Throughout the history of capitalism, investment has been primarily the function of private business; during the 20th century, however, governments in planned economies and developing countries have become important investors.

 

Before 1930, investment was thought to be strongly affected by the growing rate of interest, with the rate of investment likely to rise as the rate of interest fell. Since then, the empirical investigation has shown business investment to be less responsive to interest rates and more dependent on businessmen’s expectations about future demand and profit, technical changes in production methods, and the expected relative costs of labour and capital.

 

Foreign investment, as one form of investment, was necessitated to ensure raw materials for production in the Western states continued. At the time of colonization, resources were transferred from colonies to the metropolitan powers so that they could be converted into manufactured products or used to fuel the industries in these states. In the earlier stages, the petroleum sector was the most prominent sector for foreign investments. At that time, concession agreements were used to tie up resources for foreign investments.

 

As time went, on the concession agreements ceased to be the norm in investment and were replaced by the production sharing agreements. These agreements reflect the shift in the power equations that have taken place within the investment, particularly in oil industry. Indonesia was a pioneer in the field of devising new arrangements for the oil industry. Such a shift was aided by the formulation of international law doctrines such as the doctrine on the permanent sovereignty over natural resources. The doctrine of permanent sovereignty over natural resources has been translated into national legislation. Thus, constitutions and foreign investment legislation incorporated the doctrine. It was also possible to draft investment contracts that ensure the host state having greater control over the process of the exploitation of the mineral resources. As a result of this development, it was recognized that host states have the power to control their natural resources. Thus, international agreements which have provided significant rights for investors began in 1959.

 

HISTORY OF INTERNATIONAL LAW ON FOREIGN INVESTMENT

 

International Law on Foreign Investment has passed through some history. The first attempt to create rules to govern the conduct of foreign investment was made by the United Nations conference held in Havana after World War II. At that time, it was felt essential to reconstruct the damage caused by the war. Having in mind this reconstruction purpose, a general attempt has been made to create an International Trade Organization (ITO). The proposed law of ITO under Article 12 provides provisions for the conduct of foreign investment that include the host states’ ability to regulate investment. This provision was opposed by some countries, particularly the United States of America. Such countries argued that the provision is contrary to liberal economic principles and public international law. The opposition contributed to the demise of the ITO.

 

In place of ITO, the General Agreement on Tariffs and Trade (GATT) came into being. However, GATT deals with a reciprocal tariff reduction agreement and it does not directly deal with foreign investment. In addition, the provisions of GATT will only be applicable if states have concluded agreements to govern international trade between them.

When countries became free from colonization during the early 1960s, they wanted to control their resources. Consequently, there was a conflict between the interest of host countries and the principles of international law that determined the relations between investors and host states.

 

What do you think is the cause of such conflict? The newly independent developing countries desired to control their natural resources in order to realize their dreams of development. On the other hand, the rules of public international law concerning foreign direct investment lacked a development-focused approach. Consequently, there emerged a conflict between the interest of the host states and the rules of international law on the field. Developing countries wanted rules of international law that would promote their desire to develop by sharing fair profits from foreign investment. Thus, developing countries advocated the reconstruction of international economic order in a manner that would expedite their economic growth and development. They succeeded in having the Charter of Economic Rights and Duties of States by using their majority at the United Nations. According to this Charter, the right of all states to regulate, supervise, expropriate and nationalize foreign investment has been reasserted. Nevertheless, the developed states argued that the resolution contradicts the rules of public international law on foreign investment.

 

The evolution of international rulemaking in the field of foreign investment is marked by the growing prominence of bilateral, regional and plurilateral agreements aiming at encouraging foreign investment. Such arrangements have also an advantage in providing substantive standards with regard to the admission and treatment of foreign investment by host states.

 

HISTORY OF INVESTMENT LAW IN ETHIOPIA

 

Coming to Ethiopia, though it is not possible to pinpoint the date investment was started, it is not new to Ethiopia.

I. The Imperial Era

The Ethiopian economy after the war with Italy was described as a mixed economy in which the private and public sectors worked hand-in-hand to achieve economic progress. The private sector was having good ground during this period since there was no any law that limited the private business.

In the Emperial era, Proc. No 60/1944 and 107/1949 were enacted to promote foreign investment in Ethiopia. In 1950, the Minister of Finance gave an income tax exemption notice with a view to encouraging investment. After that, in 1956, the Income Tax Decree which provided for income tax emption to encourage investment was promulgated. However, this Decree was replaced by the Income Tax Proclamation of 1963. This Decree was the first proper law to regulate investment transactions in Ethiopia. After three years, i.e. in 1966, the Investment Proclamation No. 242/1966 was enacted.

What is special to those laws was that they did not provide investment areas for the government. Thus, investors could invest in all areas of the economy with no restriction. They also provided investment incentives which included: import-export income tax exemptions, income tax holidays. It was also possible for foreign investors to own land required for their investment.

Though the private sector was in good condition, the share of the domestic investors was very small due to lack of entrepreneurship.

II) The Derg Regime

Then, the 1974 Revolution got rid of the concept of private property including private investment. This retarded the development in the sector. During the Derg regime, it was only the state that invests. After all that was considered investment proper.

The Derg regime adopted a socialist economic policy through National Democratic Revolution (NDR), which disfavours private investment. During this period, it was witnessed that nationalization was exercised repeatedly.

Proclamation No 26/1977 heralded the start of nationalization. The proclamation clearly stated that it was necessary to transfer to government ownership all resources that were crucial for economic development.

