Mitigating Volatility: Protecting Chinese Investments in Post-Conflict Regions

Electronic copy available at: http://ssrn.com/abstract=1168296

Mitigating Volatility: Protecting Chinese Investmentin Post-Conflict Regions

Matthew T. SIMPSON1

I. INTRODUCTION

Over the past ten years China’s economy markedly grew across nearly all sectors.As government controls liberalize, Chinese investors are realizing the value andopportunities associated with foreign direct investment (FDI). Most notably, globalobservers have witnessed an exponential increase in Chinese investment in post-conflictregions. Given this dramatic rise in post-conflict investment, and the volatility associatedwith the political and economic environments in post-conflict regions, this articleillustrates several mechanisms Chinese investors may wish to employ when investing inpost-conflict states.

The article begins with an overview of Chinese investors’ recent propensitytowards investing in post-conflict regions. The analysis then turns to a core elementsdiscussion of investment mechanisms that Chinese investors should look for wheninvesting in post-conflict regions including: bilateral investment treaties, domestic lawsregulating foreign direct investment, tax treaties, incentives, and internationalinvestment organizations. The purpose of this analysis is to highlight for Chineseinvestors several of the safeguards that may provide protection and incentive for theirinvestments in economically and politically volatile post-conflict regions.

II. CHINESE INVESTMENT IN POST-CONFLICT REGIONS

Post-conflict regions provide superior growth at inexpensive prices. According tothe International Monetary Fund, economic growth in sub-Saharan Africa will topseven percent in 2008 and an estimated $5 billion of private equity is actively seekingopportunities in the region.2 This growth is occurring despite the political andeconomic volatility characteristic of these regions. Even the recent outbreak of violence

1 Matthew T. Simpson is a Peace Fellow with the Public International Law & Policy Group (PILPG) and willjoin Weil, Gotshal & Manges LLP in the fall of 2008. Mr. Simpson has advised high-level officials in various conflictand post-conflict regions including Darfur, Cyprus, Iraq, Southern Sudan, Sri Lanka and Montenegro on the legaland policy aspects of peace negotiations and post-conflict constitution drafting. Mr. Simpson holds a JD fromAmerican University’s Washington College of Law and received his B.A. from Hobart College. He can be reachedby email at [email protected].

2 Barbara Wall, Conflict Zones Sometimes Mean Investment Opportunities, INTERNATIONAL HERALD TRIBUNE(Feb. 29, 2008).

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Electronic copy available at: http://ssrn.com/abstract=1168296

in Kenya following national elections has not deterred investors in that country, someof which have increased their holdings, seizing upon low prices.3 In the words of onepension firm chief economist, “given the choice between investing in Africa – conflictor no conflict – and a basket of Western banks, Africa would win every time.”4

Africa is also not the only volatile region targeted by investors. Slim Feriani,managing director of Progressive Asset Management, used the turbulence in Pakistan asa buying opportunity, “we believe the market has priced in a disastrous outlook forPakistan and Pakistani equities,” Feriani said. “But from experience, crisis type situationslike these offer exceptional entry points.”5 Afghanistan has also attracted more than 750foreign companies from 25 countries, which have collectively invested more than$1.3 billion in a variety of sectors.6

Chinese investors are no exception to this trend. Favoring the high rate of returnassociated with being an early investor in a burgeoning market, the Chinese areinvesting heavily in post-conflict and volatile regions. Driving much of this investmentis China’s booming economy, which has averaged nine percent growth per year for thelast two decades, and requires immense levels of natural resources. Chinese investors arethus often desperate to lock in supplies from relatively low-cost post-conflict regions.7

Recognizing this propensity for investment in post-conflict regions, and the fact that theten Chinese companies responsible for the most outward foreign direct investment areall state owned enterprises,8 Chinese officials maintain several pro-investment policies,most notably “China’s Africa Policy,” setting forth significant political and financialsupport for Chinese investment in Africa.9

Post-conflict states often welcome this attention, as the Chinese, unlike many otherinvestors, tend to invest with a no-strings attached approach, not conditioning theirfunding on demands for good governance, transparency, or improvements in humanrights. The head of Angola’s National Private Investments Agency (ANIP), CarlosFernandes, recently praised China’s approach to investing in Angola, noting that “whilst

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3 Id.4 Id.5 Id.6 Id.7 Ester Pan, China, Africa, and Oil, COUNCIL ON FOREIGN REL. (Jan. 26, 2007), available at

http://www.cfr.org/publication/9557/#4 (last visited May 22, 2008).8 China’s Outward Foreign Direct Investment, OECD INVESTMENT NEWS (Mar. 2008), available at

http://www.oecd.org/dataoecd/28/10/40283257.pdf (last visited May 22, 2008).9 China’s African Policy (promulgated by the Ministry of Foreign Affairs, Jan. 12, 2006), available at

http://www.fmprc.gov.cn/eng/zxxx/t230615.htm (last visited May 21, 2008) (“The Chinese Governmentencourages and supports Chinese enterprises’ investment and business in Africa, and will continue to providepreferential loans and buyer credits to this end. The Chinese Government is ready to explore new channels andnew ways for promoting investment cooperation with African countries, and will continue to formulate andimprove relevant policies, provide guidance and service and offer convenience.”).


