqftlicher Beirat, "Neue Weltwirtschaftsordnung", at p. 45.
objectives and therefore combine the interests of North and South. Th

of the North is obvious: a supply of natural resources which is more d
and increased, and therefore surer and cheaper. Yet the Third World a
urgent self-interest in the development and utilisation of its resourc
numerous developing countries, rich in natural resources but financi
(for example, Zaire, Namibia and Angola) the development of thei
resources offers their only chance of breaking through the vicious circ
perpetuating poverty and underdevelopment; for them, investment in
resources is a pioneering investment they cannot do without. It can pr
economic potential necessary for establishing other industries. P
industries especially can then tie in with the raw material produced. An
of the opportunities offered by the development of natural resource
diversified industrialisation in many OPEC countries, and some
developing countries rich in natural resources (for instance, Br
Malaysia). 53 Thus the development of productive mineral deposits -
foreign direct investment required for it 54 - are in the common in
developing and industrialised countries alike.
Moreover, outside the area of raw material, investment protection
generally combines the global interest in the most efficient allo
resources with development policy goals 55 and, therefore, the interests
and South. Investment promotion policy, on the other hand, is invol
more complex interplay of interests, some contrary, some complemen
it must therefore be decided on the basis of an ad hoc evaluation whether
promotion is deserving. 56
The following conclusions reflect the correlations outlined here. Foreign
investment policy is an independent area of foreign economic relations. Foreign
investment protection policy realises a goal which links the interests of the world
economic community in dynamic allocation efficiency with developmental
interests. The interest in investment protection exists generally and
independently of other targets. Investment promotion policy receives its targets
and justification from objectives outside foreign investment policy; there is no
investment promotion interest per se. These objectives are rooted in very
different policy domains so that foreign investment policy cannot be placed in
any specific sector of foreign economic relations. In addition, the promotion of
foreign investment may place it in conflicting areas of differing political
53. See, in detail, EC COM(79) 130, supra n. 26, at pp. 1 et seq.
54. This does not, however, hold necessarily true for host countries with relatively strong balance of payment
positions: in the oil sector, in particular, other forms of industrial cooperation have, to alarge extent, taken the place
of direct foreign investment (so-called "non-equity arrangements on industrial cooperation"; see Pollak,
Christian, "Neue Formen internationaler Zusammenarbeit ohne Kapitalbeteiligung", Ifo-Institut (1982) a study
on behalf of the German Federal Minister of Economics). In the mining sector, however, most developing countries
still depend on foreign equity capital.
55. See supra p. 687.
56. See supra pp. 687 and 688.
interests. This makes selection necessary. It appears politically expedient to

