Is there an international investment regime? If there is one, should it be modified or improved? To answer these two questions, the Ministry of Foreign Affairs of Finland commissioned an extensive study on the evolution of investment flows as well as the regulations and policies affecting them. They entrusted the task to Karl P. Sauvant, a senior fellow at the Columbia Centre on Sustainable Investment, and Federico Ortino, from King's College London, both with a great deal of knowledge and experience in the role of foreign direct investment (FDI) in development.

According to them, there is an international regime on investment, but it is highly fragmented. It is made up of some 2,800 bilateral investment treaties and 200-plus bilateral and regional trade agreements with investment chapters, as well as some scattered provisions and soft law in organizations such as the Organisation for Economic Co-operation and Development (OECD), the International Labour Organization (ILO), and the United Nations.

This fragmentation in the investment area contrasts with the relatively coherent and unifying role of the WTO in the area of trade, although even here the proliferation of regional trade agreements is also tending to fragment the multilateral trade system.

As the authors say, ‘investor–state relations have moved a long way from a relationship defined by power toward one defined by law’, and recourse is often made to arbitration to deal with the differences among them (pp. 15–16). Still, many stakeholders question the way the current regime operates and seek to redefine its purpose, content, and dispute settlement mechanisms.

Thus, Sauvant and Ortino conduct their review of the current international investment regime with the underlying premise that action is needed. They offer a comprehensive account of the controversial issues and propose solutions to deal with them. The issue today is – as it has always been – how to regulate foreign investment in a manner that takes into account the needs and concerns of both host countries, in particular developing countries, as well as investors and home countries.

Annual FDI outflows between 2007 and 2011 averaged US$1.7 trillion, in contrast with the average USD 100 billion in the 1980s. The stock of FDI grew from US$2 trillion in 1990 to US$21 trillion at the end of 2011. Moreover, foreign investors generated sales of US$28 trillion in 2011, an amount higher that total world trade of US$22 trillion the same year.

There are currently some 100,000 multinational enterprises (MNEs) worldwide, which control some 900,000 foreign affiliates; these enterprises are responsible for most of the so-called global value chains, which in turn channel about one-third of international trade flows.

All this economic activity is ‘protected’ by the existing international investment regime, which aims basically at the ‘promotion’ and ‘protection’ of foreign investment. The contours of this regime as it exists today are well known: Investment protection standards are at the core of the regime, arbitration is the chosen mechanism to settle disputes, there are multiple legal sources, and the regime lacks a well-developed institutional framework.

This regime is, however, not static, but rather is continuously being reshaped by a range of forces. Two of these forces in particular deserve mention. First, new and more complex arbitral decisions; and, second, new international investment agreements, which are either bilateral investment treaties (BITs) or regional undertakings and are being negotiated on an almost weekly basis. To this should be added the growing significance of emerging markets.

Emerging markets have become important players in the FDI equation. For example, in the period 2009–2011, they were responsible for some 25% of total FDI outflows – an annual average of more than US$400 billion. As a result, an important number of developing countries are nowadays not only host, but increasingly also home to FDI, which is affecting their traditional approach to FDI matters, as they may now seek to ‘protect’ and ‘promote’ their own investments abroad.

At the same time, some non-traditional investors, including foreign state-owned enterprises, are playing an increasing role as investors in some developed countries, which is in turn making these countries change their traditional approach vis-à-vis FDI, from an emphasis on liberalization towards one in which control of (at least some) investors plays a role as well.

Thus, as Sauvant and Ortino point out, there is a change in attitudes and perceptions in both governments and enterprises. Some countries are becoming stricter and more critical of investment agreements; some are revising their traditional approach to FDI; some have withdrawn from International Centre for Settlement of Investment Disputes (ICSID) in response to particular arbitral awards; and some are revisiting their BITs. Multinational enterprises are also becoming more responsive to concerns such as human rights, labour, and the environment.

Last, but not least, the number of treaty-based investment disputes has increased exponentially. While before 1990 there were only few such disputes, the number of claims brought by foreign investors in recent years has moved beyond the imaginable, with all types of governments – from developed and developing countries and economies in transition – acting as respondents.

