Investment diplomacy

Relevance

Investment diplomacy has gained significance as foreign direct investment (FDI) becomes an essential factor in economic advancement, especially for developing countries. It delivers crucial capital, technology, and expertise, resulting in job creation and economic diversification. Furthermore, investment diplomacy acts as a means of statecraft, shaping political alliances and promoting international collaboration. It assists in directing private investment toward tackling global issues, such as climate change and sustainable development, making it an essential element of contemporary economic strategy.

Methods and approaches

Investment diplomacy involves strategies to attract and safeguard foreign capital, primarily led by Investment Promotion Agencies (IPAs). These agencies offer support to potential investors through information dissemination, organising events, and lobbying for favourable business conditions. Diplomats also engage in commercial diplomacy to link investors with opportunities.

Key activities include negotiating BITs and investment chapters in Free Trade Agreements (FTAs) to provide legal security.

Informal relationship-building, often through high-level visits by officials accompanied by business delegations, helps establish trust. Together, these strategies create a legal framework that ensures security while fostering the confidence necessary for successful investments.

Geographical scope

Investment diplomacy operates at multiple geographical levels:

1. Bilateral level: This involves direct relations between two countries, marked by negotiating investment treaties and targeted promotional efforts, such as embassies working to attract foreign corporations.

2. Regional level: Economic blocs like the EU, ASEAN, and Mercosur create common investment rules to boost market attractiveness and negotiate collectively with other regions.

3. Multilateral level: Organisations like the WTO and UNCTAD aim to establish global investment norms, while forums like the World Economic Forum (WEF) facilitate discussions on investment opportunities among political and corporate leaders.

Overall, investment diplomacy reflects a multi-layered approach that functions globally, regionally, and bilaterally.

Historical development

Modern investment diplomacy began to form in the latter half of the 20th century, highlighted by the signing of the first BIT between Germany and Pakistan in 1959. This treaty offered strong protections for foreign investors and set a new standard in international economic law.

During the Cold War, the signing of BITs was infrequent. However, the 1990s saw a dramatic increase in these treaties, driven by globalisation and the “Washington Consensus,” as many developing countries sought to attract foreign capital. This period marked the peak of investor protection.

Since the 2000s, however, there has been a backlash against the extensive rights granted to investors, leading countries like South Africa and Ecuador to reconsider their BITs. The current focus is on balancing investor protection with the host state’s right to regulate for public welfare.

Actors

The domain of investment diplomacy features a diverse mix of participants beyond conventional diplomats. Major contributors include national governments, especially ministries responsible for foreign affairs, trade, and finance, as well as dedicated IPAs that focus on fostering investments. Multinational corporations (MNCs) and individual investors play an active role in influencing investment regulations and are the main recipients of these diplomatic activities.

International law firms and arbitration bodies, like the International Centre for Settlement of Investment Disputes (ICSID), are essential in the process of investor-state dispute resolution (ISDS) through their interpretation and enforcement of treaties. Civil society groups and NGOs also have a role by monitoring investment agreements and advocating for the protection of human rights and the environment.

Examples

The European Union’s Global Gateway Initiative, launched in late 2021, aims to mobilise up to €300 billion in investments by 2027 for sustainable infrastructure projects in Africa, Asia, and Latin America. This initiative is seen as a response to China’s Belt and Road Initiative, emphasising a ‘values-based’ approach that promotes transparency, environmental protection, and good governance. The strategy leverages the combined resources of the EU, member states, and financial institutions to build alliances and offer partner countries an alternative model for development financing rooted in democratic principles.

The 2022 US CHIPS Act allocates over $52 billion in subsidies to attract foreign semiconductor manufacturing firms, particularly from allied nations like Taiwan’s TSMC and South Korea’s Samsung. This domestic policy serves as a tool for foreign investment diplomacy, aiming to reduce dependence on East Asian supply chains and strengthen technological alliances. The strategic objective is to direct global capital flows to enhance national security interests.

Indonesia’s Downstream Industrialisation Policy:Indonesia, the largest nickel producer globally, has implemented a policy to promote domestic investment in the electric vehicle (EV) battery value chain by banning the export of raw nickel ore since 2020. This move requires foreign companies to invest in local smelters and processing plants, resulting in significant FDI for battery and EV manufacturing. The policy has necessitated complex diplomatic negotiations, especially with China, and has faced opposition from the EU, which filed a dispute at the WTO. Despite the controversies, the strategy highlights how a developing nation can utilise its resource wealth to drive industrial transformation.

Investment diplomacy is a crucial aspect of modern statecraft that focuses on building the foundations for global economic integration. It involves diverse actors and methods, employing tools like treaties and negotiations to secure prosperity for citizens. The central challenge today is finding a balance between protecting investors and allowing governments to pursue legitimate public policy goals, such as environmental protection and social equity. This changing dynamic will be influenced by continuous diplomatic efforts rather than exclusively in corporate environments.