Foreign Direct Investment and Investment Agreements

Foreign direct investment (FDI) has significantly increased over the last two decades. For a long time, the majority of FDI used to take place between developed countries, where even now, FDI levels are still about twice as high as in developing countries. Yet in recent years a reversal of this trend has emerged, with FDI flows to developing countries being higher than flows to developed countries in 2012 and 2013.

Expectations for FDI as a trigger for growth and development are high, resulting in fierce competition between developing countries to attract investments. On a macroeconomic level, FDI is expected to raise investment and employment levels as well as exports and fiscal revenues. On a microeconomic level, additional competitive pressure is hoped to force local producers to increase productivity. In addition, the transfer of know-how and technology resulting from FDI is believed to have a positive impact on the local economy. However, the literature on the impact of FDI shows that its effects are not by definition positive since FDI can take place in enclaves with only loose ties to the local economy and only low fiscal benefits. FDI can thus not always be considered to have significant development effects and in order for it to actually contribute to development, specific policies – in the host country as well as on international level – are needed.

Governments use international (bilateral and multilateral) investment agreements – of which there are now more than 3,000 worldwide – in the hope to attract larger FDI inflows. More than 90% of those agreements provide for investor-state dispute settlement, where investors are granted the right to sue host states before international arbitration tribunals. While a number of new agreements are concluded every year, several countries such as South Africa, Bolivia and Venezuela have been recalling investment agreements due to ongoing cases of dispute and the resulting high costs to government.

ÖFSE focuses on EU investment policy and bilateral investment agreements, including their effects on the political room for manoeuvre (policy space) of partner countries.

For more information contact:

Karin Küblböck

Ms. Karin Küblböck
Senior Researcher
Tel.: +43 1 317 40 10 – 111  
more information

Publications on the topic: