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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 290  November 2, 2020
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Riccardo Loschi ([log in to unmask])
*The blind side of international investment law and policy: The need for
investor-state conflict-management mechanisms fostering investment
retention and expansion*
* <#m_-2523368687628059092__edn1>
Roberto Echandi ** <#m_-2523368687628059092__edn2>

Investor-state conflict-management mechanisms (CMMs) allow host countries
and investors to address effectively their grievances at a very early
stage, preventing conflicts from causing FDI project cancellations and
reducing the incidence of full-blown legal disputes.

Investor-state disputes are framed within a continuum*.* Disagreement can
lead to conflict, i.e., a process of “expressing dissatisfaction,
disagreement, or unmet expectations with any organizational interchange.”[1]
<#m_-2523368687628059092__edn3> A legal dispute is an unattended conflict
that has escalated and degraded into a “defined, focused disagreement
framed in legal terms and with expectations of relief.”[2]
<#m_-2523368687628059092__edn4> While conflicts are usually dealt with
between parties themselves through the flexible use of diverse
problem-solving techniques, adjudication of legal disputes entails the
application of legal frameworks by a third party.

States are multilayered and administratively complex. It is not easy for
governments to identify and address investors’ grievances before they
degrade into disputes. Investor-state CMMs enable a lead agency or joint
body to swiftly coordinate an adequate state-wide response to a conflict
while it is still in an early stage. CMMs can be contractual or
institutional.[3] <#m_-2523368687628059092__edn5> Contractual CMMs are
pre-agreed, embedded in contracts between investors and countries; they are
particularly useful for public-private partnerships. Institutional CMMs
exist within the administrative structure of host countries, entailing the
establishment of a lead agency in charge of identifying, filtering,
tracking, and attempting to resolve investor-state conflicts at an early
stage—similar to the various ombudsperson offices recently established in
many countries, inspired by the Korean Foreign Investment Ombudsman
experience.[4] <#m_-2523368687628059092__edn6>

It is important to differentiate between “conflict management” and “dispute
prevention.”[5] <#m_-2523368687628059092__edn7> Although CMMs may be useful
to prevent disputes, their most important role is to prevent investor-state
grievances from inducing investors to give up and discontinue their
investments. Indeed, only a minor fraction of investors who discontinue
their FDI projects due to grievances with governments seek redress through
investor-state dispute settlement (ISDS)—the overwhelming majority
withdraws quietly. Thus, ISDS may be successfully prevented, and yet be too
late to prevent the withdrawal or cancellation of planned FDI expansion
projects. Paradoxically, while developing countries compete in costly
promotion campaigns and incentives to attract FDI, every year around
one-quarter of all investors in developing countries discontinue their FDI
projects due to unresolved grievances which, in the majority of the cases,
arise with subnational or specialized regulatory agencies.[6]

Most conflicts leading to FDI withdrawals stem from alleged adverse
regulatory changes, breaches of contract, *de facto* expropriations,
transfer and convertibility restrictions, and more recently from lack of
transparency and predictability in dealing with public agencies and delays
in obtaining the necessary government permits to start or operate
businesses.[7] <#m_-2523368687628059092__edn9>

These findings entail several critical implications for investment policy

   - The lack of statistics and legal infrastructure in host countries to
   identify, track and monitor FDI lost as a result of government conduct
   explains why this problem has remained undetected for so long. Moreover,
   the cost of ISDS pales in comparison to FDI lost as a result of government
   conduct. Yet, it is the former, not the latter, that so far has attracted
   most academic and policy-maker attention.
   - Thus, investor-state CMMs should become a central element of the WTO’s
   investment facilitation agenda, as well as the discussions at UNCITRAL’s
   Working Group III. Priority should be given not only to dispute prevention,
   but rather to mechanisms to prevent undesired FDI divestments resulting
   from government conduct. This point becomes particularly critical in an
   international context affected by COVID-19 and its impact on FDI flows,
   where FDI retention and expansion may be easier than attracting new
   - International investment law is a useful point of reference for lead
   agencies in charge of CMMs to undertake rule-based negotiations with
   investors and peer agencies involved in grievances. Thus, CMMs could enable
   international investment agreements to be implemented effectively in a
   non-litigious way and help fulfill their original purpose as
   risk-mitigation tools to foster FDI.
   - Empirical evidence shows that CMMs can shift the political economy of
   investor-state conflicts into positive dynamics: instead of measuring the
   cost of investor-state conflicts, CMMs can measure the jobs and investment
   retained and expanded as a result of host country governments’ efficient
   reaction in resolving conflicts and preventing FDI divestments and dispute
   escalation.[8] <#m_-2523368687628059092__edn10>

It is time to conceive the application of international investment law as a
tool to enable developing countries to retain and expand investment and
jobs in a sustainable manner and provide both investors and governments
with effective means to strengthen their relationship.

