As the possibility of launching negotiations on broadening the subject matter scope[1] of multilateral trade rules to cover investment issues becomes stronger, a critical question to be looked at is which of the many types of investment activities should be covered. While Doha may have put the issue of investment on the table, there remains much room for debate on exactly what the “investment” issue covers, let alone how it should be treated.

First of all, the constantly evolving nature of international economic relations has created so many new ways of investing in foreign-owned assets that the concept of what constitutes foreign investment is in itself an evolving one and may therefore be a debatable issue. Over the last four decades in particular, the term foreign investment has come to represent increasingly diverse economic activities as, in addition to the traditional investment in the manufacturing and natural resources sectors, there has been increasing new forms of investment in technology related areas such as patents, copyrights and intellectual property as well as investment in services and contractual rights. There is every likelihood that yet newer forms of “investment” in foreign countries will be developed. As this suggests, there might not always be consensus on what kind of assets constitute foreign investment proper at a given time.

Secondly, the classification of certain types of investments is sometimes based on arbitrary definitions. For instance, there is the issue of whether “direct” and “portfolio” investment should be treated in the same manner. Sometimes the distinction between these two types of investment is based on whether it is short term or long term: investment is defined as direct if it is to be of lasting duration. But more often, the distinction is based on company control. An investment is considered direct when the investor’s share of ownership is sufficient to allow control of the company, while investment that provides the investor with a return, but not control over the company, generally is considered portfolio investment. However, this distinction is not a sharp one as in many companies no one investor is a majority shareholder, and effective control rests in the hands of an investor who simply owns a significant minority of the stock. A quantity of stock that would constitute portfolio investment in one corporation could therefore constitute direct investment in another. Thus, economists often adopt arbitrary standards for making a clearer distinction such as classifying ownership of 10 percent or more of the outstanding stock as automatically direct investment. The point for emphasis here is that there are certain categories of investment that are in a sense well known but could actually prove problematic in agreeing on in binding rules on their definition.

Thirdly, and perhaps most importantly in the context of possible negotiations, all these different types of international investment flows have different economic implications for countries at different stages of development. Thus even if there would be consensus that they all constitute foreign investment, different countries may, in efforts to implement their separate economic and development policies, wish to accept different rules concerning the treatment of the different types of foreign investment. In other words, countries may be willing to assume certain multilateral obligations only with respect to certain types of foreign investment and not others.

Thus the issue of the scope of the subject matter will be critical in any discussions of multilateral rules both for purposes of determining what is meant by investment in general as well as which type of investment should be covered in particular. In an international agreement or some other sort of multilaterally accepted rules, this issue could be dealt with in one or both of two fashions. On one hand, the scope of the types of investment to be covered may be determined by the operative provisions of the agreement that may be negotiated. That is, in their prescription of the operating nature of the agreement, such provisions may also individually list or describe the assets/activities they apply to. On the other hand, those drafting the agreement or rules may also wish to delimit the scope of the subject matter simply through the formulation of an overriding definition of “investment”. Because that definition would specify the economic activities to which the operative provisions of the agreement will apply, the terms of that definition would determine the normative content of the agreement just as much as the terms of the operative provisions.  Thus, the formulation of a definition of investment could effectively enlarge or limit the scope of a potential agreement.

The task of formulating some sort of definition of “investment” in international treaties is, of course, not exactly a new one. The novelty here is the multilateral context. But developing countries can certainly take lessons from the many existing bilateral and other international agreements covering investment issues. And they would note that it is a wide spectrum. Some of these investment agreements define "investment" in a way that is very broad and open-ended. Others define the term in a narrow and limited style.

The very broad definitions embrace every kind of asset including in particular movable and immovable property, interest in companies (including both portfolio and direct investment), contractual rights (such as service agreements), intellectual property, and business concessions. Most investments agreements, however, narrow the definition of investment with various limitations.  In particular, they often exclude from the definition those types of investment that do not meet certain industrial policies of the host countries concerned and which they consider should not be accorded the guarantees and benefits international agreements provide.