other countries demanded conditions that limited Angola’s development, China alwaysunderstood that it had no right to impose conditions.”10

As a result of the development of this apparently mutually agreeable relationship,since 2000, post-conflict regions have witnessed an exponential increase in Chineseinvestment at a rate greater than Chinese investment in the rest of the world.11 In Africaalone, Sino-African direct investment rose to $1.6 billion between 2000 and 2005, asChina sought access to African oil and other raw materials to feed its rapidly-expandingeconomy.12 The biggest target for Chinese investment on the continent was conflict-ridden Sudan and its vast oil reserves and production.13 In 2005, the U.N. Conferenceon Trade and Development (UNCTAD) said Sudan received $351.5 million in Chinesedirect investment, making it Beijing’s ninth-largest target for such flows worldwide.14

After Sudan, the biggest African recipients of Chinese direct investment in 2005 wereAlgeria with $171.2 million, Zambia with $160.3 million and South Africa with$112.3 million.15

III. RECOMMENDATIONS FOR PROTECTING CHINESE INVESTMENTS IN

POST-CONFLICT STATES

Given the highly volatile nature of the political and economic environments inpost-conflict states, Chinese investors would be wise to look for certain mechanisms andprotections to ensure the safety of both their initial investment and return. Though theseinvestments often offer high potential rates of return, they are accompanied byconsiderable risk, and several safeguards would provide an added level of protection inthe event of political and economic deterioration. Below is an analysis of severalsafeguards that Chinese investors may wish to look for when investing in a post-conflictor volatile region. The list is by no means exhaustive, but rather a menu of initialconsideration.

319PROTECTING CHINESE INVESTMENTS

10 Kissy Agyeman, Angolan Government Agency Praises Chinese Investment, GLOBAL INSIGHT DAILY ANALYSIS(May 1, 2008), available at http://www.uofaweb.ualberta.ca/chinainstitute/nav03.cfm?nav03=77107&nav02=76744&nav01=57272 (last visited May 21, 2008). But see Zephania Ubwani, Tanzania: Don His At ChinaNon-Interference Policy, THE CITIZEN (DAR ES SALAAM) (Apr. 29, 2008), available athttp://allafrica.com/stories/200804290836.html (quoting Prof Humphrey Moshi, Senior Research Fellow withthe Economic Research Bureau at the University of Dar es Salaam as saying China’s non-interference policy will“promote bad governance and ultimately tarnish the image of China”).

11 China’s Outward Foreign Direct Investment, supra note 8.12 Sudan Biggest Target for Chinese Investment in Africa, SUDAN TRIBUNE (Mar. 28, 2007), available at

http://www.sudantribune.com/spip.php?article21011 (last visited Mar. 19, 2008).13 Id.14 Id.15 Id.

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A. BILATERAL INVESTMENT TREATIES

Bilateral investment treaties (BITs) provide significant protection for Chineseinvestments in post-conflict regions as they ground the investment in rules-basedsystems that provide for greater transparency of the parameters and environment inwhich the investment operates, as well as providing appropriate opportunities forremedies should a dispute over the investment arise. BITs protect business investmentsin foreign jurisdictions enabling investors to seek damages from the foreign governmentthrough a claim before an independent arbitral tribunal.16 As of 2008, over 2,200 BITswere in force worldwide.17

Most BITs are designed for relationships similar to the Sino-post-conflict regionrelationship. They are often between developed capital exporting states and developingcapital importing states, and are typically initiated by the capital exporting states toprotect their investors and provide them with stability in foreign jurisdictions. Withouta BIT, international investors must exclusively rely on host country law for protection,which entails a variety of risks to their investments.18 Capital importing states typicallysign BITs with the expectation of attracting much needed foreign investment,19 and thecapital and technological inflows associated with it. As of April 2008, China had signed101 BITs, the vast majority of which are with developing or net capital importingstates.20

One challenge associated with the establishment of investment relationshipsbetween developed capital exporting states and post-conflict capital importing states viaBITs, is the opportunity for exploitation of the post-conflict state. As the capitalexporter, China wields a great deal of power and influence over the terms and scope ofthe agreement. Chinese investors would benefit from recognizing this asymmetry ofpower and wealth associated with BITs, and tailoring the terms with an eye towardsmutual benefit. While at first glance an aggressively exploitative BIT may offer short-term gain for Chinese investors, post-conflict states are by definition those with freshmemories of conflict, and therefore are much more likely (than other developing stateswhose recent histories are less tumultuous) to circumvent or simply disregard the termsof an agreement. Given this high propensity for derogation, Chinese investors would bewise to encourage BITs with more mutually beneficial terms, to minimize the post-conflict state’s sense of exploitation, and increase the lifespan of the agreement.


16 John W. Boscariol and Orlando E. Silva, Protecting Foreign Investors BIT by BIT, THE INVESTOR’S WEEKLY(Jul. 7, 2004), available at http://www.tradeobservatory.org/headlines.cfm?refID=36214 (last visited May 22,2008).