distinguish clearly between investment selection/promotion/regulation, on th
one hand, and investment protection, on the other. Whereas the former are
requires a balancing of conflicting economic interests, North and South share
common interest in appropriate investment protection. Foreign investment
policy (protection and promotion policies) is most closely interrelated with
interests and requirements regarding raw materials. In this field there exists
basic congruence of interests between North and South in investment
protection and investment promotion. Here the requirements of effecti
investment protection are demonstrated most convincingly. Since the specia
situation of investment in natural resources has the greatest protection needs,
includes at the same time those required for investment in other areas. 7
While North and South are united by a common economic interest in the
removal of any political and legal investment barriers, their policies reflect su
a common interest to a very different extent in bilateral contacts and on th
multilateral plane. On the one hand, numerous States have concluded or are
the process of negotiating "investment protection treaties" which mutually
safeguard their respective investments under international law. 5 Als
numerous initiatives towards multilateral agreements on investment protectio
were launched 59 in order to transform common interests into "a synergism
cooperation". 59a While the networks of bilateral treaties are, however, bein
consistently extended, all multilateral endeavours have failed so far. There i
57. A difference between the extractive sector and the processing sector exists with regard to the impact of
political risks on investment decision-making. Mining companies will usually shy away from "worthy" project
no sufficient legal protection is accorded to their investment, since they cannot properly spread their risks. Ot
industries which are in aposition to diversify their political risks might invest in spite of alack of legal protection. Bu
the host country has to counterbalance legal risks by paying a "risk premium".
58. For the concept and use in practice of the German "investment promotion agreements", see Alenfe
Justus, Die Investitionsfdrderungsvertrige der Bundesrepublik Deutschland (1971). "Modifications" of su
treaties are the treaties on friendship, commerce and navigation which integrate investment protection withi
much broader range of economic cooperation between the contracting States (cf. Walker, "Modern Treaties
Friendship, Commerce and Navigation" (1958) 42 Minn. L.R. 805. In particular, they provide, on a recipro
basis, for the free flow of investment, whereas "investment protection treaties" restict themselves to setting do
protection standards, leaving the admission of investment to the discretion of host governments. (For a comparat
analysis of German "Investment Promotion Agreements" and U.S. "Friendship, Commerce and Navigatio
Treaties", see Frick, Hartmut, Bilateraler Investitionsschutz in Entwicklungslandern: ein Vergleich
Vertragssysteme der Vereinigten Staaten von Amerika und der Bundesrepublik Deutschland (1974). The so-calle
"OPIC agreements" which the U.S. investment insurance agency, Overseas Private Investment Corporati
(OPIC), has concluded with developing countries do not incorporate any substantive investment protect
standards, but restrict themselves to providing for international arbitration on all claims OPIC acquires against h
countries from insured investors by way of "subrogation" (note the similarity of this approach with the "ICSI
concept). At present, the U.S. is embarking on the negotiation of investment protection agreements which follo
the European example (cf. Zagaris, "Draft Bilateral Treaty Seems Approved", 4 INVESTMT/USA 8 (No. 1, 19
8). For a comparative survey on the contractural systems of OECD countries, see OECD Report, Investing
Developing Countries (1978).
59. See, e.g., OECD Draft Convention on the Protection of Foreign Property (1967) OECD Publication N
23081 (1967); a complete bibliography is to be found in Browndorfard-Riemer (Eds.), Bibliography
Multinational Corporations and Foreign Direct Investment.
59a. World Bank President A. W. Clausen, in a speech given at the 1981 Annual Meeting of the World Bank a
International Monetary Fund on Sept. 29, 1981 in Washington, D.C.
only one example of multilateral accomplishment in this area: th

Declaration on International Investment and Multilateral Enterprises of
which includes guidelines for multinational enterprises, a pledge
member States on "national treatment" of multinational enterpr
provision for government consultations on investment incenti
disincentives.61
Under the aegis of the United Nations, the Working Group on a
comprehensive Code of Conduct for Transnational Corporations finished its
work in May 1982. The draft code which emerged addresses transnational
corporations as well as their host countries - the former by setting down rules
of good conduct and the latter by the stipulation of standards of fair treatment
of such corporations. Whereas the draft code reflects a considerable amount of
international agreement in respect of rules of good conduct, the lengthy
negotiations - 17 two-week-long sessions of the Working Group over the past
five years - left important issues concerning the fair treatment of transnational
corporations controversial, notably the interrelated issues of nationalisation/
expropriation and compensation, jurisdiction, and national treatment. 62 The
inability to agree on these issues reflects the inherent difficulty, if not
impossibility, of agreeing on universally accepted investment protection
standards.
Hence, progress towards more stable investment conditions seems only
possible where, as is generally the case with bilateral contracts, concrete
projects, rather than abstract principles, are discerned, so that the tangible
economic interests become apparent.63 It, therefore, follows that investment
protection should be primarily rooted in bilateral policies, and that multilateral
endeavours ought to aim at supporting bilateral ones, for example, by devising
service facilities which are to be utilised on the basis of ad hoc decisions by
countries and investors interested in a specific project. 1
60. OECD Publication No. 37.431 (1976).

