Brazil and China A Need for International Arbitration to Secure Foreign Direct Investment?

Andr Feldhof Course: International Economic Law Course coordinator: Prof. Harm Schepel Date: 24 April 2012

Introduction Dani Rodrik (2007) holds that international economic regimes such as the World Trade Organization (WTO) and international arbitration regimes such as the International Centre for the Settlement of Investment Disputes (ICSID) limit a developing countrys policy space and thereby limit its possibilities of economic development1. This has been exemplified by the case of Argentina. Argentina largely followed the advice of the Washington institutions and the guidance of the US until it had to devalue its national currency and compensate international investors for the damages resulting from this policy choice2. Van Harten (2010) has focused on bilateral investment treaties (BITs) and complemented Rodriks insights with the argument that BITs, intended to protect foreign investors through recourse to an international tribunal, do not encourage foreign direct investment (FDI) and fail to meet other objectives which would benefit the capital-importing state3. This paper therefore wants to investigate the relationship between a countrys openness to international arbitration and its capacity to attract FDI by comparing two emerging economies, Brazil and China. Brazil has not ratified a single BIT up to today and refused to sign up to ICSID4 while China is an ICSID member and the country with the second-most BITs in the world, only surpassed by Germany5. To compare the relationship between openness to international arbitration and the ability to attract FDI, this paper is divided into two parts. The first part presents the economic opening of China and Brazil and investigates their attitude towards international arbitration based on their regulatory action in favor of FDI and investor protection. Building upon the first part, the second part outlines Brazils and Chinas economic development and compares the consequences of their policies in favor of investor protection. It analyzes the degree to which international arbitration instills investor confidence in China, and the degree to which Brazils refusal to open to international arbitration has had adverse consequences. The conclusion will bring together the main results of this analysis and try to answer whether on the basis of the
1 2

Rodrik, 2007, p. 19 Kalicki & Medeiros, 2008, pp. 440f 3 Van Harten, 2010, p. 19 4 Kalicki & Medeiros, 2008, pp. 426ff 5 Shen, 2010a, p. 164

findings, openness to international arbitration seems beneficial for attracting FDI or not. 1. Brazils and Chinas economic opening process Policies for and against international arbitration 1.1 Brazil Before the late 1980s, Latin American countries were downright hostile to international arbitration. An arrangement called the Calvo doctrine forbade them to treat foreign investors any more favorable than domestic investors6. On grounds of this arrangement, they rejected the idea of allowing a foreign investor to appeal to an international panel while a domestic investor could only rely on the domestic legal system. They also refused to ratify the ICSID Convention which allowed for dispute resolution in ICSID7. At the end of the 1980s, however, many Latin American countries gave up their reluctance to international arbitration and BITs and joined the ICSID Convention and the New York Convention on Recognition and Enforcement of Arbitral Awards8. The Brazilian government also decided to move away from the Calvo doctrine and progressively included investor protection in its policies to attract FDI. Firstly, the government launched a program towards the middle of the 1990s that included stabilization of the exchange rate of the real and a plan to pay back government debt9. Scholars agree that this reform program greatly boosted investor confidence although Brazil refused to sign the ICSID Convention10. The result was an inflow of capital into the car manufacturing industry. Brazil actively offered foreign car producers preferential import tariffs for finished cars if they achieved 60% of local content in the assembly of the cars, and proposed investors to benefit from its multiple tariff agreements with other countries to save costs in the export of finished cars11.
6 7

Kalicki & Medeiros, 2008, pp. 425f; p. 432 Kalicki & Medeiros, 2008, p. 426 8 ibid. 9 OECD, 1998a, p. 21; ECLAC, 2004, p. 104. It is interesting to note that in the process of signing the Real Plan that aimed to reduce government debt, the government consented to international arbitration as a means of dispute resolution, albeit only in the framework of debt reduction. (OECD, 1998a, p. 48) 10 OECD, 1998b, p. 81; ECLAC, 2004, p. 104 11 OECD, 1998b, p. 80