17 UNCTAD INVESTMENT INSTRUMENTS ONLINE, UNCTAD ANALYSIS OF BITS (AUG. 17,2004), available athttp://www.unctadxi.org/templates/Page__1007.aspx (last visited May 22, 2008).

18 Jeswald W. Salacuse & Nicholas P. Sullivan, Do BITs Really Work?: An Evaluation of Bilateral InvestmentTreaties and Their Grand Bargain, 46 HARV. INT’L L. J. 67, 75 (2005).

19 Boscariol & Silva, supra note 16.20 UNCTAD Investment Instruments Online, UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT

(last updated Apr. 7, 2008), available at http://www.unctadxi.org/templates/DocSearch__779.aspx?PageIndex=2&TextWord=’China’,%20”%20,l&CategoryBrowsing=False&syear= (last visited May 23, 2008).


Chinese investors should also be aware of recent suggestions that BITs do not in factincrease investment flows to the capital importing state. According to the World Bank,“empirical studies have not found a strong link between the conclusion of a BIT andsubsequent investment inflows.”21 While many still contend that BITs are indeedadvantageous to both parties, the possibility that the agreement will not spur thebargained-for increased investment may make post-conflict states less disposed tooffering greater investment protection.

1. Elements

Although the substantive investment obligations imposed on host governmentsmay differ from one BIT to another, they typically include the following:22

– The foreign investor must be treated no less favorably than a domestic investor(national treatment) or investors from any other state (most-favored-nationtreatment); and

– The foreign investor must be treated fairly in accordance with internationallaw, and be entitled to the full protection and security given to domesticinvestors; and

– Expropriation, or measures equivalent to expropriation, must be for a publicpurpose, non-discriminatory, under due process of law, and accompanied bypayment of prompt, adequate, and effective compensation.23

A BIT may also include obligations relating to transfers of funds out of the hostterritory, performance requirements, and measures concerning the nationality of seniormanagement and boards of directors. Some BITs contain “umbrella clauses” [thatrequire a host government to observe] all of its contractual obligations with respect toinvestments in its territory.24 In addition, many BITs have specific provisions for certaintypes of measures or sectors, including taxation, subsidies, national security, financialservices, and cultural activities.

2. Dispute Resolution Mechanisms

In the event of a breach of the agreement, investors have the opportunity to seekrecourse via a predetermined dispute resolution mechanism. In addition togovernment-to-government procedures, BITs often contain a private investor-state

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21 WORLD DEVELOPMENT REPORT, 2005: A BETTER INVESTMENT CLIMATE FOR EVERYONE, THE WORLDBANK (2005), available at http://go.worldbank.org/4DP5PX4M30 (last visited May 24, 2008).

22 Boscariol & Silva, supra note 16.23 North American Free Trade Agreement art. 1102, U.S.-CAN.-MEX., (Dec. 17, 1992), 32 I.L.M. 289,

641-42 (1993).24 Interpretation of Umbrella Clauses in Investment Agreements, OECD (Oct. 2006), available at http://www.oecd.

org/dataoecd/3/20/37579220.pdf (last visited May 24, 2008).

PROTECTING CHINESE INVESTMENTS


dispute mechanism enabling private foreign entities to sue host governments fordamages arising out of their failure to comply with their investment obligations.25

The International Center for the Settlement of Investment Disputes (ICSID) offersboth substantive provisions for the resolution of disputes, as well as institutionalsupport.26 Other mechanisms, such as the United Nations Commission on InternationalTrade Law (UNCITRAL), may also prove effective at resolving disputes.27

3. Enforcement of Awards

Essential to all BITs is the New York Convention on the Enforceability of ArbitralAwards, which requires its signatories to uphold and enforce any valid decision of anarbitral panel.28 The New York Convention is widely recognized as a foundationalinstrument of international arbitration requiring courts of contracting states to giveeffect to an agreement to arbitrate when seized of an action in a matter subject to anarbitration agreement. States must also recognize and enforce awards made in otherstates, subject to specific limited exceptions.29

B. DOMESTIC LAWS

Chinese investors should also look for the existence and enforcement of certaindomestic laws in the post-conflict region. Key elements of these laws include: (1)freedom to invest; (2) transfers; (3) treatment; (4) dispute settlement; (5) incentives; and(6) ownership requirements.

1. Freedom to Invest

Despite attempts in 1995 by the Organization for Economic Co-operation andDevelopment (OECD) member governments to negotiate a Multilateral Agreement onInvestment providing for high standards for the freedom to invest, negotiations werediscontinued and states are responsible for developing their own standards on anindividual and ad hoc basis. As such, there are a variety of domestic laws providing forthe freedom to invest.


25 This mechanism is available regardless of whether the investor already has a contractual or arbitrationarrangement with the host state or one of its governmental entities.

26 THE WORLD BANK, ABOUT ICSID (2008), available at http://www.worldbank.org/icsid/about/about.htm(last visited May 22, 2008).

27 UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW, FAQ – ORIGIN, MANDATE ANDCOMPOSITION (2007), available at http://www.uncitral.org/uncitral/en/about/origin_faq.html (last visited May 20,2008).