61. For a survey on the various international "codes of conduct", see Horn-Schmitthoff-Buxbaum, "Legal
Problems of Codes of Conduct for Multinational Enterprises" in Studies in Transnational Economic Law (1980).
62. Compare the Report to the Eighth Session of the Committee on Transnational Corporations of the
Intergovernmental Working Group on a Code of Conduct (E/C10/1982/6, June 5, 1982) to which a draft code is
attached.
63. As to the reasons for this phenomenon, as well as the result and dilution of international customary law as a
means of protecting foreign investment by way of U.N. Resolutions, see Voss (1981) 18 C.M.L. Rev. 363 and 371 et
seq.; for the efforts of the European Community to integrate bilateral investment protection treaties within the
framework of multilateral cooperation agreements, cf. Voss, ibid., pp. 364 et seq. and 380 et seq.
64. Such an approach has already been chosen by the establishment of the International Centre for Settlement of
Investment Disputes (ICSID) in 1966 (for its Articles of Agreement, see 575 UNTS 160; see also Sutherland, "The
World Bank Convention on the Settlement of Investment Disputes (1979) 28 I.C.L.Q. 367). ICSID provides an
international dispute settlement mechanism which is availableto host countries and investors if both so agree in their
investment contracts. The renewed efforts to establish a Multilateral Investment Insurance Agency under the
auspices of the World Bank are centred on an instrument which does not, by its very existence, impose any rules but
which offers an insurance service to countries and investors at their free choice.
II. INTRICACIES OF INVESTMENT PROTECTION
Cases of the outright deprivation of investors without compensa

infrequently. In particular for post-colonial industrial investm
statistical probability of evident expropriation or nationalisation
Practice shows, however, a broad range of host country measures an
conduct which, in their economic consequences, are tantam
expropriation without compensation, but cannot easily be legally iden
at least, not proven as constituting expropriations.
In this "grey zone" belongs, first of all, interference with the prope
of the foreign investor which camouflages expropriations through t
apparently lawful means - that is by the application of tax or admin
laws. The following practices have been observed:66 prohibitive t
profits, interest income and revenue from licences; forced sales of
interests to local partners or employees; depriving the investo
management rights flowing from his equity holdings, e.g. by a
government inspectors; indirect transfer restrictions by means of t
delays by central banks.
Of even greater practical importance than such interference w
substance of the investor's property rights - his "substantive prope
the conduct of a host government which, in the long run, deprives the
of its capacity to operate at a profit, or even at cost, and dilutes th
value of the investment - infringements with the "functional proper
investor. Among such infringements are the following: restri
procuring raw materials (import restrictions, cash deposits, customs d
of local pre-products, etc.); restrictions related to production techni
the selection of technical procedures); restrictions on production (re
concerning products, line of business, prohibition of competit
restrictions under labour legislation (hiring and firing of employees,
local personnel for managerial and technical positions regardless
qualifications, training requirements, minimum wages, social benefi
environmental restrictions (obligations to contribute to the infrastr
requirements or restrictions on the marketing of goods (export restr
of specific marketing channels, etc.); restrictions on establishi
(maximum prices); financial restrictions (exclusion from the loc
market, ratio between equity and borrowed capital, etc.); require
65. Cf. supra n. 24. For a table on nationalisations and compensation settlements between 1951
Bring, Ove E., "The Impact of Developing States on International Customary Law Concerning
Foreign Property" (1980), pp. 118 et seq.
66. The examples given on the following pages are taken from: Ifo-Study, supra n. 34, at p
Paetzold-Petersen, "Politische Investitionsrisiken in Entwicklungslindern: Erfahrungen d
Materialien No. 6 (1978), p. 24 and the author's observations on the administration of the Germ
guarantee scheme.
OCTOBER 19821 Investment Protection and Promotion 703
restrictions regarding the site of a plant; relations with local authorit

