HOME-COUNTRY _ INVOLVEMENT IN ASSET PROTECTION
HOME-COUNTRY _
INVOLVEMENT IN ASSET PROTECTION
The Historical Background
In the nineteenth century the home country ensured through military force and coercion that prompt, adequate, and effective compensation would be received for investors in cases of expropriation, a concept known as the international standard of fair dealing.17 The host countries had little to say about this standard. As late as the period between the two world wars, the United States on several occasions sent troops into Latin America to protect investors' property. The 1917 Soviet confiscations without compensation of Russian and foreign private investment led the way to noncoercive interference by home countries in cases of expropriation. In conferences attended by developing countries at The Hague in 1930 and at Montevideo in 1933, participants concluded a treaty stating that "foreigners may not claim rights other or more extensive than nationals."18 On the basis of this doctrine, Mexico used its own courts in 1938 to settle disputes arising from expropriation of foreign agricultural properties in 1915.19 This same doctrine formed the precedent for later settlements and, in the absence of specific treaties, remains largely in effect today.
Except for the abortive attempt by British, French, and Israeli forces to prevent Egypt's takeover of the Suez Canal, there has been no major attempt since World War II at direct military intervention to protect property of home-country citizens. (There have been, however, threatened or actual troop movements by large powers to developing countries during this period. Property protection possibly was a surreptitious factor in the movements.) The concept of nonintervention has been strengthened by a series of UN resolutions. A secondary factor has been that most expropriations have been selective rather than general, that is, involving a few rather than all foreign firms. In these cases it is thought that intervention might lead to further takeovers and jeopardize settlements for affected foreign firms.
The Use of Bilateral Agreements
To improve the foreign investment climates for their investors, many industrial countries have established bilateral treaties with foreign governments, often as a result of long and difficult negotiations. Although these agreements differ in detail, they generally provide for home-country insurance to investors to cover losses from expropriation, civil war, and currency devaluation or control and to exporters to cover losses from nonpayment in a convertible currency. The recipient country, by approving a contract, agrees to settle payment on a government-to-government basis. In other words, Gillette could insure its Chinese investment against expropriation because of the bilateral agreement between the United States and the People's Republic of China. If China expropriated Gillette's facilities, the U.S. government would pay Gillette and then seek settlement with China. Other types of bilateral agreements include treaties of friendship, commerce, and navigation as well as prevention of double taxation. All these efforts help promote factor mobility for MNEs.
A major problem with these agreements to protect foreign investments is that they do not normally provide a mechanism for settlement. The host governments simply may lack the financial resources to settle in an appropriate currency, for example. Even if they have the resources, it is unclear whether the amount of payment should be settled in local courts, in external courts, or through negotiations. Many recipient countries resist treaties because they imply the abrogation of sovereignty over business activities conducted within their borders and provide more protection for alien property than for that of their own citizens.20 Another problem is that the agreements do not protect against gradual changes in operating rules, which can reduce substantially the profit of foreign operations. Revere Copper and Brass, for example, was forced by Jamaica to make payments greater than those provided by the original investment agreement. The result was an operating loss that the investment insurance did not cover.
INVOLVEMENT IN ASSET PROTECTION
The Historical Background
In the nineteenth century the home country ensured through military force and coercion that prompt, adequate, and effective compensation would be received for investors in cases of expropriation, a concept known as the international standard of fair dealing.17 The host countries had little to say about this standard. As late as the period between the two world wars, the United States on several occasions sent troops into Latin America to protect investors' property. The 1917 Soviet confiscations without compensation of Russian and foreign private investment led the way to noncoercive interference by home countries in cases of expropriation. In conferences attended by developing countries at The Hague in 1930 and at Montevideo in 1933, participants concluded a treaty stating that "foreigners may not claim rights other or more extensive than nationals."18 On the basis of this doctrine, Mexico used its own courts in 1938 to settle disputes arising from expropriation of foreign agricultural properties in 1915.19 This same doctrine formed the precedent for later settlements and, in the absence of specific treaties, remains largely in effect today.
Except for the abortive attempt by British, French, and Israeli forces to prevent Egypt's takeover of the Suez Canal, there has been no major attempt since World War II at direct military intervention to protect property of home-country citizens. (There have been, however, threatened or actual troop movements by large powers to developing countries during this period. Property protection possibly was a surreptitious factor in the movements.) The concept of nonintervention has been strengthened by a series of UN resolutions. A secondary factor has been that most expropriations have been selective rather than general, that is, involving a few rather than all foreign firms. In these cases it is thought that intervention might lead to further takeovers and jeopardize settlements for affected foreign firms.
The Use of Bilateral Agreements
To improve the foreign investment climates for their investors, many industrial countries have established bilateral treaties with foreign governments, often as a result of long and difficult negotiations. Although these agreements differ in detail, they generally provide for home-country insurance to investors to cover losses from expropriation, civil war, and currency devaluation or control and to exporters to cover losses from nonpayment in a convertible currency. The recipient country, by approving a contract, agrees to settle payment on a government-to-government basis. In other words, Gillette could insure its Chinese investment against expropriation because of the bilateral agreement between the United States and the People's Republic of China. If China expropriated Gillette's facilities, the U.S. government would pay Gillette and then seek settlement with China. Other types of bilateral agreements include treaties of friendship, commerce, and navigation as well as prevention of double taxation. All these efforts help promote factor mobility for MNEs.
A major problem with these agreements to protect foreign investments is that they do not normally provide a mechanism for settlement. The host governments simply may lack the financial resources to settle in an appropriate currency, for example. Even if they have the resources, it is unclear whether the amount of payment should be settled in local courts, in external courts, or through negotiations. Many recipient countries resist treaties because they imply the abrogation of sovereignty over business activities conducted within their borders and provide more protection for alien property than for that of their own citizens.20 Another problem is that the agreements do not protect against gradual changes in operating rules, which can reduce substantially the profit of foreign operations. Revere Copper and Brass, for example, was forced by Jamaica to make payments greater than those provided by the original investment agreement. The result was an operating loss that the investment insurance did not cover.
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