28 UNITED NATIONS CONFERENCE ON INTERNATIONAL COMMERCIAL ARBITRATION, Convention on theRecognition and Enforcement of Foreign Arbitral Awards, (July 6, 1988), available at http://www.uncitral.org/pdf/english/texts/arbitration/NY-conv/XXII_l_e.pdf (last visited May 24, 2008); Boscariol & Silva, supra note 16.

29 UNCITRAL, 1958 – CONVENTION ON THE RECOGNITION AND ENFORCEMENT OF FOREIGN ARBITRALAWARDS – THE “NEW YORK” CONVENTION (2007), available at http://www.uncitral.org/uncitral/en/uncitral_texts/arbitration/NYConvention.html (last visited May 24, 2008).


In Bulgaria, the law on FDI allows for a “foreign person” to invest “under the termsset out for Bulgarian persons” and grants foreign investors equal rights with “Bulgarianpersons”, unless otherwise provided by law.”30 In Vietnam, “[f]oreign investors mayestablish in Vietnam an enterprise with one hundred (100) per cent foreign ownedcapital.”31 In Mongolia, foreigners may invest “in all areas of production and serviceswhich are not prohibited by the laws of Mongolia.”32 The Ukraine has a similarprovision in its FDI law. Chinese investors would be wise to look for similar provisionsin domestic law, to ensure their investments are not expropriated on the grounds thatthey were made in a prohibited industry or sector.

2. Transfers

The right to transfer freely assets out of the state is an important protection Chineseinvestors should look for when investing in post-conflict regions. Often, foreigners aremore likely to invest in a state if they can access their profits by freely transferring theirassets out of the state. The freedom to transfer assets adds predictability and security toa foreign investment.

In Syria, foreign investors may repatriate all of their assets.34 In Bosnia andHerzegovina, domestic law provides foreign investors with the freedom to repatriatetheir earnings, including profits, dividends, and interest.35 Egyptian law allows foreigninvestors to repatriate profits upon their proper registration with the government agencyresponsible for investment.36

Transfer laws are often one of the most important domestic laws for foreigninvestors to consider. Before initiating an investment in a post-conflict region, Chineseinvestors should ensure the transferability of revenue, profits, and assets out of the post-conflict state. It requires little explanation to make the point that earning asignificant return on an investment is only worthwhile if you have access to the fruits ofyour endeavour.

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30 Law on Foreign Investment in Bulgaria, art. 2, Act No. 97 (1997), available at http://www.fifoost.org/bulgarien/recht/en/foreigninvest/bul_f_Invest_law.php (last visited May 24, 2008).

31 Law on Foreign Investment in Vietnam, art. 15 (1996), available at http://www.vietnamembassy.org.uk/chapter2.html (last visited May 24, 2008).

32 Foreign Investment Law of Mongolia, art. 4(1), Act. No. 86 (1993), available at http://www.mongolembassy.org/doc/foreign_investment_law_of_mongolia.doc (last visited May 24, 2008).

33 The Law of Ukraine on the Regime of Foreign Investment, art. 4 (1996), available at http://www.sympatico.ca/tem-ukraine/law_fir.htm (last visited May 24, 2008) (“Foreign investment can be made in anyobjects, investment in which is not prohibited by the laws of Ukraine.”).

34 Syria Investment Law No. 10, art. 25 (Apr. 25, 1991), available at http://www.caeu.net/Investment_Laws/en/syria/syria_en.htm (last visited May 24, 2008) (“[T]he Central Bank of Syria shall allow thetransfer abroad of the external funds invested in the project, together with the profits and revenues, in the samecurrencies brought in, or in any other transferable currency.”).

35 Law on Direct Foreign Investment Policy in Bosnia and Herzegovina, art. 11, sec. c (1998), available athttp://www.vladars.net/pdf/law_direct_foreign_investment_BiH.pdf (last visited May 24, 2008).

36 ANIMA: EUROMEDITERRANEAN NETWORK OF INVESTMENT PROMOTION AGENCIES, INVESTING IN EGYPT(2008), available at http://www.animaweb.org/pays_egypte_pourquoiinvestir_en.php (last visited May 24, 2008).



3. Treatment

Domestic investment laws can address the treatment of foreign investors by thedomestic government in three main ways: (1) national treatment; (2) most-favourednation treatment; and (3) expropriation. Given the political instability of post-conflictregions, Chinese investors should take into consideration these protections in the eventof domestic government interference with their investment. Treatment laws also ensurelevel playing fields in regions where corruption and bribery are often rampant.

Many states provide foreign investors protection equal to that of domestic investors(national treatment). Bosnia and Herzegovina guarantees, “foreign investors shall havethe same rights and obligations as the residents of Bosnia and Herzegovina.”37 In Jordan,“the non-Jordanian Investor investing in any project . . . shall be afforded the sametreatment as the Jordanian investor.”38 Saudi Arabian law provides that foreign investors“shall enjoy all the benefits, incentives, and guarantees enjoyed by a national projectaccording to regulations and directives.”39

Similar to national treatment, most-favoured nation (MFN) treatment occurs whena state treats all foreign investors alike. A state will not treat a foreign investor from stateA differently than a foreign investor from state B simply because the foreign investorsare from different states.40 MFN treatment ensures a foreign investor equal terms ofbusiness with other foreign investors.41