As a result, the government had controlled all private investments and the private sector was restricted to small industrial activities. However, the government allowed investment through joint venture, i.e. investment in Cooperation with the Ethiopian Government. The intention of the government was to introduce capital know-how, and technology into the country. But the law was taken as a disincentive to the private investors since the share of the government could grow from 51-99% while that of private investors could fall down from 49-1%.

The government felt the necessity to change the economic policy in the late period of the Derg Regime and adopted a mixed economic policy by adopting the Multilateral Investment Guarantee Agency (MIGA) of which Ethiopia became a member. Then, this economic reform was reiterated by the transitional Government of Ethiopia in 1992 after the down fall of Derg Regime.

III) The Period after Derg

The Derg regime was replaced by the Transitional Government. The Transitional Government, which was established in 1991 adopted an economic and investment policy directly opposite to that of the Derg regime. The policy emphasised the role of private investment in the development of the Ethiopian economy. In 1992, Ethiopia embarked upon the liberal economic policy which is deemed to be a favourable condition for investment. To implement this policy, the Transitional Government enacted Investment Proclamation No 15/1992 so as to open the door to private investment. The proclamation also reserved some sectors such as large scale eclectic power and postal service to the government. It also provided for joint investment with the Ethiopian government.

The proclamation provided for incentives to attract and promote private investment. It also guaranteed against nationalization and expropriation. Thus, “no assets of a domestic or foreign investor may be expropriated or nationalized wholly or partially except in accordance with the due process of law”.

The Investment Office was established by the proclamation to regulate and supervise investment activities. The proclamation imposed a higher capital requirement for foreign investors and proclamation No 37/1996 was enacted to rectify this problem.

Thus, the following are essential developments in Proc No 37/1996 and Regulations No 7/1996.

1. The minimum capital required from foreign investors has been reduced from 500,000 USD to 300,000 USD to establish joint venture with our government. The minimum capital of retained profit and dividends reduced to 400,000 USD for expansion. Further, the capital requirement for foreign investors to invest in engineering and consultancy was reduced from 500,000 USD to 100,000 USD.

2. Foreign investors were relieved from the obligation to deposit 1258,000 USD in blocked account.

3. Foreign investors were also allowed to invest in building construction equipment, and in hotels whose standard was below the four star and five grades.

4. Foreign investors were allowed to repatriate capital from sale, liquidation or transfer of residence to their home country, in addition to profits, dividends, interests and payments arising from technological transfer.

5. It also provided for internationally accepted investment dispute settlement procedures where it was not possible to solve the dispute amicably.

6. Investment incentives were also extended to additional sectors such as education, hotels, tourism and health. Further, the period of incentives was extended from 3 to 5 years.

7. Banking and insurance, electricity-generating up to 25 MW, air transport with the capacity of up to 20 passengers or 2,700kg. were reserved for Ethiopian nationals.

8. Both domestic and foreign investors were allowed to borrow money from abroad provided that they are registered with the NBE.

9. It was also provided under the proclamation that investors should be provided land within sixty days from the date of application for land.

 

In general, despite its constraints and drawbacks, the law seems to be attractive to private investment when compared to the past regime’s restrictive policy.

 

Investment (Amendment) Proclamation No 116/1998 and Regulations No 36/1998

 

These laws were enacted with a view to encouraging and facilitating investment (both domestic and foreign). Thus, the amendment was made with the aim of opening more investment areas to the private sector. It also aimed at providing additional investment incentives.

These laws resulted in the following essential changes to the proclamation No 37/1996 and Regulations No 7/1996.

1. The status of foreign nationals of Ethiopian origin: A number of Ethiopians were forced to leave Ethiopia and went abroad for political and other reasons (especially in the past regime).

It is felt important to give them a chance to invest in their country and to contribute in the economic development by investing their capital and know-how that they acquired abroad. Thus, Proclamation No 116/1998 provides that foreign nationals of Ethiopian origin are at liberty to chosse to be treated as domestic investors or foreign investors.

If they opt to be considered as domestic investors they must apply to the then Ethiopian Investment Authority (EIA) and fill a form which is taken as a promise not to be considered as a foreign investor. Thus, they are relieved from a capital restriction on a foreign investors and be able to take part in investment with a capital of 250,000 Ethiopian Birr rather than 500,000 USD, 300,000 USD or 100, 000 USD.

In addition, they will acquire a right to invest in areas exclusively reserved to domestic investors by Regulations No 35/1998. On the other hand, they will lose the rights of foreign investors. Thus, they may not claim to repatriate their profits and capital outside Ethiopia, because such a right is given to foreign investors.

Once an investor is considered a domestic investor, s/he/it may participate in investment areas exclusively reserved for Ethiopian nationals such as banking and insurance.

 

Employment of Expatriates

 

According to Proclamation No 37/1996, there were restrictions in employing expatriates imposed on investors both domestic or foreign.  First, they must ascertain that a person of the required qualification cannot be found in Ethiopia Second, they must arrange to replace such foreigners by Ethiopians within a limited period.[29] Nonetheless, Proclamation No 116/1998 avoided these restrictions with regard to foreign investors while maintaining the restrictions for domestic investors.

However, it is worth noting that Proc. No 116/98 gave a discretion to the EIA to allow or refuse the recruitment because prior consent of the Authority is a requirement. The restriction is also limited to top managerial positions though the term top managerial position was not defined by the law.