However, the offer came with strings attached: The government required that two thirds of the workforce in the company had to be Brazilian, and that two thirds of the salaries be paid to Brazilians as well12. The policy ensured that FDI would benefit the economic development of the Brazilian people while at the same time allowing the investor to make a profit. Secondly, the government enacted the 1996 Brazilian Arbitration Law which has been seen as a milestone on the way to offer investor protection13. Before this law, disputes over a contract with an arbitration clause between a Brazilian company and a foreign investor could only be withdrawn from the domestic legal system if both parties consented14. This was problematic for investors: ECLAC (2004) argues that an overwhelming majority of judges in Brazil considered that the maintenance of social justice outweighed the breach of a commercial contract15. If the case went to international arbitration and was decided in favor of the investor, this was not necessarily a victory either: There were many complaints that Brazilian courts frequently refused to enforce international awards16. As a result, Brazil occupied the 113th rank of 134 in a World Bank survey on the enforcement of international awards before the Brazilian Arbitration Law came into force17. When the law was passed in 1996, a five-year long debate ensued in Brazil. The Supreme Court ruled it unconstitutional because it would conflict with the universal right of access to Brazilian state courts18. Essentially, the Court criticized the laws provision that a national judge could transmit the case to an international arbitrator even though one of the parties did not consent19. During the debate, the view that the Brazilian Arbitration Law did not infringe the Constitution gained more and more support and in 2001 the Supreme Court declared it constitutional20. In addition, enforcement of international awards had to conform to the requirements of the New York Convention which Brazil signed in 200221. Now Brazilian courts could

12 13

OECD, 1998b, p. 77 Brazil-David, 2011, pp. 58ff 14 Brazil-David, 2011, p. 58 15 ECLAC, 2004, p. 105 16 Pucci, 2005, p. 85; Brazil-David, 2011, p. 62 17 ibid. 18 Pucci, 2005, p. 83 19 Pucci, 2005, p. 84 20 Brazil-David, 2011, p. 59 21 Brazil-David, 2001, p. 71

only refuse to enforce an award if they found a serious breach of procedure, but no longer due to the content of the award itself22. Thirdly, the government introduced several constitutional amendments in 1995 which revoked the governments monopoly in oil, telecommunications, electricity and other sectors23. Overall, a prohibition of FDI was only maintained in banking, broadcasting, publishing, airports, fishing, health care and security services24. The government argued that a liberalization of the state monopolies would bring about modernization and greater efficiency of these public utilities25. As a result, Brazil witnessed a surge of FDI inflows as foreign investors bought shares in the former state-owned companies26. Had the greatest part of FDI been going into the car industry before 1995, FDI flows after 1995 went largely into services27. Since the state retained a golden share in many enterprises28, foreign investors were uncertain whether they could seek international arbitration against these companies. Previously, domestic courts had frequently upheld judicial immunity of state-owned companies on grounds of the concepts of legality (a state-owned company can only be a party to arbitration if there is a statutory provision consenting to the referral to arbitration29) or arbitrability (only relevant assets of the company can be subject to arbitration30). A host of sectoral laws in the second half of the 1990s and a law on private-public partnerships in 2004 made these concerns unnecessary. The sectoral laws generally allowed for arbitration in Telecommunications, Oil and other sectors31. The law on private-public partnerships specifically allowed for international arbitration in privatepublic partnerships, provided that it take place in Brazil, be held in Portuguese and conform to the requirements of the Brazilian Arbitration Law32. Finally, the government even went so far as to seek a loophole in the Brazilian constitution, citing interests of the Brazilian government in order to allow for FDI

22 23

Brazil-David, 2001, p. 61 OECD, 1998a, pp. 9ff; OECD, 1998b, p. 76 24 OECD, 1998b, p. 81 25 ECLAC, 2004, p. 86 26 OECD, 1998a, p. 12 27 ECLAC, 2004, p. 63 28 OECD, 1998a, p. 24 29 Brazil-David, 2011, p. 63 30 ibid. 31 Brazil-David, 2011, p. 64 32 ibid.