Can developing countries identify from these agreements a “development friendly” formula to emulate in a multilateral context? While one may draw lessons from examples of the existing bilateral and other international investment agreements, they, however, provide no consistency as each of the different kinds of limitations one finds therein appears either singularly or in quite varied combinations with others in different agreements. It is thus difficult to pinpoint a particular strategy or pattern that most developing countries have adopted on drafting a definition clause on investment. Nevertheless, in the context of post-Doha discussions, these various formulations would indicate that there are likely to be two key issues for developing countries to address on the question of scope of a potential agreement.

First, the general type of definition of “investment” will be a critical issue for developing countries in any possible negotiations on multilateral rules and the fundamental question will be whether it should be an open-ended type or a limited type. An argument may be made that a very broad definition of “investment” actually has positive implications for the development of investment policies by developing countries. Considering what was noted above that the concept of investment has continuously evolved over time the point could be made that there are advantages in international treaties utilizing language that can extend an agreement to new forms of investment as they emerge, without renegotiation of the agreement.  On the other hand, others would argue that a broad, open-ended definition may commit developing host countries to permitting, promoting or protecting forms of investment that they did not contemplate at the time they entered into an agreement and would not have agreed to include within the scope of the agreement had the issue arisen explicitly. It would also involve a commitment to provide treaty coverage to some investments that these countries may otherwise wish to restrict or control at the current time due to their development strategies even if they plan to liberalize further in the future. More likely than not, therefore, caution coupled with current differences in development policy approaches will almost inevitably result in a compromise leaning towards some narrowing of the definition of investment from the kind of open-ended type mentioned above.

Some developing countries may in particular wish to limit the types of foreign investment to be subject to such rules. Such limitations may be based on the size of investments or the sector or parts of the economy to which the agreement applies. Also of relevance here is the issue of portfolio investment regarded by some developing countries as not so desirable, given that it generally is easily withdrawn, thus creating the potential for capital volatility in the event of economic turbulence. Some developing countries may also wish to exclude investments according to the date of establishment.

The second key issue for developing countries is whether to primarily rely on a definitional clause to delimit the subject-matter. Here, the point to note is that while many of the concerns of developing countries could be reflected in limitations incorporated in a definition clause, it may prove impossible to agree on which ones to adopt, even among the developing countries themselves. Moreover, a very restrictive definition may leave no room for compromise that the developing countries may themselves be wishing for. For instance, there might be a desire to prescribe different limitations for different groups of countries or perhaps have some limitations applicable for only prescribed periods of time. These variations may be difficult to incorporate in a definition. The solution might be to adopt a twin-track approach. As pointed out above, the subject matter scope may also be delimited through the substantive provisions. By addressing some of the developing country concerns in the operative provisions, this may avoid the problem of an “all-or-nothing” approach that a purely definitional solution may provide.  Rather, some investments may be admitted under a rather broad definition formula but with only limited rights under the substantive provisions of the agreement.

For example, while most developing countries would agree that portfolio investment has the capital volatility characteristic, some view portfolio investment as an increasingly important source of capital and foreign exchange and therefore capable of providing a very positive contribution to their development.  Thus, if the concern about portfolio investment is that it may be withdrawn quickly, an investment agreement might define “investment” to include portfolio investment, but the typical currency-transfers guarantee provision in such agreements would apply to portfolio investment only if the investment has been established for some minimum period of time.  Such a limitation would be directed at the volatility of the investment, which may be the one particular concern regarding portfolio investment. But it would not exclude portfolio investment from the same other provisions generally applicable to all investments. Similarly, if developing countries concerns are about some types of FDI, no category of investment would, through some definitional limitation, be excluded from treaty coverage a priori, but through the operative provisions, host countries would reserve the right to screen or place conditions on the establishment of individual investments. This approach would ensure that host countries are subject to multilateral rules obligations only with respect to those investments that have passed some general or specific approval test.