Finally, many domestic investment laws contain provisions protecting foreigninvestments from unjust expropriation. Some states provide that domestic governmentsmay only expropriate foreign investments if the expropriation is in the public interestand accompanied by just compensation. Bosnia and Herzegovina provide that FDI “shallnot be subject to any act of nationalization, expropriation, requisition, or measureswhich have similar effects, except in the public interest in accordance with applicablelaws and regulations, without any type of discrimination and against the payment ofappropriate compensation.”42 Iranian law stipulates that the government “guaranteesfair compensation where the promulgation of a special legislation deprives the owner ofcapital from ownership.”43 Ukrainian law provides that the government “may not seize


37 Law on Direct Foreign Investment Policy in Bosnia and Herzegovina, supra note 35 at art. 8, sec. a.38 Jordan Investment Promotion Law of 1995, art. 24, sec. B (amended in 2000), available at

http://www.jordanecb.org/pdf/Investment_Promotion_Law.pdf (last visited May 24, 2008).39 Saudi Arabia Foreign Investment Act, art. 6, (2000), available at http://www.saudia-online.com/

txtinvestment.htm (last visited May 24, 2008).40 Law on Direct Foreign Investment Policy in Bosnia and Herzegovina, supra note 35 at art. 8, sec. b.41 For more information on MFN treatment with regards to bilateral, regional, and multilateral agreements see

UNITED NATIONS, UNCTAD SERIES ON INTERNATIONAL INVESTMENT POLICIES FOR DEVELOPMENT (2004), availableat http://www.unctad.org/Templates/webflyer.asp?docid=5736&intItemID=2310&lang=l&mode=downloads(last visited May 24, 2008).

42 Law on Direct Foreign Investment Policy in Bosnia and Herzegovina, supra note 35 at art. 16.43 Law Concerning the Attraction and Protection of Foreign Investments in Iran, art. 3 (1994), available at

http://www.tco.gov.ir/law/English/Regulation/Internal/foreign-law.htm (last visited May 24, 2008).


foreign investments, with the exception of emergency measures in the event of naturaldisaster, accidents, epidemics, or epizootic.”44

Given the political instability and high propensity towards significant governmentoverhauls and interference in post-conflict regions, Chinese investors should look forthe existence of all three forms of treatment to protect their investments and ensure theircompetitiveness.

4. Dispute Settlement

Most domestic laws encouraging investment provide the parties of an investmentdispute with the option of selecting the dispute settlement forum. Bosnia andHerzegovina provides that FDI “disputes shall be resolved by the relevant courts inBosnia and Herzegovina, unless the parties concerned agree on another procedure forthe resolution of disputes, including but not limited to local or international conciliationor arbitration.”45 Jordanian law provides that if a dispute between a foreign investor andthe Jordanian government is not settled within six months, the parties may “resort tolitigation or may refer the dispute to ‘The International Center for the Settlement ofInvestment Disputes’ (ICSID) for settlement by conciliation or arbitration.”46

Some states, however, restrict the available dispute resolution devices. Iranian lawrestricts dispute resolution to the domestic court system. Iranian law provides that “[i]ncase of disputes, investigation of claims for fair compensation guaranteed by theGovernment shall be undertaken by competent Iranian courts.”47 Similarly, in SaudiArabia, disputes not settled amicably “shall be settled according to regulations.”48

In light of the variance among state dispute settlement mechanisms, Chineseinvestors should avail themselves of as much information as possible relating to theoptions and forums for dispute settlement. Restricted mechanisms such as those foundin Iran and Saudi Arabia make the likelihood of the positive resolution of disputes lesslikely, and therefore increase the risk associated with investment.

5. Ownership

States may impose restrictions on foreign ownership of property. Three broad typesof ownership restrictions exist: (1) asset ownership restrictions in general; (2) real estateacquisition restrictions; and (3) equity ownership restrictions. States also have a fourthoption of placing no restrictions on foreign ownership. Ownership restrictions clearlyhave the potential to impact greatly any Chinese investment in post-conflict regions,

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44 The Law of Ukraine on the Regime of Foreign Investment, supra note 33 at art. 9.45 Law on Direct Foreign Investment Policy in Bosnia and Herzegovina, supra note 35 at art. 16.46 Jordan Investment Promotion Law of 1995, supra note 38 at art. 33.47 Law Concerning the Attraction and Protection of Foreign Investments in Iran, supra note 43 at art. 3.48 Saudi Arabia Foreign Investment Act, supra note 39 at art. 13.



especially given the fact that a significant percentage of Chinese investment is in naturalresources, and therefore Chinese investors should avail themselves of as muchinformation as possible regarding domestic ownership laws.

Asset ownership restrictions expressly prohibit foreign investors from owningparticular types of domestic assets. In Ghana, the Ghana Investment Promotion CentreAct of 1994 prohibits foreigners from entering certain industries, including: beautysalons, barbershops, taxi services (if the taxi fleet is less than ten vehicles), and sellinggoods or services from a kiosk.49 Further, Vietnam “will not license any foreigninvestment project in sectors or regions which may have adverse effects on nationaldefense, national security, cultural and historical heritage, fine custom, and tradition, orthe ecological environment.”50 States may use this type of absolute ownershiprestriction to safeguard protected domestic industries.

