International Investment Dispute Settlement Procedures: The Evolving Regime for Foreign Direct Investment

INTRODUCTION The Uruguay Round agreements(1) have refocused attention on international institutional arrangements for dispute settlement in international business. Since the new dispute settlement procedures of the World Trade Organization (WTO) encompass investment disputes as well as trade disputes, it is important to examine existing and prospective international institutional arrangements for the settlement of investment disputes. This Article analyzes such procedures within the context of the evolution of the larger regime of international institutional focuses on "direct investments" as opposed to "portfolio investments," and it is therefore concerned with investments involving substantial ownership by a parent firm in one country of an affiliated firm in another country. Direct investments involve international business relationships in which a parent firm has ix "lasting interest" and "a significant degree of influence" in the management of an affiliated foreign firm.(2) The term "investment" is thus used throughout this Article specifically to mean foreign direct investment (FDI). During the past decade, FDI has grown substantially in most regions of the world. In fact, the rate of increase in world-wide FDI flows substantially exceeded the rate of increase in international trade during many of the years since the mid-eighties. Total world FDI flows increased from US$88 billion in 1986 to US$234 billion in 1990--an average annual rate of increase, in nominal terms, of twenty-six percent over the period (or eighteen percent in real terms).(3) The increases in outward FDI from Japan and inward FDI into the United States during the latter half of the eighties were particularly conspicuous. While annual inward flows to the United States, as well as total world flows, have been at lower levels since 1991, the proportion channeled to non-OECD countries has increased. FDI in China has increased dramatically, and intra-regional FDI in Southeast Asia has been substantial. In Latin America, the level of annual inward FDI flows has also returned to previous levels after several years of decline during the external debt crisis in the eighties. In selected countries of Central and Eastern Europe and the former Soviet Union, despite current uncertainties that inhibit investment activity, FDI is likely to increase significantly in coming years as well.(4) These changes in the magnitude and geographic distribution of FDI are likely to result in increases in investment disputes between governments, between firms and governments, and between firms. This is especially true in the countries of Central and Eastern Europe, where much FDI to date has taken the form of rapidly concluded agreements in the midst of revolutionary privatization programs and changing political circumstances. Moreover, the elementary and evolutionary nature of property rights laws, plus the relative inexperience of both host governments and investors with FDI projects in the region, suggest that investment disputes will be relatively common in those countries. In the Pacific Rim region, differences in Asian and Western legal cultures make agreement on dispute resolution procedures unusually difficult; the former emphasizes the importance of flexible procedures and ad hoc, adaptive resolution of disputes, while the latter emphasizes the establishment of extensive formalized rules that can be applied to individual disputes. Any significant growth in the number of unresolved investment disputes could be highly detrimental to the future of FDI flows throughout the world, and such disputes could also cause strains in diplomatic relations between governments. As a consequence, investment dispute settlement procedures will take on greater importance, and the existing system of institutional arrangements will be under much more detailed and critical scrutiny.(5) Recent publications reflect the resurgence of interest in strengthening investment dispute procedures in international institutions. …