in the area of banking33. As a result, only four years after liberalization of the banking sector had started, the share of foreign banks in Brazil was 51.7%34. It can be seen from these initiatives that the Brazilian government had a pronounced interest to attract FDI and was prepared to start a wide range of reforms in order to become a more attractive location. Nonetheless, the government has remained very critical towards international treaties and obligations which would expose the state itself to international arbitration. Brazil negotiated 14 BITs during the 1990s, but none of them was ratified, mainly due to the investor-state arbitration mechanism contemplated in those agreements35. Up to today, Brazil has not ratified the ICSID Convention, partly because it did not consider it necessary in order to attract FDI36, partly because it raised constitutional problems, since it implied a certain curtailment of the scope of national legal processes37 and partly, according to Brazil-David (2011), because BITs and ICSID are still perceived as a tool of the developed countries which does not aim at encouraging economic development in developing countries38. Nonetheless, given that Brazil reformed its arbitration system, it is now considered favorably as a place for arbitration by the International Chamber of Commerce (ICC)39. Overall, it appears from the analysis above that Brazil has opened its economy to FDI rather successfully and that it is no longer the black sheep of Latin America that it is often said to be40. 1.2 China China under Mao Zedongs rule had few trade links with other countries and FDI was virtually non-existent. When Chinese leadership changed to Deng Xiaoping in the late 1970s, the states policy quickly shifted from autarky to openness. The Deng administration set to work with a strong sense of pragmatism, guided by the aim of developing the country economically41. Although China had a lot of savings, the
33 34

ECLAC, 2004, p. 90 ECLAC, 2004, p. 91 35 Kalicki & Medeiros, 2008, pp. 433f 36 Brazil-David, 2011, p. 66; Kalicki & Medeiros, 2008, pp. 438f 37 Kalicki & Medeiros, 2008, p. 432; cf. OECD, 1998a, p. 48 38 Brazil-David, 2011, p. 67 39 Brazil-David, 2011, pp. 77f 40 Kalicki & Medeiros, 2008, pp. 442f 41 OECD, 2003, p. 32

country lacked both a stock market and an understanding of commercial lending42. Banks were able to fulfill the plan given to them by the government, but they were unable to assess and finance viable business projects that could have helped the economy develop 43. As a result, the pragmatic Deng opened the Chinese economy to FDI. Had the governments priority been full employment before, it now shifted to output maximization fostered by FDI, always with the aim of increasing overall living standards for the Chinese people44. The OECD (2003) asserts that the new policy has since been so successful that it has radically altered the background against which Chinas neighbours now formulate their own economic policies45. At the beginning of Chinas economic opening, Deng only allowed a limited amount of joint ventures between Chinese and foreign companies, and restricted FDI to five Special Economic Zones in southern China46. Some of the policy priorities that he named in welcoming FDI were the possibility of high tax revenues for the government, the payment of wages by the investor, financial trickle-down effects to related domestic industries, and technology transfer to domestic companies47. The modernization of Chinas manufacturing technology, both with regard to products and production techniques, was arguably one of the most important reasons for welcoming FDI48. As a result, China initially attracted most of its FDI to the manufacturing sector. Zhang (2009) argues that China pursued four different policies to help attract FDI. First, to promote its industry, the government attempted to obtain foreign technologies, provided an infrastructure for export-oriented producers and set up high-technology clusters in coastal regions49. Second, to allow FDI to flow into all of China, the government allowed FDI into a wider area of 14 coastal cities in 1988 and opened FDI to all of China in 199950. In 1997, China also increased the number of industries where FDI was encouraged from 186 to 262, and decreased number of restricted industries from 112 to 7551. Third, although the ministry of commerce
42 43

OECD, 2003, p. 32f ibid. 44 OECD, 2003, p. 33 45 OECD, 2003, p. 30 46 OECD, 2003, p. 35 47 OECD, 2003, p. 33 48 ibid. 49 Zhang, 2009, p. 8 50 ibid. 51 OECD, 2003, p. 37