Equity ownership restrictions generally occur when a state permits foreigninvestors to enter a domestic industry but requires a certain percentage of a domesticfirm’s ownership to remain in domestic hands. In Algeria, foreign companies may ownup to 71 percent of a hydrocarbons firm, while foreign purchasing banks many onlyown 51 percent of a firm.51 In Iran, foreign investors may only own 49 percent of anIranian company, though this percentage also depends on the merits of each project.52

Some states have real estate acquisition restrictions, which prohibit foreigninvestors from owning domestic land. Although less of these laws exist today, manyinstances of state practice still exist. China itself is a good example of such a restriction,as the land belongs to the people. Foreign investors therefore cannot own land, but mayobtain long-term land leases.53 Similarly, in the United Arab Emirates, only domesticcitizens can own land.54

Some states place no limitations on foreign ownership or control of corporations.In Vietnam, foreign investors can own 100 percent of domestic companies, providedthese companies are not involved in protected industries.55


49 Ghana Investment, sec. 18 (1994), available at http://www.gipc.org.gh/UploadFiles/Publications/Investment_Law070627114453.pdf (last visited May 24, 2008).

50 Law on Foreign Investment in Vietnam, supra note 31 at art. 15.51 UNITED STATES COMMERCIAL SERVICE, ALGERIA – OPENNESS TO INVESTMENT (2008), available at

http://www.buyusa.gov/algeria/en/openness_to_foreign_investment.html (last visited May 24, 2008).52 Law Concerning the Attraction and Protection of Foreign Investments in Iran, supra note 43 at General

Note.53 Joyce Palomar, Land Tenure Security as a Market Stimulator in China, 12 DUKE J. OF COMP. & INT’L L. 7

(2002).54 Jean-Yves P. Steyt, Comparative Foreign Direct Investment Law: Determinants of the Legal Framework and the

Level of Openness and Attractiveness of Host Economies (2006), available at http://lsr.nellco.org/cgi/viewcontent.cgi?article=1031&context=cornell/lps (last accessed Sept. 26, 2007).

55 Law on Foreign Investment in Vietnam, supra note 31 at art. 15.


C. BILATERAL TAX TREATY AGREEMENTS

Tax treaties deal specifically with tax issues related to the promotion of trade andinvestment between two states.56 The fundamental goal of most tax treaties is to avoiddouble taxation on citizens who earn foreign income. Under these treaties, businesseslocated in one state receive a reduction in taxes or an exemption from the income theyreceive from sources within the foreign state in which they operate. Treaty provisionsgenerally are reciprocal, and the provisions apply to both treaty signatories.57

Tax treaties may protect and encourage Chinese investment in post conflict regionsin several ways: 1) tax treaties reduce or eliminate the economic disincentive of doubletaxation of foreign-earned profits; 2) tax treaties articulate clear rules for dealing withtax-related conflicts; and 3) the international codification of a post-conflict region’s taxpolicy reduces the likelihood of a unilateral change in its tax policy. In these ways, taxtreaties reduce the uncertainty of a Chinese investor’s tax liability in post-conflictregions, thereby encouraging and subsequently protecting their investments.

D. INCENTIVES

Chinese investors in post-conflict regions should consider locating in tax free orincentivized zones. Tax incentive zones are areas offering economic tax incentives forpurposes of attracting investment. These incentives may either continue indefinitely orterminate after a period. Incentive zones may also permit certain types of businesses oroperations that otherwise may not be permitted inside the state, or which otherwise mayrequire some sort of special licensing to operate. Such zones allow the host state to notonly increase investment, but also manage it, by selecting geographical locations withthe greatest need for investment.

In the Dominican Republic, foreign investors enjoy 100 percent tax-free businessincome or a reduced rate of taxation when operating inside a free zone.58 Thisexemption is time limited, and determined by the geographic location of the free zone.For instance, investments in a free zone located near Santo Domingo or Santiago willobtain a 20 year income tax exemption, while investments in more rural or investment-needy areas will obtain a 25 year exemption.59

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56 UNITED NATIONS MODEL DOUBLE TAXATION CONVENTION BETWEEN DEVELOPED AND DEVELOPINGCOUNTRIES (2001), available at http://unpan1.un.org/intradoc/groups/public/documents/un/unpan002084.pdf(visited May 23, 2008). Bilateral agreements are the accepted international norm when creating tax agreements.States often fashion their tax treaties after two internationally accepted models: the OECD model, and the UNmodel. In addition, the United States uses the U.S. Model Income Tax Convention as a starting point in bilateraltreaty negotiations between the United States and other states; See also U.S. MODEL INCOME TAX CONVENTION(2006), available at http://www.ustreas.gov/press/releases/reports/hp16801.pdf (last visited May 23, 2008).

57 UNITED STATES INTERNAL REVENUE SERVICE, TAX TREATIES (2008), available at http://www.irs.gov/businesses/small/international/article/0,,id=96454,00.html (last visited May 24, 2008).

58 U.S. DEPARTMENT OF STATE, DOMINICAN REPUBLIC (Nov. 2007), available at http://www.state.gov/r/pa/ei/bgn/35639.htm (last visited May 24, 2008).