Ownership of immovable properties by foreigners to create conducive atmosphere for foreign investors and to make them feel at home in Ethiopia, Proclamation No 116/1998 allows foreigners to own immovable property required for their investment. Immovable property in this context means buildings only since land is not the subject of private ownership but is made available for investors by lease.

Areas of Investment

One of the achievements of investment Proclamation No 116/1998 was that it fully opened the hydroelectric power generation for private sectors. However, the distribution of the electricity was still made to continue as the exclusive monopoly of the government. Thus, private investors were allowed to generate electric power and to sell it to a state-owned electric distribution agency.

Further, the proclamation allowed private investors to invest in the telecommunication sector jointly with the government,[32] although it which was reserved only for the government as per Proclamation No 37/1996.

Defence industries may be important to produce civilian goods and services in addition to weapons. Thus, it was felt important to allow private investors to participate in order to have the know-how to efficiently run the defence industries that were inherited from the Derg regime.[33] Thus, Proclamation No 116/1998 allowed private investors to participate jointly with the government.

Proclamation No 116/1998 also expanded the scope of consultancy services to include accounting and auditing services in addition to engineering, architectural or other technical services.

Regulation No 35/1998 also recognized oil companies such as Shell, Mobil, Agip and Total as areas of investment for foreigners with a view to maintaining efficient service in supplying petroleum and its by-products.

Another important change made to Proclamation No 37/1996 was that Proclamation No 116/1998 conferred on the Ethiopian Investment Board the power to decide on additional investment incentives other than those provided under the Investment Regulations No.

Thus, the Board was given the power to initiate and propose additional investment incentives so as to promote investment, but the power to approve was given to the Council of Ministers.

 

Law of investment, in general, is a branch of a law consisting of set of rules that regulate investment. Investment law may be either international law on foreign investment or national law.

International law on foreign investment may be defined as a set of rules that govern international investment. International law on foreign investment has been and is being shaped by on interplay of various economic, political and historical factors. It is generated by the eventual resolution of conflicting national interests. The interests of capital-exporting states have clashed with those of the capital-importing states. The international law on foreign investment is a resultant resolution to such conflicts. It is a field by which economic theories, political science and related areas have helped to shape the arguments in the field.[1]

It is a field of international law which calls for a creation of alternative theory because
it cannot be explained in accordance with any existing theory of international law.[2] Now, the rules are not clear.[3]

National investment law -Investment is a commercial or business activity. Business activities are governed by Commercial Code/law. Commercial law cuts across both the law of obligations and the law of property. That means commercial law includes some part of the law of obligations and the law of property.[4]
For instance, the transactions of business in general and investment in particular require the application of the law of contract since it involves contractual transactions. Properties are the subject of contracts in investment.
Let us consider another example. An investor may import or export products or other goods that are related to his/her investment. An investor should import machineries and equipment for his/her investment. Those machineries and equipment should be transported to Ethiopia. In such a case, a bill of lading may be used. A bill of lading is a receipt for the bailment of a specific object and possesses the quality of being ‘negotiable’. Thus, it represents the goods in some way. It is also a document that contains a contract for the carriage of the goods.[5] In short, it both includes contract and property. This shows that an investment involves the application of the law of contract and property.

Further, we have seen that investment activity is governed by commercial law. Commercial law developed through practice by merchants and the state ‘received’ it into a legal system.[6]

Recently, state regulations grows to regulate the industry and with the creation of public utilities owned by the State have led to the intrusion of public law into the realm of commerce.[7] This shows that commercial law is also a public law. Do you remember what public law means?

Public law is a body of law dealing with the relations between individuals and the government.[8] Investors are individuals and the government regulates investment. Therefore, law of investment is a public law.

One of the purposes of our Commercial Cod is, as indicated under the preface as follows:

We have directed that in the expansion and consolidation of our commercial laws, great attention should be given to the control of all trading,

This clearly shows that commercial code is public law by its nature because the government regulates the transaction of investment as a commercial activity.

Investment law regulates investment in general and among others addresses the following issues among:

It defines important terms like investment and investor. International investment agreements are international investment law that define these terms. National laws also devote certain provisions to define investment and investor.[9] In so doing, the investment law regulates investment. For example, many international agreements define investment as something established according to the laws of the host country.[10] The main purpose of such definition is to ensure that investment has been properly registered and licensed in accordance with the laws of the host country. As was have discussed earlier, investment law classifies investment in to varies categories, such as foreign direct investment, portfolio investment, domestic investment etc.

Admission and Establishment of Investment – Investment law regulates the entry of foreign investment in a host country. Each state may wish to restrict investment in certain sectors of the economy to the state or to domestic inventors. Investment law puts requirements to establish enterprises to undertake investment activities, and the forms of enterprises. It also includes ownership restrictions and related issues.

National Treatment – A host country is required by international investment law to treat foreign investors in the same manner as national/domestic investors. However, the host country may not treat foreign investors equally with domestic investors. It is worth noting that a customary international law does not necessarily require states to extend national treatment to foreign investors. Such national treatment is provided by bilateral investment treaties or/and national laws.

Guarantees- Investment law provides guarantees to investors. International investment law is aimed at guaranteeing foreign investors. History has shown nationalization and expropriation of foreign direct investment. Thus, customary international investment law guarantees investors against those and other forms of expropriation of investment.

Environmental Issues:- are also addressed by investment law. Today, it is realized that economic activities are closely linked to the protection of the environment. Thus, investment treaties have begun to include provisions addressing environmental protection.

