Essay on “Code of Conduct for Foreign Investments Round the World” competitive exam essay.

Code of Conduct for Foreign Investments Round the World


Besides the code of conduct for multinational companies, there is a code of conduct for Governments wanting foreign investment. Patent protection continues to be a live issue in India. But even as what was really yesterday’s battle is still being fought within the country, the agenda for tomorrow’s been drawn up in Paris. In May 1996, members of the Organisation for Economic Cooperation and Development (OECD), the Paris-based rich country club, began negotiations on sweeping new rules for foreign investment.

Over the next few years, OECD hopes to draw up a code for foreign investment, that countries around the world will have to adhere to if they want multinational firms to invest in their economies. The proposals on the table for these new rules cover a vast area. In addition to reaffirming old principles, like the right to repatriate earnings, the agenda includes far reaching proposals: foreign companies’ right to investment in privatisation programmes; easier rules for takeover by multinational companies and their entry into areas traditionally reserved for State monopolies. Foreign firms will expect to be treated on equal terms by their local counter-parts in all respects. The agenda, in short, is for drawing up a global investment code that will leave little room for independent national policies on foreign investment.

The wheel has turned the full circle. Until 1992, efforts were on within the United Nations to draw up a code of conduct for multinational corporations. The aim was to formulate rules to govern activities of companies operating outside their home countries. The U.N. code was to prevent unfair competition, abuse of monopoly power by multinational companies, over-invoicing of imports and under-invoicing of exports, and area and volume restrictions of exports by subsidiaries. But that attempt was abandoned, and even the U.N. center entrusted with the job was shut down. The rules that are now being negotiated, aim at the very opposite. Instead of a code of conduct for multinational companies, there is to be a code of conduct for governments wanting foreign investment.

An unusual aspect of this attempt to draw up foreign investment rules for host countries is that, it is not being negotiated at the 120-member World Trade Organisation but at the smaller 25-member OECD. But the OECD countries want all countries to comply with the code if they want to attract foreign investment. The message, in other words, is respect these rules or forget about large-scale foreign investment. As 93 per cent of foreign direct investment (FDI) originates in the developed countries, there is little doubt that the OECD code, if and when it is finalised, will have a major say in the decisions of multinational companies. In recent years, there has been an explosion in foreign investment flows to developing countries. But this growth is already beginning to flag while the enthusiasm among the developing countries for international capital has not. With competition for FDI, therefore, likely to increase in the future, the power of governments of industrial countries to command respect for the proposed investment rules will also increase. Some companies in the industrial countries may want to break ranks, but the ability of governments of the OECD countries to get their firms to keep away from non-complying countries should not be discounted. For years, we had the coordinating committee for exports—co-effectively controlling export of dual purpose technologies to the developing countries.

In an article presented at a World Bank conference in early 1995, Mr. Patrick Low and Mr. Arvind Subramaniam, staff members of the World Bank and the International Monetary Fund, gave six reasons for why global investment rules—negotiated in a multilateral body and not in a closed forum—may be desirable. First, such rules make it difficult to reverse liberalisation of investment policies that have already taken place. Second, common rules will simultaneously hasten further liberalisation in individual wild Third, a continuity of policy will be ensured. Fourth, an international code will constrain regional trade agreements from fragmenting the global economy. Fifth, common rules will prevent governments from vying with each other in offering costly incentives to attract foreign investment.

This is not the first time that an attempt is being made to draw up a code for foreign investment. In a more restricted form it was on the agenda of the Uruguay Round of multilateral Trade Negotiations of the General Agreement on Tariffs and Trade. It is one of the mysteries of the Uruguay Round that, in the end, there was not much fuss about the trade-related investment measures (TRIMS) that were negotiated at GATT, though they were potentially more powerful and ‘controversial than the proposals contained in the twin acronym, TRIPs (trade-related aspects of intellectual property rights), which are still being debated and criticised.

In the final agreement on the Uruguay Round, in the TRIMS clauses, countries only promised to phase out what are called local content requirements, i.e., rules similar to India’s earlier Phased Manufacturing Programme (PMP), that insisted on foreign companies/collaboration ventures increasing their use of domestic raw materials/inputs. In the end, even a phasing out of minimum export performance requirements was not included in the GATT/WTO agreements which are dated, since many developing countries have independently abolished their local content rules. India scrapped its PMP in July 1991 when the new industrial policy was announced, well before the conclusion of the Uruguay Round in December 1993.

Mr. Low and Mr. Subramaniam offer an explanation for why the TRIMs did not turn out in the Uruguay Round to be as controversial as earlier expected: “In conjunction with services and TRIPS, TRIMS was to be a part in the trinity of the new GATT, which would respond to the changing conditions of international competition in the world. The United States, the most insistent demandeur, wanted a very broad remit for the TRIMS negotiations, including ‘pure’ investment issues such as rights of establishment, national treatment and investment incentive. The original negotiating agenda would have created a ‘GATT for investment.’ In the face of opposition from developing countries, who sought to preserve their sovereignty over investment policies, the U.S. con-ceded–for the sake of keeping TRIPS and services on the agenda to a narrow mandate for TRIMS negotiations.”

The failure to go very far with TRIMS in the Uruguay Round of GATT, explains why the industrial nations are keen on the investment code being negotiated in the smaller and relatively more homogeneous OECD. Theoretically, without opposition and without much bargaining, it should be possible to draft a tough investment code.

By no means should it be assumed that drawing up a code for foreign investment will be a cakewalk for the industrial countries. There are differences among themselves as well—between the U.S. and Japan, and between the U.S. and the European Union—about what the code should deal with and how tight the rules should be. There is also a turf battle looming between OECD and the WTO about who should be responsible for drafting global investment rules.

Difficulties the industrial countries will have in formulating an acceptable set of international investment rules. But that does not mean the effort will be given up. They faced difficulties in the Uruguay Round in tightening patent rules, but in the end they were able to push through their agenda. Compared to what an international code for foreign investment will mean, the costs of the stricter patent rules that were negotiated in the Uruguary Round are small change. Instead of continuing to expend energy on TRIPS, it is more important that India and other countries think about countering the process that has begun in OECD.

The demands are endless. After an investment code, will come an agenda for a global competition policy. This is already being talked about and proposals have been aired for international norms that will ensure a so-called level playing field between countries. A competition policy will cover an even larger canvas: domestic wholes  on monopolies, subsidies, government procurement, I e and retail distribution systems, and support for research and development. If an international investment code is drawn up, can formulation of a competition policy be far behind?

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