59 DOMINICAN REPUBLIC, DOMINICAN REPUBLIC FREE ZONE (2005), available at http://www.dominicanrepublicpage.com/Free_Zone_Information.html (last visited May 24, 2008).



Ghana’s tax incentive zones are known as the BF Tema Export Processing Zone.Tema is an industrial center as well as the largest major port in Ghana. Ghana’s lawprovides a 100 percent exemption to investors from income tax on profits for tenyears.60 After the ten-year period, the income tax rate cannot exceed eight percent. Thelaw also provides for a total exemption from payment of withholding taxes fromdividends arising out of free zone investments. Further, the government provides relieffrom double taxation for foreign investors and their employees.61

The Jebel Ali Free Zone (JAFZA), located in the Jebel Ali area of Dubai, UnitedArab Emirates, is a complex economic zone servicing the Dubai port. The governmentdoes not tax the income or profits of foreign investors within the zone and does notplace restrictions on foreign exchange or transfer of capital. The government also allowsforeign investors to own 100 percent of the equity in a local enterprise and providesoperational support and business continuity facilities.62 Within the free zones, investorsmay enter into multi-year leases. They also have easy access to sea and airports, buildingsfor lease, energy connections (often at subsidized prices), and assistance in labourrecruitment.63

Chinese investors should also consider other financial incentives offered to foreigninvestors. In Korea, domestic laws provide for cash grants and reduced or eliminatedrental fees of government land for specific categories of foreign investors.64 Additionally,taxes on foreign investments in Korea “may be reduced or exempted in accordancewith” domestic law.65 In Jordan, domestic law provides for complementary facilities andtax exemptions for several sectors, including agriculture, hotels, hospitals, and thedevelopment of maritime and rail transport systems.66 Syrian law exempts taxes on theimport of vehicles, equipment, and machines necessary to set up, expand, and developa project.67

Chinese investors clearly have a great interest in identifying various incentivesoffered for investments in post-conflict regions. Given the economic instability,awareness of risk, and general need for infrastructure and economic development, post-conflict governments are often eager to provide investors with significantincentives to secure their investments. Opportunities therefore exist to significantlyreduce the transactional and sunk costs of the investment, limit the overhead of


60 GHANA FREE ZONES BOARD, TEMA EXPORT PROCESSING ZONE (2006), available athttp://www.gfzb.com/corp_div_details_gfzb.cfm?EmpID=168&BrandsID=45 (last visited May 24, 2008).

61 GHANA EMBASSY, FREE TRADE ZONE – EXPORT PROCESSING ZONE (2008), available athttp://www.ghanaembassy.or.jp/business/free-trade-zone.html (last visited May 24, 2008).

62 JAFZA, INCENTIVES (2008), available at http://www.jafza.ae/en/jafza-offerings/incentives.html (last visitedMay 24, 2008).

63 US DEPARTMENT OF STATE, 2005 INVESTMENT CLIMATE STATEMENT – UNITED ARAB EMIRATES (2005),available at http://www.state.gov/e/eeb/ifd/2005/42194.htm (last visited May 24, 2008).

64 Jongseok An, FDI and Corporate Taxation in Korea, KOREAN INSTITUTE OF PUBLIC FINANCE (2006), availableat http://www.econ.hit-u.ac.jp/~ap3/apppfdi6/paper/KOREA.pdf (last visited May 24, 2008).

65 South Korea Foreign Investment Promotion Act, art. 9 (1998), available at http://unpan1.un.org/intradoc/groups/public/documents/APCITY/UNPAN011487.pdf (last visited May 24, 2008).

66 Jordan Investment Promotion Law of 1995, supra note 38 at art. 3.67 Syria Investment Law No. 10 of April 25, 1991, supra note 34 at art. 11, sec. .a; art., 12, sec. .a.


managing the investment, and mitigate against the economic and political volatility ofthe region.

E. FOREIGN DIRECT INVESTMENT ORGANIZATIONS

Many organizations promote and/or finance foreign direct investment. Theseorganizations include: (1) multilateral organizations; (2) bilateral organizations; and (3)governmental organizations. Chinese investors should consider developing relationshipswith these organizations when investing in post-conflict regions as they may provideChinese investors with substantial security for their investments, as well as access toinfrastructure and markets not otherwise accessible.

Multilateral FDI organizations are institutions with a membership base consisting ofmultiple states. Each of these organizations operates as an independent entity.68 Themain purpose of multilateral FDI organizations is to provide sound economic advice andcapital for FDI in developing states.69 The World Bank, International Monetary Fund,Islamic Development Bank, United Nations Development Program, and the NordicInvestment Bank are examples of multilateral FDI organizations.