procedures for obtaining permits, etc.); legal uncertainty reg
enforceability of claims; breaches of commitments entered into by
governments, especially with regard to the purchase of the p
allocation of raw material quotas, in particular, where the governm
monopolistic buyer of the product or the monopolistic supplier
materials, as well as measures concerning the infrastructure; the ex
shareholders' rights by the host country as shareholder in the joint
the detriment of the interests of the enterprise, in particular if the
has acquired the holdings from local partners (e.g. through exp
measures directed against the latter, as in Iran); denial of legal prot
instance in cases of occupation of the plants, illegal strikes, etc.).
Measures of this nature may be justified by restrictions inherent in
rights, including those of foreigners, in order to accommodate soci
Restrictions under labour legislation or for the protection of the env
may be quoted as examples. Or such measures may implement
development goals of the host country (e.g. restrictions on capital-
the local capital market, requirements that only locally-produced p
be used, etc.). If such restrictions, however, preclude profitable or,
cost-covering operations of the enterprise, they dilute the economi
of the investment and have the effect of an uncompensated exprop
particularly if applied discriminatorily (distortion of compet
retroactively (so as to frustrate the calculation underlying the i
decision). A representative poll among 500 enterprises on behalf of th
Federal Minister of Economics on the investment disincentive impa
listed factors 67 confirmed that conduct in the "grey zone" is conside
risk factor specific to developing countries. Difficulties in dealing
authorities were rated as the most significant disincentive (in first p
the 17 factors with 58.8 points while the danger of nationalisation
only in 11 th place with 26.4 points).
Next to '"disguised expropriation" comes "creeping expropriation"
of measures or events attributable to the host country none of wh
alone, is significant enough to constitute a violation of investors' ri
which collectively dilute or even destroy the economic substa
investment. The most subtle and efficient example is probabl
administrative harassment by local authorities: the individual act or
appears accidental but, taken in its entirety, such treatment re
investor's venture unmanageable. Another example arises where
disturbances gradually evolve in host countries and increasingly
encroachments on investor's ventures. Thus, the destruction of
67. Ifo-Studie, supra, p. 186.
company, a majority of which was held by a German parent company, started

in November 1978 (when the Shah was still in office) with politically motivated
strikes and harassments of the German management which impaired the
plant's operations. Then in February 1979, a "workers' committee" actually
took over the management of the enterprise with the acquiescence of the
revolutionary Khomeini regime which had seized power in Iran at that time.
Shortly afterwards, in March and April 1979, the Khomeini government placed
"directors" on the board - superseding the representatives of private Iranian
shareholders whose equity had been confiscated in the meantime - with an
instruction to exercise their mandates in the interests of the revolutionary
regime and to the detriment of the venture. Finally, in May 1980, the Iranian
Ministry of Industry appointed a new directorate, thereby denying the German
majority shareholder all its rights. In such a context, the question arises whether
the many single acts and omissions involved integrate to form a single process of
"creeping expropriation" and, if so, which particular step in the process
constitutes the expropriation and gives rise to a claim to compensation. The
Iranian example illustrates a second problem: if the act completing the take-
over of the investment in May 1980 is the relevant one, the Iranian government
might well have agreed to compensation for, at that time, the investment was
practically worthless.
Even where an investor overcomes the obstacles outlined above and
substantiates an expropriation, his claim to compensation is by no mean
assured by any generally accepted rules. Under the famous "Hull doctrin
expropriating States owe "prompt, adequate and effective" compensation to
investors.68 Adequacy, under this formula, has to reflect the full market valu
of the investment as "a going concern" at the time of its expropriation, i.e. th
price which a "reasonable purchaser" would pay under the same circumstanc
as those of the investor.
In cases such as the Iranian expropriation, no such market value can
however, be ascertained with any degree of certainty. At the time th
encroachments on foreign investments took place, the general politic
framework in Iran had already deterioriated to such an extent that a
"reasonable purchaser" would hardly have acquired the investment at a price
equivalent to its value under "normal circumstances". Furthermore, a recent
study on behalf of the United Nations Centre for Transnational Corporation
of all 154 compensation disputes settled between developing countries and U
investors during the 1970s69 shows that a "full" or even "fair" market value
68. Developed by U.S. Secretary of State Hull in dealing with the Mexican expropriations of U.S. agrarian and
oil properties between 1915 and 1940 (cf. Skinner and Vagts, Transnational Legal Problems (2nd edn. 1976) p
418 et seq.).
69. Sunshine, Russel B., "Terms of Compensation in Developing Countries' Nationalisation Settlements"
(1981, unpublished).
test did not prevail in those cases. Rather, the patterns of actual com
terms emerged from complex negotiations and varied largely accord
respective bargaining positions of the host governments and investors
Frequently, the position of investors is impaired by the circumstanc
situation more than by legal uncertainties. Their overall interest
country are often not restricted to the economic return on a specific
but include the safety of their personnel stationed in that country, ex
imports from it, interests of business associates in the country conc
the like. As a result, host governments can prevent investors from
their rights, and especially from requesting diplomatic protection f
home country, by threatening reprisals against other unprotected an
unprotectable interests. Thus, German investors in Iran who were in
the German government against "political risks" 71 filed their claims
they had abandoned virtually all their interests in that country. The
reason for this was that by filing their claims they would have
diplomatic steps by the German Government against the Iranian Gov
which, in turn, would probably have reacted by taking reprisals aga
exposed interests of the claimants.
III. CONCLUSIONS AND POLICY CONSIDERATIONS
The effectiveness of any investment protection and insurance system dep