* <#m_-2523368687628059092__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_-2523368687628059092__ednref2> Roberto Echandi ([log in to unmask]) is
Lead Private Sector Specialist, Trade Unit, World Bank Group (WBG), and
non-resident fellow, World Trade Institute, University of Bern. The views
expressed in this note do not represent the views of the WBG and are the
exclusive responsibility of the author. This Perspective is based on
findings referred to in Roberto Echandi and Mariana H.C. Gonstead,
“Investor-state conflict management: Systemic investment response
mechanisms (SIRMS) and shared decisions system design (SDSD),” in T.
Cottier and K. Nadakavukaren, eds., Elgar Encyclopedia of International
Economic Law (Cheltenham: Edward Elgar, 2017). The author wishes to thank
Mariana H.C. Gonstead for her input and Makane Moïse Mbengue, Marie Estelle
Rey and Rafael Ramos CodeVo for their helpful peer reviews.
[1] <#m_-2523368687628059092__ednref3> Cathy Costantino and Christine
Sickles-Merchant, *Designing Conflict Management Systems* (San Francisco:
Jossey-Bass, 1996), p. 5.
[2] <#m_-2523368687628059092__ednref4> Stephanie Smith and Janet Martinez
“An analytic framework for dispute systems design,” *Harvard Negotiation
Law Review*, vol. 14 (2009), p. 126.
[3] <#m_-2523368687628059092__ednref5> Roberto Echandi, “Complementing
investor-state dispute resolution: A conceptual framework for
investor-state conflict management,” in Roberto Echandi and Pierre Sauvé,
eds., *Prospects International Investment Law and Policy* (Cambridge:
Cambridge University Press, 2013).
[4] <#m_-2523368687628059092__ednref6> Ricardo Figueiredo de Oliveira, “The
useful institution of an investment ombudsperson,” *Columbia FDI
Perspectives*, No. 273, Mar. 9, 2020.
[5] <#m_-2523368687628059092__ednref7> WBG, *Retention and Expansion of
Foreign Direct Investment: Political Risk and Policy Responses *(Washington,
D.C.: WBG, 2019).
[6] <#m_-2523368687628059092__ednref8> Ibid.
[7] <#m_-2523368687628059092__ednref9> Ibid.
[8] <#m_-2523368687628059092__ednref10> Ibid.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Roberto Echandi, ‘The blind side of
international investment law and policy: The need for investor-state
conflict-management mechanisms fostering investment retention and
expansion,’ Columbia FDI Perspectives, No. 290, November 2, 2020. Reprinted
with permission from the Columbia Center on Sustainable Investment (*
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Riccardo Loschi, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 289, Maria Adele Carrai, ‘Outward FDI under China’s Belt and Road
   Initiative: Between regulation and adaption,’ October 19, 2020
   - No. 288, Ivan Anton Nimac, ‘COVID-19 and FDI: How should governments
   respond?,’ October 5, 2020
   - No. 287, Florence Dafe and Zoe Williams, ‘Explaining the rise of
   third-party funding in investment arbitration,’ September 21, 2020

*All previous FDI Perspectives are available at *
*. *

*Other relevant CCSI news and announcements*

   - CCSI announces a *call for papers* for the 2020 edition of
   the Yearbook on International Investment Law and Policy. Original
   contributions to be considered for publication in the Yearbook will be
   accepted on a rolling basis until *February 28, 2021.* More information
   can be found here
   - *CCSI is accepting applications until March 31, 2021* for its
   Executive Training on Sustainable Investments in Agriculture, which will
   take place online June 15-25, 2021. Please visit our website
   for more information, including on how to apply.
   - CCSI and partners call for ISDS moratorium during COVID-19 crisis and
   who are interested in adding their names to this sign-on can express their
   interest in doing so here

Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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*Karl P. Sauvant, PhD*

*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
| p: (212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
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