Bilateral foreign direct investment organizations are FDI institutions sponsored byindividual states. Bilateral FDI organizations promote a state’s international developmentpolicy by providing capital for FDI. The Agence Française de Développement, FinnishFund for Industrial Cooperation, Industrialization Fund for Developing Countries, andthe Japan Bank for International Cooperation are examples of bilateral FDI

organizations.70

In addition to multilateral and bilateral investment organizations, states alsoestablish governmental agencies to promote FDI. Some of these agencies promote bothinternational investment in the domestic economy71 and outward investment fromdomestic companies into foreign economies.72 The government of Jordan created theJordan Investment Board in 2003 to promote FDI.73 The Jordanian Investment Boardworks with private sector investors in expediting registration and licensing requirementsfor investment projects and simplifying the overall investment process. The agency’s

329

68 THE WORLD BANK, HOME, ABOUT US, MULTILATERAL AND BILATERAL DEVELOPMENT AGENCIES(Mar. 2006), available at http://web.worldbank.org/WBSITE/EXTERNAL/EXTABOUTUS/0,,contentMDK:20040612~menuPK:41694~pagePK:43912~piPK:44037~theSitePK:29708,00.html (last visited May 24, 2008).

69 Id.70 HARVARD BUSINESS SCHOOL, PROJECT FINANCE PORTAL (Apr. 17, 2007), available at

http://www.people.hbs.edu/besty/projfinportal/mdasbdas.htm (last visited May 24, 2008).71 WORLD ASSOCIATION OF INVESTMENT PROMOTION AGENCIES, MEMBERS LIST (2008), available at

http://www.waipa.org/members.htm (last visited May 24, 2008).72 WORLD ASSOCIATION OF INVESTMENT PROMOTION AGENCIES, INVESTMENT ORGANIZATIONS, OUTWARD

INVESTMENT AGENCIES (2008), available at http://www.waipa.org/inv_organizations.htm (last visited May 24,2008).

73 JORDAN INVESTMENT BOARD, ABOUT JIB (2008), available at http://www.jordaninvestment.com/pages.php?menu_id=l&local_type=0&local_id=&local_details=&local_details1=&localsite_branchname=JIB (lastvisited May 24, 2008).



goal is to use FDI in Jordan as a tool that will benefit the local job market, increasenational exports, and advance the international transfer of technology.74

The Egyptian General Authority for Investment and Free Zones is the governmentagency in Egypt concerned with both the oversight and promotion of FDI.75 TheEgyptian General Authority provides numerous services to investors looking to investin the Egyptian economy. Some of these services include business partner identification,expediting licensing and registration requirements, and project site assistance. Theagency’s goal is to expand the economic opportunities of Egypt to internationalinvestors by promoting foreign investment, provide investor services, and supportinvestor friendly government regulations.76

The Montenegrin Investment Promotion Agency works with both foreign anddomestic investors to promote and increase investment within Montenegro. The goalsof the Agency include increased investment in Montenegro and increased economicdevelopment of the Montenegrin economy.77 The Agency promotes investment byproviding services such as investment climate information, business permit assistance,and aide in the location and identification of project sites.

Currently China has no bilateral foreign direct investment organization. Chineseinvestors should therefore look for the benefits and assistance of the multilateralinvestment organizations, as well as domestic investment promoting agencies andinstitutions in the post-conflict regions.

IV. CONCLUSION

As Chinese investors exponentially increase their investments in post-conflictregions, they should take into account the above-mentioned mechanisms whendetermining the size and location of their investment. These mechanisms serve toincentivize foreign direct investment by providing lower market entry and operatingcosts and protecting investments with transparent and robust controls. While none ofthese mechanisms on their own guarantees protection to Chinese investments in apolitically and economically volatile area, together, they provide a substantial safety netshould the investment environment deteriorate.


74 Id.75 EGYPT – GENERAL AUTHORITY FOR INVESTMENT AND FREE TRADE ZONES (2008), available at

http://www.gafinet.org/index.htm (last visited May 24, 2008).76 EGYPT – GENERAL AUTHORITY FOR INVESTMENT AND FREE TRADE ZONES, ABOUT GAFI, OUR MISSION

(2008), available at http://www.gafinet.org/our-mission.htm (last visited May 24, 2008).77 MONTENEGRO INVESTMENT PROTECTION AGENCY (2008), available at http://www.mipa.cg.yu/ (last

visited May 24, 2008).


Table of Contents

I. INTRODUCTION ............................................................................................317

II. CHINESE INVESTMENT IN POST-CONFLICT REGIONS ......................................317

III. RECOMMENDATIONS FOR PROTECTING CHINESE

INVESTMENTS IN POST-CONFLICT STATES ......................................................317

A. BILATERAL INVESTMENT TREATIES ......................................................320

1. Elements....................................................................................3212. Dispute Resolution Mechanisms ......................................................3213. Enforcement of Awards ................................................................322

B. DOMESTIC LAWS ............................................................................322

1. Freedom to Invest ........................................................................3222. Transfers ...................................................................................3233. Treatment. ................................................................................3244. Dispute Settlement ......................................................................3255. Ownership ................................................................................325

C. BILATERAL TAX TREATY AGREEMENTS ................................................327

D. INCENTIVES ....................................................................................327

E. FOREIGN DIRECT INVESTMENT ORGANIZATIONS ....................................329

IV. CONCLUSION ..................................................................................................333

331PROTECTING CHINESE INVESTMENTS


Mitigating Volatility: Protecting Chinese Investments in Post-Conflict Regions

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Transcript of Mitigating Volatility: Protecting Chinese Investments in Post-Conflict Regions