on the extent to which it shields investors from "disguised" or "creep
political interference, safeguards claims which actually compensate fo
losses suffered as a consequence of such interference and secures an invest
ability to assert his rights without fear of reprisals against unprotected bus
interests. Stipulation of rights restricted to "clear and evident" cases, eithe
investment protection agreements or in pertinent insurance conditions, do
establish standards for avoiding or resolving the kind of conflicts which,
practice, threaten investors and frighten them away from developing coun
Only standards outlining investment protection and insurance with adequa
precision and comprehensiveness are able to contribute to a narrowing of
"confidence gap". It is therefore suggested that precise covenant
incorporated in investment contracts which provide for the degree
cooperation with the host government essential to the successful operation
the venture (e.g. import licences for specified pre-products, secured quota
essential raw materials, terms on taxation and royalties, conditions
renegotiations and time scales tailored to the specific circumstances).
70. See, Sunshine, supra, pp. 64 et seq.

71. Almost all OECD countries and, recently, even some capital-exporting developing countries oper
investment insurance schemes whereby they offer their nationals or residents insurance on their investme
developing countries against "political risks". The agencies cooperate - along with national export
insurances - within the framework of the International Union of Credit and Investment Insurers (Berne Un
covenants should be "stabilised" by investment protection agreements and

investment insurance terms. 72
While "disguised" and "creeping" expropriation do not lend themselves to
proper delimitation, there could and should, nevertheless, be criteria of
investor protection and insurance provision which cover at least the more
obvious threats to investors. Discriminatory application, retroactivity and
diluting the economic substance of the investment are appropriate criteria
against "disguised" expropriation. A series of State interferences might be
identified as "creeping" expropriation if single acts of interference are linked
by political intent, indicated by discrimination against foreign investment vis-d-
vis local investment; if interference began only after foreigners invested in it,
and if acts of interference in their aggregate impact make it impossible for the
venture to operate, in the long run, without loss. 7 Admittedly, each of the
suggested criteria sets a rather vague standard. Applied together, however, they
allow reasonably foreseeable results. At least cases which meet all of the
suggested criteria could be identified as involving "disguised" or "creeping"
expropriation. Moreover the time of the first expropriatory act or omission
should be relevant for computing the compensation.
Investment protection is credible only when it has been proved to be viable in
actual cases of conflict. Considerations of political expedience and substantive
difficulties may easily lead to non-enforcement of investment protection
standards in an actual situation of conflict. Frequently, the stress placed on the
political relationship between the countries involved in such a conflict is out of
all proportion to the amount of compensation in dispute, particularly where
investments by medium-sized and small enterprises are at stake. Moreover, the
facts of the case may often appear complex and impenetrable to the home
government. In Iran, for example, specific acts of interference with investors'
interests and the general deterioration of the political and economic context
have almost inevitably led to the losses suffered by investors. If one accepts the
notion broadly advocated74 that only losses from specific encroachments
on investments entitle investors to claim, and that those arising from a
deterioration of the general situation in the host country belongs to an