Arbitration is the chosen mechanism to deal with controversies between foreign investors and host countries. Recourse to arbitration is called for in BITs as well as in most investment chapters of free trade agreements (FTAs), and is normally conducted under the aegis of the ICSID ConventionFootnote ² or the (United Nations Commission on International Trade Law) UNCITRALFootnote ³ commercial arbitration rules. This is a relatively new phenomenon: The first ICSID arbitration (involving Sri Lanka) was initiated in 1987, but by the end of 2012 the number of treaty-based disputes was more than 500. Arbitral decisions – although not always uncontroversial – contribute significantly to the body of international investment law.

Key issues regarding the settlement of investment disputes under ICSID and UNCITRAL include the cost of disputes, the role of arbitrators, the increase in the number of disputes, the consistency of decisions, and the absence of an appellate body to ensure such consistency. Also, an increasingly important issue is whether it is acceptable to continue with a situation in which foreign corporations are entitled to investment arbitration mechanisms that are not available to national enterprises.

Thus, while investment agreements continue to proliferate, many people question their usefulness and their ability to really promote FDI. Moreover, there is growing dissatisfaction with the way the international, fragmented investment regime now in place is working in practice. All of these factors, according to the authors, are reopening the debate as to the need for a stronger, and better-balanced, international framework on investment.

And here we return to the initial question referred to in this review.

Is there a need for an international agreement on investment? The answer is probably ‘yes’. Few will question the need for an international investment framework, but the form and content of this regime is far from being universally agreed. While many countries and most corporations are happy with the current, fragmented regime, others question some of its components, as exemplified by the withdrawal of some countries from ICSID.

The authors attempt to find a way to move forward. This is understandable. No process is underway to design such an international agreement and, as they point out, what can realistically be done at this stage is only to clarify the key questions regarding such a regime. Is the purpose of a new regime to control governments, corporations or both? Does it need to be legally binding or not? What would be the underlying principles? Would it aim only at the promotion and protection of foreign investors or should it also include obligations on home countries? How should one draw the right balance between rights and obligations that such a regime would contemplate?

The issue is where this clarification effort could take place. The authors propose a number of options, from engaging in an international hearings process to establishing consensus-building working groups and to encouraging a focussed dialogue between business and civil society, all of which may pave the way to a subsequent intergovernmental process of sorts.

And here is where the situation and the various options become more complicated. Ideally, such an intergovernmental process should take place in one of the existing institutions with responsibilities in the investment area, namely the WTO, UNCTAD, and the OECD. However, none seems to be in a position as of now to undertake such an initiative.

The WTO is perhaps the multilateral institution where a new international framework on investment should be discussed, but not such initiative could take place while the Doha negotiations are on-going – and no end is in sight for their conclusion. The experience of the WTO in dealing with trade disputes is also something that needs to be taken into account when dealing with investment arbitration issues, a matter that the authors rightly identify as the one that needs to be most urgently revisited. The WTO's experience and institutions – including the WTO Appellate and loosely affiliated bodies such as the Advisory Centre on WTO Law – may offer useful guidance in this regard.

Other institutions, such as UNCTAD and the OECD, would also have an important role to play in any attempt to reformulate the current investment regime. Investment issues are at the core of their functions; they have accumulated a vast amount of expertise and knowledge on investment issues; and, in the case of the OECD, have experience in negotiating investment frameworks.

The initiative could still come from the G20 countries, according to the authors. Yet, there may be no appetite for a process of this sort, as many key players are engaged in important (trade and investment) negotiations: in the context of the Trans Pacific Partnership (TPP) and the Transatlantic Trade and Investment Partnership (TTIP) initiatives, among others.

As a result, defining where and when to negotiate a global regulatory framework for international investment may not be a viable proposition at this stage, and, given the current status of international cooperation on global economic issues, such an initiative may have to wait for a while. However, were such a process to start, participants would certainly benefit from the analyses, insights, and suggestions put forward by Karl P. Sauvant and Federico Ortino in their excellent and thoughtful essay.