Labour Issues –The inclusion of labour provisions in investment treaties is growing although they are always included. The International Labour organization’s Tripartite Declaration of Principles Concerning Multinational Enterprises and social policy (1977) and the DECD’S Guidelines on Investment and Multinational Enterprises (1976) are the two international agreements that address labour issue.  Promotion of employment of host country’s nationals is one of the labour issues treated by the investment law. For example, the Ethiopian Investment Law requires, in some cases, that foreigners be replaced within a specified period of time by Ethiopians who have been trained by the investors (employer).[11] Investment treaties may provide for minimum standards as to wages and working labour conditions. It may also address the right of workers to organize labour union.

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[1] M. Sornarajah; The International Law on Foreign Investment, Grotius Publications, Cambridge University Press, New York, 1996, Pp. 2-3
[2] Ibid, P-3
[3] Ibid, P-4
[4] George Whitecross Paton; A Text Book of Jurisprudence,(third Edition),Oxford, London, 1967,pp. 245-46
[5] Ibid, p. 246
[6] Ibid
[7] Ibid
[8] Bryan.; Ibid, p. 1267
[9] See for example Proc, No 280/2002, Ibid,  Art.2
[10] UNCTAD, International Investment Agreements: Volume 1(2004), P.122
[11] See Proc. No 280/2002, Ibid, Art. 38.

{/slide}

General

In developing countries, the trend is that both inflows and outflows rose in 2005 although trends varied by regions. According to the study conducted by the UN, inflows into and outflows from Latin America and the Caribbean and West Asia rose in 2005. But, only inflows rose in Africa and East, south and South- East Asia in the same year. West Asia underscored both inward and outward.

Africa

In Africa, rising corporate profits and high commodity prices helped boost inflows in 2005 to $ 31 billion from 17$ billion in 2004. However, the region’s share of global FDI remained at around 3%. The inflows concentrated in mining, in particular oil and gas, although there was also investment in services from the United Kingdom, the United States, South Africa, China, Brazil and India.

With respect to manufacturing, low skill labour, fragmented markets and lack of diversification inhibited FDI in Africa.

South Africa, Egypt, Nigeria, Morocco and Sudan accounted for 66% of the region’s FDI inflows in descending order of value of FDI in 2005. Investment from China and other Asian economies increased particularly in the oil and telecom industries.

FDI inflows into East Africa fell to $ 1.7 billion from $ 1.9 billion in 2004, which represented only 5% of the inflows to Africa. Two factors are pointed out as reasons for the decline in the inflow of FDI in East Africa. These concern the fact that the sub-region is poor in resources, and there is a political instability. As a resul,t the inflow of FDI into Ethiopia, Kenya, Madagascar and Mozambique declined in 2005. On the other hand Uganda attracted more FDI due to its continued macro economic and political stability.

With regard to out flow FDI in 2005, Africa’s share fell by 44% to $ 1.1 billion from $ 1.9 billion. This comprises only 0.1% of the world FDI outflow and only 0.9% of developing countries out flows. In 2005, Nigeria, Liberia, Morocco, the Libyan Arab Jamahiriya, Egypt and South Africa were the top six countries in out ward flow FDI, accounting for 81% the region’s outflows.

Sectorial trends

The trend shows that the FDI inflows to Africa in 2005 were tilted towards primary production, particularly oil. It also shows an increase in service sector, especially in banking. Algeria (55%,) Egypt (37%,) Nigeria (80%) and Sudan (90%) attracted FDI in oil production.

Policy Developments

African countries continued to liberalize their investment environments. Most of the African countries made their environment favourable to investment although some of them made the environment less favourable. In addition, the trend towards privatization continued across Africa. African countries also attempted to change the investment climate. Countries like Egypt, Ghana, Senegal and South Africa have reformed their tax systems, and as a result they often reduced corporate income taxes. In addition, some have ensued operational conditions for TNCs. For instance, Egypt has been facilitating the entry and residence of foreigners.

Further, some countries such as Ghana, and Mali have reformed their admission procedures by introducing one-stop shops, having recognized that an investor-friendly admission phase has a beneficial effect on the subsequent  relationship between the host and the investor. Some other countries also acted to remove some of the key constraints in attracting and benefiting from FDI. South Africa, for instance, has introduced a Skills Support Programme (SSP) to enhance the supply of skilled labour.

Some policy changes have also been made with respect to regulatory framework less favourable to FDI in the extractive industries. For example, the Central African Republic introduced an indefinite suspension of the issuance of new gold and diamond mining permits and banned foreigners from entering mining zones. Zimbabwe continued its indigenization program by requiring all foreign- owned mining companies to sell a 30% stake to local businesses within a 10-year period.

African countries concluded bilateral investment treaties to regulate investment.

India: A Successful Developing Country in Investment

Since 1991, India has opened its doors to foreign investment. Prior to the implementation of the 1991 Indian economic policy, foreign investment was allowed on a case-by-case basis. However, now the Indian Industrial Policy liberalized the internal licensing requirements for business and retained only minimum procedural formalities. The policy removed restrictions on investment and it facilitated easy access to foreign technology and foreign direct investment.

The Industrial policy of 1991 was aimed at avoiding the red tape and corruption in the bureaucracy, and liberating Indian business. The policy has resulted in increasing income and improving the living standards of Indian residents over the last decade.