investor's entrepreneurial risk, then in the individual case the recoverable losses
incurred through specific acts of interference must be quantified separately
from the non-reimbursable devaluation of the investment caused by the general
72. E.g., the German Model Treaty on the Encouragement and Reciprocal Protection of Investments provides
in Art. 8(2) for such a "safeguard clause".
73. Compare the German General Conditions for the Assumption of Guarantees for Investments in Foreign
Countries, s. 5(2)(b).
74. For example, by the German Government in the interpretation of its investment guarantee terms.
situation - an almost impossible undertaking. 17 In considering isolat

therefore, the principle of political commensurability may well indi
doubtful claims are not to be met. If this were applied in practice, ho
would progressively undermine the effectiveness of investment prote
rob it of all credibility, since small and medium-sized investors especi
only expect their interests to be sacrificed to opportunistic political e
Furthermore, investment guarantees which offered compensat
generous scale only shift the problem, without resolving it. This wo
encourage host governments to interfere with foreign capital investm
any resulting compensation costs would be passed on to investment in
the capital exporting countries. As a result, compensation would be f
either by all insured enterprises, through higher premiums, or
resources of the home country, through higher subsidies. In the final
compensation would be at the expense of the community of de
countries as a result of either higher investment costs, 76 or as
of a corresponding decrease in official development assistance. Comp
would thus enable "radical" host governments to appropriate resourc
expense of "moderate" ones. 77
For these reasons, the German Government, for example, in
adherence to investment protection standards under treaties it enters
other States and under international customary law. Where breaches
standards establish claims under domestic investment systems, the f
reactions are at its disposal: diplomatic support for the negotiatio
investors concerned; consultations at governmental level; suspe
investment guarantees and D.E.G.78 commitments to the country in
discussion of the matter in the Inter-ministerial Committee for Inves
Guarantees with participation by representatives of industry; notice
situation to the investment insurers united in the Berne Union; if nec
appeal to the ad hoc arbitration tribunal on the basis of the relevant in
promotion treaty provisions; if necessary, the inclusion of the
discussions on financial cooperation.
In the past it has usually proved possible to find appropriate s
75. Interestingly enough, the payments already made by the major national investment insur
contingencies (e.g., US-OPIC, French-COFACE, British-ECDG, German-Treuarbeit) without any r
proceedings indicate that this issue is being resolved in favour of insured investors by the application
reason".
76. The premiums are very likely to be "rolled over" to the host country as costs of the project (cf. supra p. 690
77. Those facts are apparently overlooked by authors who advocate that home countries' investment insurers
should indemnify investors and waive recourse vis-d-vis host countries, the shifting of the compensation from t
host country to the taxpayer of the home country being justified as a sacrifice fostering peace (Boulanger, Franc; ois,
Les nationalisations en droit privd (1975) p. 2621, cited with cautious sympathy by Seidel-Hohenveldernm
Versicherung nichtkommerzieller Risiken und die Europiische Gemeinschaft (1977), p. 176).
78. The DEG (Deutsche Entwicklungsgesellschaft) is a corporation wholly owned by the Federal Republic which
undertakes equity participations and loans in ventures located in developing countries; its international equivalent
the International Finance Corporation (IFC).
through negotiation and consultation with host governments. In most cases,

