1. FDI Characteristics
2. Laws Governing FDI
3. Risk Management
4. Sample FDI Laws

FDI law regulates foreign direct investments, a situation in which an investor who lives in one national economy has significant influence or control over a business that exists in a different economy, according to the International Monetary Fund.

FDI Characteristics

This type of investment consists of:

  • A long-term relationship between the business and the investor
  • Ownership of more than 10 percent of the business's voting shares, either directly or indirectly
  • Substantial influence over the operations of the business

While portfolio investment is passive, FDI is considered active investment because of its managerial component. Unlike the widespread nationalization practiced from the 1950s through the 1970s, today FDI is supported across the globe for its ability to stabilize economies, encourage growth, and share technology and knowledge.

Laws Governing FDI

This form of investment is regulated by international laws as well as the applicable domestic laws for both economies involved in a transaction. The latter primarily focuses on safeguarding investors, attracting FDI, resolving disputes, and establishing security measures, tax incentives, and standards for national treatment.

International law for FDI comprises multilateral treaties, inter alia, bilateral investment treaties, judicial decisions, and established international law. Multilateral treaties are designed to be used when national laws conflict and include Agreement on Trade-Related Investment Measures and the Agreement on Trade-Related Aspects of Intellectual Property. Although no attempts to create an overarching treaty of this kind have been successful, U.S. FDIs are governed by bilateral treaties with more than 40 nations.

When a dispute arises between the investor and the nation in question, the investor should first rely on his or her own national laws, followed by the laws of the other nation, and then by international dispute resolution and arbitration procedures.

Risk Management

The risks of FDI are covered by international law. One example is the United Nations General Assembly resolution 1803, which calls for adequate compensation. The Multilateral Investment Guarantee Agency (MIGA) provides insurance against contract breach, currency issues, civil disturbance, war, and terrorism for individuals and businesses who invest in developing economies. A federal agency called the Overseas Private Investment Corporation offers private insurance policies for U.S investors that cover currency issues, political violence, and expropriation.

The International Centre for Settlement of Investment Disputes (ICSID) offers international dispute arbitration. This agency formed a multilateral treaty that has been in effect since 1966 and is considered the leading institution for FDI-related arbitration.

The Transatlantic Trade and Investment Partnership between the U.S. and the European Union includes a method for settling disputes between nations and investors in which claims can be brought against governments that breach standards of investment protection. Similar agreements include the North American Free Trade Agreement (NAFTA), the Comprehensive Economic and Trade Agreement, and the Central American Free Trade Agreement.

Sample FDI Laws

These FDI laws are reprinted from those established by the Embassy of the Kingdom of Saudi Arabia.

Article 1:

The following expressions and terms shall have the meaning ascribed beside each, unless the context deems otherwise:

* The Council: The Supreme Economic Council.

* Board of Directors: The Board of Directors of the General Investment Authority.

* The Authority: The General Investment Authority.

* The Governor: The Governor of the General Investment Authority and Chairman of the Board of Directors.

* Foreign Investor: The natural person of non-Saudi nationality or otherwise the body corporate, where all partners are non- Saudi nationals.

* Foreign Investment: Investment of Foreign Capital in a licensed activity under this Act.

* Foreign Capital: The Foreign Capital in this Act shall mean, for example but not limited to, the following funds and rights as long as they are possessed by a Foreign Investor:

1. Money, securities and commercial instruments.

2. Foreign investment profits if they are invested to increase the capital, expansion of existing projects or establishment of new projects.

3. Machinery, equipment, supplies, spare-parts, means of transportation and production requirements relevant to the investment.

4. Legal rights, i.e., licenses, intellectual properties, technical know-how, administrative skills, and production techniques.

* Production Facilities: Projects for the production of industrial and agricultural products (plant and animal).

* Service Facilities: Service and construction projects.

* The Act: The Foreign Investment Act.

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