THE world economy has maintained or enhanced its integration in the past decade even in the face of the global financial crisis. A large part of this globalization has been driven by capital flows. This symposium focuses on one element of these capital flows, foreign direct investment (fdi), and on the regime in place to safeguard and promote such investments around the globe.1 The articles by Allee and Peinhardt and Simmons focus on the nature and evolution of the bilateral investment treaties (bits) that have been developed to protect such investments and that have proliferated since the 1990s. The final article, by Büthe and Milner, turns its attention to the ways in which international trade agreements affect fdi. The comparison between the investment and trade agreements is instructive, since they seem to have different effects. [End Page 1]
FDI Flows and the Regime for Global Investment
fdi has become one of the most important economic flows in the global economy. It is a critical source of capital for developing countries and remains a significant source of investment in the developed world. fdi has grown in part because countries changed their policies toward it dramatically after the 1980s; governments in developing countries made unilateral policy changes that opened up markets across the globe and increased competition among countries for fdi.2
fdi has grown in terms of both flows and stock over the past few decades, although the financial crisis has weakened this channel. In 1990 global fdi flows were about $290 billion (constant 2005). In 2000 this figure had increased to $1.58 trillion in constant dollars. In the following years it dropped slightly and then peaked in 2007 just before the financial crisis.3 By 2011 it had recovered, but it remains slightly below 2000 levels at about $1.34 trillion (in constant dollars). On average, since 1990 fdi grew by about 7.6 percent per year (or about $50 billion per year). About half of all fdi now flows to the developing world; developing and transition economies, respectively, accounted for 45 percent and 6 percent, respectively, of global fdi by 2012. For these countries fdi flows have become the largest source of external capital, outweighing portfolio, debt, and aid flows.4 Looking at the stock of global fdi, there has been an annual increase of 9.1 percent since 1990 and of about 7.2 percent since 2000. In 2011 global fdi stock reached about $18 trillion. Roughly two-thirds of this was located in developed countries, but China’s share alone has grown to about $628 billion, and Hong Kong’s to about $1 trillion.5
Most fdi is undertaken by multinational corporations (mncs), although a small but growing fraction has been accounted for by sovereign wealth funds (swfs). mncs use fdi to build their global production networks and to service host markets. These corporations exert a significant influence on the world economy and within particular countries. In 2011 foreign affiliates of mncs employed an estimated sixty-nine million workers, who generated $28 trillion in sales and $7 trillion in value added.6fdi is a very important part of the global economy, and mncs are significant actors on the world stage. Indeed, the relationship [End Page 2] between these transnational investors and states is a primary issue in the global investment regime.
At the international level, great changes have also occurred in the set of norms, rules, and procedures guiding the expectations of actors—that is, in the regime—for global investment. From an unwelcoming environment that treated fdi with suspicion—as evidenced by the proposals made in the New Economic Order by developing countries at the UN in the 1970s—a new regime has developed that protects and promotes foreign investment. Unlike in international trade, however, a multilateral agreement regulating fdi does not exist. As Simmons notes in her article, this difference may reflect the time inconsistency problems in international investments and thus the greater need for credible commitments there.7 The closest analog to the World Trade Organization’s rules for fdi...