agreements have been reached in the course of such negotiations which have
averted claims under the insurance system. Thus, while the German investment
insurance system underwrote an aggregate amount of DM 4.574 billion within
the 20 years of its existence up to December 31, 1980, its actual payment on
claims totalled only DM 1.8 million net (that is, original payments of DM 8.8
million, minus DM 7 million recovered from host countries). Only in the case of
Iran is there no apparent progress.
Investment protection can only be carried out within the framework of close
political cooperation. In most problem cases experienced by Germany, the
political will to keep cooperation free from strain made possible a coming to
terms. The political will is indispensable not only because of the difficulties in
enforcing claims under international law, but also, and especially, because the
home country can hardly establish the facts needed to justify and quantify
claims without the cooperation of the host country, the complexity of the
situation almost always leaving it open to the host government to make counter-
allegations. Thus, Germany recently settled a dispute "in the spirit of the
investment promotion treaty and friendly bilateral relations", after no
agreement had been reached during negotiations on how to compute
compensation that had lasted for five years. The efforts made - so far without
results - to solve the situation in Iran confirm the importance of the political
will to come to terms. As long as a country refuses to give economic cooperation
to another and places itself outside the rule of international law,9" any
investment protection arrangement will be prone to fail.
Investment protection can be secured only in part contractually and
administratively. At least as important are efforts made to spread the political
conviction that such protection is in the common interest of the world economic
community and therefore transcends individual cases.
79. Iranian authorities described the reference to the German-Iranian investment protection treaty by
representatives of some investors as "an insult to the Iranian revolution".

British Institute Article Explores Foreign Investment Protection

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British Institute of International and Comparative Law

The Protection and Promotion of Foreign Direct Investment in Developing Countries:

Cambridge University Press, British Institute of International and Comparative Law

I. INTERESTS AND INTERDEPENDENCIES

A. Investment Protection versus Investment Promotion

Direct investment means the investment of money, goods or services in a project

international law - realisation of a diplomatic protection of assets - but of

a cost-return analysis considering the entire economy, which weighs the

B. Investment Protection and Promotion within the System of

1. Interaction with Development Policy

United States: from 1975 to 1979, U.S. outward investment averaged

undertaken by providing "incentives" 13 for welcome investments, subjecting

(principle of self-insurance through risk-spreading). 1' These "risk

According to this perception, any restriction on the disposition of investment

2. Interaction with Raw Material Supply Policy

show themselves especially reluctant to operate in developing countries.28

28. See supra n. 26.

3. Interaction with Trade Policy

(i) Foreign investment policy versus trade policy

(ii) Trade policy versus foreign investment policy

37. Cf., supra n. 34, p. 61.

competition in the home country is transferred abroad, foreign investmen

4. Interaction with Industry, Employment, Currency and Fiscal Policies

particular mention. Most of the European investment protection and

C. Foreign Investment Policy in the North-South Sphere of Interests

Hence, the channelling of investment into natural reso

45. 25 per cent. goal of the "Declaration of Lima", see supra n. 9, at p. 6.

objectives and therefore combine the interests of North and South. Th

interests. This makes selection necessary. It appears politically expedient to

only one example of multilateral accomplishment in this area: th

60. OECD Publication No. 37.431 (1976).

II. INTRICACIES OF INVESTMENT PROTECTION

Cases of the outright deprivation of investors without compensa

restrictions regarding the site of a plant; relations with local authorit

67. Ifo-Studie, supra, p. 186.

company, a majority of which was held by a German parent company, started

III. CONCLUSIONS AND POLICY CONSIDERATIONS

The effectiveness of any investment protection and insurance system dep

70. See, Sunshine, supra, pp. 64 et seq.

covenants should be "stabilised" by investment protection agreements and

situation - an almost impossible undertaking. 17 In considering isolat

through negotiation and consultation with host governments. In most cases,

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