Labour-The local employment population is another great benefit for investment in India in addition to the liberal investment policy. India is one of “the largest domestic markets in the world and it has a large labour force available at relatively low cost”. India has very educated workers especially in the area of engineering and science. The country welcomes approximately 200,000 new engineers per year. India offers investors higher  potential rate of return than any country in the computer software sector. The people are fluent in the global language English, which offers an advantage for foreign investors in the country.  The Indian labour has a generally favourable attitude towards foreign investment. What is more, foreign investors could employ foreigners since the Indian investment law does not prohibit doing that.

Despite the fact that India offers educated workers, investors faced delays due to Indian workers failure to understand what they are expected to perform. The reason is believed to be that Indian workers are not being onsite. In addition to delays, there are also hidden costs associated with outsourcing jobs to India. As a result, investors have been forced to expend more money and hence, many companies could actively look for places cheaper than India, such as Argentina and Colombia.

Tax treatment- India has also made changes to its tax law with a view to increasing foreign investment. As a result, the rate of import duties for capital goods has been greatly reduced.

Investing in developing countries abroad

Foreign investors are encouraged by several factors to invest abroad in general and in a developing country in particular. There are also factors that pull investors to invest abroad. These factors may be categorized as pull factors and push factors. Pull factors are factors that attract the investor towards developing countries to invest. Push factors, on the other hand, are unfavourable factors in the home state of the investor that repel the investor from that country. Thus, push factors have the force to push the investor to opt for a favourable condition to invest in. Therefore, the investor will go to abroad to invest. It is worth noting that push factors are the opposite of pull factors.

The following may be the pull factors for investors to invest in a developing country:

1. Market pull factors– Investors need market for their production. Now a days, the world is divided into different economic blocks. For example, there are the common Market of Eastern and Southern Africa (COMESA), European Union (EU) etc. If the product originating from a member country of a block, it may benefit from preferential tax treatment compared to a similar product originating from another region. For example, a product originates from Ethiopia will get a preferential tax treatment in COMESA than a similar product that originated from China because Ethiopia is a member to COMESA while China is not. Thus, if the particular product has a demand in COMESA, Chinese investor may want to invest it in Ethiopia to be a beneficiary of the COMESA.Market pull factors are the most important determinants of FDI especially in host economies. Large Markets that are emerging in developing countries will be more attractive. However, the size of the market depends on the type of the product. Thus, the capacity of the consumers to buy the product is crucial.

2. Resources: An investor needs natural and human resources in a reliable manner to produce or manufacture. Thus, the investor could be attracted by the abundance of natural and human resources available in developing countries. An investor will prefer to invest in a country where natural resources needed for the manufacture of his/her/its produce are available in a large quantity and at a cheaper in price.In addition, an investor will be attracted to invest in a country where skilled, disciplined and cheap labour force is found, other factors being equal.

3. Policy frameworksof a host country also determine the direction of FDI. Liberalized economic policies and privatization policies of a host country attract FDI. Regulations and inducements encouraging FDI and investment treaties (bilateral or multilateral) facilitating FDI are pull factors.

4. Political and economic stability:Investors are investing with a view to gaining profit which would be realized through time. Thus, to gain profit, the political and economic stability of a country are essential. Therefore, investors will be attracted to invest in a country where there is political and economic stability.

5. Existence of relevant clusters:- The nature of investment requires the existence of some inputs from other enterprises. A group of enterprises feeding each other within put are known as a cluster. For example, a textile factory needs an enterprise that spins cotton and produces raw material to produce clothes. An investor will be attracted to invest in a country where inputs are available for him/her/it to produce.

6. Growth: An investor wants to invest in a country where there is a demand for the product because this may reduce cost to transport the product to such country by producing it in the country. This definitely will increase the profit from the investment. Investing in the country where there is demand for the product will also enable the investor to adapt the product to local needs and taste. The point here is that the foreign investor prefers to invest in the country if customers of a given product grow in number, the other factors being same.

Lax Environmental Laws–Developed states require investors to ensure that their investment does not affect the environment negatively. For example, they may require investors to reduce their carbon emission to a specified level. In short, the investment law of developed states is very strict in protecting their environment. On the other hand, developing countries have less strict laws in this regard. Consequently, investors would invest in developing countries to reduce additional costs due to strict environmental law.

Push factors that repel FDI in developing countries include:

1)      Market push factors- Developing countries have limited home market that may not expand as required by investors. Thus, this is a push factor since the investor may wish to go out to find market.

2)      Increases in production costs are also driving factors. Increase in production costs may be the result of rapid economic expansion, or scarcity of resources or inputs. Increase in labour costs is a crucial factor that pushes investors. In addition, inflationary pressures also are pushing factors.

3)      Home country business conditions-may be the cause for the investor to opt for international investment. For example, if the competition in the home country is stiff, the investor may need to move into a foreign market.

MOTIVATION AND STRATEGIES

Market-Seeking– FDI is the most common type of strategy for TNCs in their places of internationalization. This was confirmed by a study conducted by UNCTAD as the most significant motive for FDI. Particularly NTCs in developing countries invest to open or secure markets since the resources, like oil gas, are available in their home countries.

Efficiency-seeking–FDI is an important motive. In Asia FDI investments in electrical and electronic products, garments and IT services are made based on the principle of efficiency seeking. They mostly consider efficiency to mean low-cost labour but for Indians it means “primarily the synergies to be gained through the international integration of production and service activities, rather than “low cost inputs”.

