How Investment Laws Can Become Powerful tools for Sustainable FDI Governance

A growing number of policy-makers are concerned about their countries’ national investment laws. Many developing countries rewrote their investment laws between 1980 and 2010, often in ways that aligned them more closely with outdated IIAs. As a result, such laws pose many of the same legal risks and policy concerns as old-style IIAs. Some laws include especially risky provisions, such as

  • advance consent to international arbitration. Many developing countries include provisions in their investment laws that could be interpreted as providing consent to investor–state arbitration, undermining the role of domestic courts in interpreting the law and settling disputes arising from its application in line with the overall domestic legal system, while also creating a risk of costly arbitration cases. However, there is no evidence that providing consent to arbitration in an investment law has any effect on FDI flows, and, to our knowledge, no developed country has ever provided advance consent to arbitration through an investment law.
  • tax incentives. Research has shown that many fiscal incentives, particularly profit-based incentives, are ineffective—they do not increase sustainable FDI flows but have real costs. Rather than granting fiscal incentives in investment law, reviewing and consolidating them in general tax codes can improve their transparency and administration.

Beyond concerns about risky provisions, investment laws warrant reconsideration because they are versatile policy tools. In the past, they were redesigned to meet new challenges and opportunities, and they can once again be redesigned as powerful tools for governments seeking to align their investment policy with sustainable development or other policy goals. For instance, investment laws can be instrumental in implementing new norms or policies in business and human rights, climate finance, and the global minimum tax. This paper makes two recommendations for policy-makers concerned about investment laws and seeking to rethink them in order to address their countries’ challenges.

First, clarify what functions an investment law is intended to perform and how these functions relate to its broader objectives. A crucial first step in any reform process is to identify the high-level policy objectives that an investment law intends to achieve, for example, promoting sustainable development.

Investment laws currently perform a variety of functions, including

  • governing the admission and approval of new FDI
  • conferring and administering investment incentives
  • facilitating investment
  • guaranteeing legal protection of FDI
  • establishing or specifying a system for managing investor–state disputes
  • specifying the obligations and responsibilities of MNEs
  • monitoring and overseeing foreign investments.

However, investment laws should not necessarily seek to perform all these functions. Some functions, such as the conferral of investment incentives, are more appropriately governed by general tax codes, as argued above, and are better omitted from investment laws entirely. Whether other functions should be performed by the investment law or by laws of general application, supplemented by sector-specific regulations, depends on the country context and policy-makers’ objectives. The key is to recognize that investment laws can perform many different functions, clarify the functions the law in question is intended to perform, and ensure that the performance of selected functions aligns with the law’s higher-order objectives.

Second, ensuring that the content of investment laws is consistent with their objectives and functions. After policy-makers have decided on the objectives and functions the law should serve, the crucial question is: How to design the law’s content to best perform the given functions? For instance, general language requiring MNEs to conduct themselves sustainably has not been as effective as reiterating that any MNEs’ business activity is directly subject to relevant environmental laws and approval processes, including the environmental and social impact assessment regime contained in other domestic law instruments.

Several countries have decided not to have an investment law. Policy-makers who decide to have an investment law may wish to consider a series of questions as they (re)design their laws. For instance, “How will this law interface with our laws of general application?” and “What is the best institutional structure for the administration or enforcement of the investment law?” The questions we suggest policy-makers ask and answer are the same across countries, but the answers may vary, as there is no single best-practice model for an investment law.

In conclusion, poorly designed investment laws can pose risks to governments, while well-designed ones can serve as powerful tools for governments to align their investment policies with their national sustainable development objectives.


Jonathan Bonnitcha ( is Associate Professor at the University of New South Wales and a Senior Associate with the International Institute for Sustainable Development (IISD).

Suzy Nikiéma ( is Director of Sustainable Investment at IISD, and lecturer at Université Saint Thomas d’Aquin and Université Aune Nouvelle in Burkina Faso.

Taylor St John ( is Assistant Professor, University of St Andrews, and Researcher, Faculty of Law, University of Oslo.

The authors wish to thank Martin Dietrich Brauch for helpful peer review.