Efficiency seeking investments depend on the nature of the product and the particular type of global production network in which it is located. The two main types of networks are:

I. Buyer driven– Large buyers control branding, marketing and access to markets and strive to organize, coordinate and control the value chain in industries such as agro-industries, garments, furniture & toys.

II. Product driven– Key companies own crucial technologies and other firms in the net work, especially supplies e.g. Electronic & automobiles. Industry clusters are also an important aspect of product-driven global production networks.

C. Resource- seeking:-is of moderate significance. FDI may be made to secure material resources abroad, e.g. China, India, Turkey.

- Due to competition, TNCs are extracting resources in countries beset with civil wars, ethnic unrest or other difficult conditions e.g. China National Petroleum Corporation (CNPC), ONGC and Patronas (Malaysia’s national oil company), are heavily involved in oil exploration and production in the Sudan where a number of conflicts are  raging.

Investment may be categorized differently. From the standpoint of an individual, two types of investment may be distinguished: investment in the means of production, and purely financial investment. Both types may provide a monetary return to the investor. However, from the standpoint of the entire economy, purely financial investments appear only as title transfers, and do not constitute an addition to productive capacity.[1]

 

Investment may also be grouped into foreign (international) and local (domestic) investment. The classification of investment into foreign and domestic depends on the identity of the investor because the identity of the investor would attract several legal consequences. The identity of the investor poses different policy considerations, and this in turn attracts several legal manifestations.

 

Foreign investment is an investment by a foreign investor while a domestic investment is an investment by a domestic investor.

Foreign Investor- who is foreign investor? See Article 2(6) of Proclamation No 280/2002.

A foreign investor is one who is a foreigner not permanently residing in Ethiopia and who invests capital obtained from foreign sources or reinvests profits accruing to her/him from investment already made in Ethiopia or

A foreigner who is an Ethiopian by origin and chooses to be treated as a foreign investor and invests capital s/he raised abroad, or reinvests profits made in Ethiopia from previous foreign investment; or

An Ethiopian permanently residing abroad and chooses to be treated as a foreign investor and invests capital obtained outside Ethiopia, or reinvests profits obtained from prior foreign investment in Ethiopia, or an enterprise owned by foreign nationals who invest capital raised abroad or reinvest profits made from previous foreign investment in Ethiopia.

In general, investment made by a foreign investor is a foreign investment.

 

Foreign investment “involves the transfer of tangible or intangible assets from one country into another for the purpose of use in that country to generate wealth under the total or partial control of the owner of the assets”.[2] We observe, from this definition, that transfer of intangible asset is an essential element. Intangible assets include intellectual property rights, such as patents, copyrights, know how etc. In addition, foreign investment also includes transfer of tangible assets. The purpose of transferring tangible and intangible assets to another country is to generate wealth. Generating wealth indicates that foreign investment is profitable.

 

The term ‘foreign investment’ may also be defined as: “A transfer of funds or materials from one country (called the capital exporting country) to another country (called the host country) in return for a direct or indirect participation in the earnings of that enterprise.”[3]

 

What are the essential elements of this definition? The first essential point with regard to this definition is that it involves transfer of funds or materials. Fund denotes “the sum of money or other liquid assets established for the purpose of” investment in another country [Garner; 2004:696]. The foreign investor will transfer this fund from his/her country to another. Thus, we have two countries which involve in the transaction of foreign investment. They are: capital exporting country and host country. A capital exporting country is a state (country) from where the investor sends his/her its funds/and/or materials to invest while a host country is a country where the investment is made. In other words, a country where the fund and materials reach and the actual investment takes place is a host country. A capital exploring country is also called “home state”.[4]

The main purpose of foreign investment, according to the above definition, is to participate in the earnings of the enterprise. In other words, investment is made with the main purpose to accrue a benefit from the investment.

 

Foreign investment may be either foreign direct investment or portfolio investment.

Foreign Direct investment (FDI) is investment that is made to acquire a lasting interest the investor’s purpose being to have an effective choice in the management of the enterprise. To be more specific, a foreign direct investment is ownership of assets by foreign residents for the purpose of controlling the use of these assets.[5] In case of foreign direct investment, the foreign investor directly controls his/her assets that are made on investment in host country. For example, John is an American investor who invests on flowers in Ethiopia. He has expended Birr 1.5 million on the investment. He recruits staff working for his investment, like the guardian, secretary, flower cutters and soon. Thus, John has exerced the right of ownership over his assets directly.  Therefore, the investment is foreign direct investment.

 

According to the United Nations (UN), an investor is said to have the controlling power over the investment where s/he/it has ten percent (10%) or more of the voting powers in the firm. This is to indicate the power of the investor to decide upon the affairs of the investment. In other words, controlling the investment refers to the power to exert control on the management of the affairs of the enterprise.

 

The power to control the management of the enterprise could vary according to the type of business organization in question. For example, in cases of partnership, all shareholders have equal voting powers irrespective of their contribution unless otherwise agreed.[6] Thus, according to the principle of management of partnership, a person who contributed 1000 Birr will have equal voting power as another who contributed 100,000 Birr. However, our commercial code gives the liberty for shareholders (partners) to agree that the voting power should be as equal as the amount of the contribution of each partner.

 

On the contrary, the power of voting depends on the amount of contribution of each shareholder in case of companies. For example, according to Article 535(1) of the Commercial Code, a majority is a “majority of members representing more than one half of the capital” of the private limited company. Similarly, a shareholder in a share company has a voting power depending on the proportion to the amount of capital contributed (Art. 407(1) of the Commercial Code). For example, Azeb has contributed Birr 500 to a share company while Zinash contributed Birr 150,000 to the same company. Consequently, Zinash has the power of voting 300 times more than that of Azeb.

 

Therefore, the UN threshold of 10% of voting rights would be meaningful with regard to companies under Ethiopian law, and it would be otherwise in case of partnerships devoid of the agreement.

 

The second criterion to determine foreign direct investment is that it is made to acquire lasting interests. This means that foreign investment is made for long term.

 

What do you understand by lasting interest? Or long-term investment? In fact, there are no specific yardsticks to determine whether or not a given investment is lasting. However, we can take into account the intention of the investor. If the intent of the investor is invest for a long period of time, that would indicate the intent of such investor is to acquire a lasting interest from the investment. The amount of investment may also indicate whether or not the investment is lasting. The sector of the investment would also indicate the nature of the investment. For example, investment made on factories in general could be regarded as a long-term one  since it could not be accomplished during a short period of time.

In a foreign direct investment, the investor is entitled to protection of both the domestic law of the host state and the diplomatic protection of the home state from which it was exported[7]

 

Why such double protection is granted to a direct foreign investment?

First and for most, a foreign investor uses the economy that would have been used to advance the economy of the home state. In other words, if the investor were not investing the capital in a host country, it would have been used to promote the development of the capital exporting country.[8] For example, Mike and his two friends invest on the pharmaceutical sector in Ethiopia with a capital of 5 million Birr. There is a general presumption that if Mike and his friends did not invest such capital in Ethiopia, they would invest it in their country, they are using the wealth of their country to invest in Ethiopia. In general, foreign investors use the wealth of their country. Therefore, the home state is justified in ensuring that the resources invested in a foreign country (host state) are protected.

 

In addition, investment by its very nature requires the continuous presence of the investor and his/her its capital in the hose state.[9] Then, this requires or necessitates the protection for the person(s) (the investor) and the capital that is invested. For example, the investors should spend a certain period in the host state so long as the investment continues. To perform the investment peacefully, legal protection is essential. We have seen that personnel and the plant for the investment should be present for a long period of time in the host state. The enterprise (or the plant),as a property needs protection. Moreover, the personnel require legal protection: their rights should be protected while they are at work.

 

Further, the investment is made for the good of both nations. The investment made in the host state definitely will enhance the economic development of the host state. It would create an employment opportunity for the residents of the host state. The benefits accrue from the investment will not eventuate in the absence of such investment.[10] The capital exporting state will benefit from the profits that accrue from the investment because the investor is entitled to take the profits to his/her/ its home.

 

Foreign direct investments are made largely by multinational corporations. Multinational corporations are large business organizations so the sum of money invested is large. Further, those multinational corporations will implement a global strategy in making foreign investment. Consequently, controlling is essential for the implementation of the global strategy[11]

 

We have seen that in foreign direct investment, it is necessary for the investor to be present physically in the host state. The foreign investment has to be held in the host economy since it operates there. This will create  the conducive environment for the investor to be active participant in the economic and political process of the host state.[12]

In foreign direct investment, there is a movement of people and property from one state to another, and such movement has potential for conflict between the two states. The investor needs to keep secret the competitive advantages of that state to maximize the profit. Similarly, the host state requires to acquire a lot out of the investment such competitive interests require the protection of both the interest of the investor and the host state. Personnel attract diplomatic protection wile the property requires equal protection. Thus, it is argued that the right of alien can be extended to the protection of foreign investment. At this juncture, it is important to note that the roles of international law on foreign investment lie in the effort to extend diplomatic protection to the assets of the alien. However, this argument was criticized on the ground that it leads to unwarranted interference in the domestic affairs of the host state.[13]

Portfolio Investment- “is a movement of money for the purpose of buying shares in a company formed or functioning in another country.[14] The World Bank defines portfolio flows as consisting of “bonds, equity (comprising direct stock market purchases, American Depository Receipts (ADRs), and country funds), and money market instruments (such as certificates of deposits (CDs) and commercial paper”.[15] As we can see from these definitions, in portfolio investment, the investor purchases shares from the host country business organization. The nature of portfolio investment does not offer the opportunity to control the business organization. In other words, in portfolio investment, there is a divorce between management and control of the company and the share ownership in it.[16]

Domestic Investor-Proclamation  No 280/2002 Art 2(5) defines domestic investor as:

An Ethiopian or a foreign national permanently residing in Ethiopia having made an investment, and includes the Government, Public enterprises as well as a foreign national, Ethiopian by birth, and desiring to be considered as a domestic investor.

From this definition, we can gsee that for an investor to be regarded as a domestic investor s/he or it must either be 1) An Ethiopian national; or 2) A foreigner who is a permanent resident of Ethiopia; or 3) A person of Ethiopian origin who is no longer an Ethiopian national even where s/he does not live in Ethiopia so long as s/he chooses to be treated as a domestic investor; Or 4) Public enterprises which according to Proclamation No. 25/1992, business entities owned by the Ethiopian Government or  regional governments or other state entities in Ethiopia. In short, they are publicly owned business entities.[17]

In general, we have seen that investment may be categorized as foreign and domestic. Foreign investment may further be classified into foreign direct investment and foreign portfolio investment.

FACTORS THAT AFFECT THE DIRECTION OF FOREIGN DIRECT INVESTMENT

 

Why do you think investors wish required to invest abroad? Researchers have examined this issue almost for forty (40) years and the following three points have been forwarded as reasons for foreign investment. The first reason is that multinational companies own assets that can be profitably exploited on a comparatively large scale, organizational and managerial skills, and marketing net works. In other words, foreign investment is attractive to those who own a large amount of money and managerial skills. Secondly, the profit that could be gained from investing abroad is greater than that could be gained from the home country. Thirdly, investors decide to undertake foreign direct investment (FDI) where it is preferable to licensing the production.[18] In general, foreign investment is more profitable to the investor than domestic investment, and this attracts foreign investors.

 

There are also economic factors that determine the FDI. They are: A) market-seeking-FDIs are made in seeking market for goods and services; B) Resource/asset seeking-investors require resources or assets to produce, and therefore, they will invest in locations where resources or assets are available; C) Efficiency seeking is another factor stimulating foreign direct investment. Thus investors will undertake investments where the production is efficient in terms of cost.[19]

 

Economists have developed different theories to explain the factors that affect the direction of foreign investment. What are these theories? Let us discuss the most important ones.

 

Transportation costs-it becomes unprofitable to ship some products a long distance when transportation costs are added to production costs. For example, Cemex has undertaken FDI rather than exporting the product.  It is essential to note that transportation costs have little impact on the relative attractiveness of FDI on electronic components, personal computers, medical equipment, computer software, etc because transport costs are very minor.[20]

 

2) Market Imperfections (internalization theory) - Market imperfections provide a major explanation of why enterprises may prefer FDI to either exporting or licensing. What are market imperfections? Factors that inhibit market from working perfectly are called market imperfections. A market imperfection that is favoured by most economists is referred to as internalization theory.[21]

 

Market imperfections may arise where there are impediments to the free flow of products between nations. Thus, impediments to the free flow of products between nations decrease the profitability of exporting the products. Whenever there are market impediments, investors may opt for FDI.[22]

 

3) Competition strategy –Another theory that explains FDI is that FDI flows are a reflection of strategic rivalry between enterprises in the global market. If one enterprise cuts prices, another competitor will also do the same. On the other hand, if one raises prices, the others follow to retain their market share. Knicker Bocker argued that the same kind of imitative behaviour takes place in FDI. For instance, Toyota and Nissan responded to investment by Honda in the United States of America and Europe by undertaking their own FDI in the countries.[23]

 

It is also observable that Fuji is compelled to follow Kodak to ensure that Kodak does not gain a dominant position in the foreign market. Therefore, Fuji invests in a country where Kodak invests with the intention of not allowing Kodak to take the advantage of FDI.[24]

 

4) The Product Life Cycle –Raymond Vernon’s product life-cycle theory is also used to explain FDI. According to Vernon, an enterprise that is a pioneer in its home markets may undertake FDI to produce a product for consumption in a foreign market. For example, Xerox which produced photocopier in the United States of America, invests in Japan (Figi-Xerox) and Great Britain (Rank Xerox) to serve those markets. Then they shift their production to developing countries to satisfy the demands where labour costs are lower to produce.[25]

 

According to Vernon’s theory, firms invest in a foreign country when demand in that country will support local production, and they invest in low-cost locations. Thus, investors  invest in developing countries where production cost is low. However, it is worth noting that a large demand in a foreign country does not necessitate foreign direct investment. It may be more profitable to license instead of FDI for the production of the product.[26]

 

5) Location –Specific advantages –According to John Dunning, location specific advantages can help to explain FDI in addition to the various factors we discussed above. Location specific advantages are advantages that arise from using local natural resources and know-how that helps the investor to produce. Dunning refers to this argument as the eclectic paradigm.[27]

 

For example, an investor will invest in a country where oil as a natural resource is abundant. In addition, an investor may invest in a country where there is low-cost highly skilled labour.

 

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[1] The New Encyclopaedia Britannica; Vol  6, 2003, Pp.  363

[2] M. Sornarajah; The International Law on Foreign Investment, Grotius Publications, Cambridge University Press, New York, 1996, p 4

[3]

[4] II SD Model International Agreement on Investment for Sustainable Development; 2005, Art. 2(I)

[5]Sornarajah; Ibid, p. 4

[6] Commercial Code  of the Empire of Ethiopia, Proclamation  No. 166 of 1960, Negarit Gazeta, 19^th Year No. 3, Addis Ababa, 5^th May 1960, Art. 234

[7] M. Sornarajah; Ibid, p. 5

[8] Ibid

[9] Ibid.

[10] Ibid, p 5-6

[11] Ibid, p. 6

[12] Ibid

[13] Ibid, p. 8

[14] Sornarajah; Ibid, p. 4

[15] Bhalla and Ramu; Ibid, p. 516

[16] Sornarajah,  Ibid, p. 4

[17] See Seyoum; Ibid, p. 5-6

[18] (?), Trade and Foreign Direct Investment: (?), P. 50

[19] Gibrehiwot Ageba, Investment; (Unpublished), 1999, Pp.10-11

[20] Charles W. L.  Hill; International Business: Competing in the global Market (Fourth Edition), Tata McGraw-Hill Publishing Company Limited, New Delhi, 2003, p. 213

[21] Ibid, p. 214

[22] Ibid

[23] Ibid, p. 216

[24] Ibid, Pp. 216-17

[25]Ibid, p.27

[26] Ibid

[27] Ibid, p 218

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