(MOFCOM) retained the prime authority to approve FDI projects, the central government allowed local governments to approve projects with a lower volume of FDI flows52. It also allowed local governments to compete for investment by providing free land and infrastructure or by organizing investment fairs53. Fourth, the central government used income tax rates and import tariffs in a flexible way so that it could promise an investor a five-year period of low tax rates or other benefits54. In addition to these incentives, the government was quick to give formal security guarantees to foreign investors. In 1982, China signed its first BIT (with Sweden) and until the end of 2006 it added another 116 BITs to it, making it the country in the world with the second-most BITs55. Scholars distinguish between two generations of Chinese BITs, a bulk of BITs that were concluded before the late 1990s and around 30 BITs which were concluded afterwards56. The first generation BITs were narrow in scope: they only contained protection of investors against expropriation, and the principle of fair and equal treatment of investments57. In addition, they only provided for arbitration where the dispute concerned the amount of compensation to be paid for expropriation, after a bilateral negotiation period of six months and after local remedies had been exhausted58. The second generation BITs were wider in scope: they all contained an arbitration clause and other provisions such as non-discrimination, protection from expropriation and MFN treatment59. Even though China has been rather hostile to MFN treatment for foreign investors, it is assumed among scholars that the principle of MFN treatment would now allow parties to the first generation BITs to come under the same procedural benefits as parties to the second generation BITs with an arbitration clause, meaning that they could seek international arbitration60. Besides the signing of BITs, China has also undertaken a reform of its national laws to attract more FDI. Thus, the government passed the 1994 Arbitration Act which replaced the previous web of different rules and laws in the area of commercial
52 53

Zhang, 2009, pp. 9f Zhang, 2009, p. 10 54 Zhang, 2009, p. 10 55 Rooney, 2007, p. 690 56 Kalicki & Medeiros, 2008, p. 440; Rooney, 2007; OECD, 2003; 57 Rooney, 2007, p. 703 58 ibid. 59 Rooney, 2007, p. 705 60 Chandler, 2010, Conclusion, para 2; Wagoner, 2006, p. 31

arbitration with a single law61. The law has been considered a milestone giving protection to investors, although scholars have also criticized its explicit commitment to the healthy development of the socialist market economy62. It has furthermore been criticized that the Act is not completely in accordance with international principles in favor of arbitration63. While China has afforded international investors protection and formal recourse to international arbitration through BITs, scholars hold that the enforcement of international awards is the key concern. Lianbin, Jian & Hong (2003) assert that some Chinese courts have interpreted the Arbitration Act in such a way that they refused to enforce international commercial arbitration awards on grounds of conflicting national economic or social interest64. The Chinese government furthermore made important reservations with regard to its own liability vis--vis foreign investors. Although the government signed the New York Convention in 1987 and the ICSID Convention in 1990, scholars are doubtful whether or not an international award against the Chinese government itself could be enforced in China. Thus, in its accession to the New York Convention, the Chinese government issued a reservation that limited international arbitration to disputes arising from commercial legal relationship of a contractual nature or a non-contractual nature65. The Chinese Supreme Court thereupon issued a note that declared disputes between a foreign investor and the Chinese government non-commercial66. Although this cannot prevent an investor from launching proceedings against the Chinese government, it is doubtful whether such an award could be enforced under the New York Convention. Instead, it could possibly be enforced under the Civil Procedure Law67. Under the ICSID Convention, China issued a notification that limited ICSID arbitration to disputes arising from nationalization or expropriation68. Since China issued this notification before it engaged in its second generation BITs, is in questioned whether the notification, although formally still in place, still has validity today. The claim cannot be assessed on the basis of sound evidence, however, because none of the Chinese
61 62

Lianbin, Jian & Hong, 2003, p. 172 Lianbin, Jian & Hong, 2003, pp. 172f 63 ibid. 64 Lianbin Jian & Hong, 2003, pp. 176ff 65 Rooney, 2007, p. 709 66 Rooney, 2007, p. 710 67 ibid. 68 ibid.

BITs have given rise to international arbitration against China so far69. The only international award that has been delivered under a Chinese BIT concerns a dispute between a Chinese investor and the state of Peru in 200770. Overall, it can be said that within 20 years, China opened almost its entire market for FDI, except for a few restricted areas such as natural resources, technology and agriculture71. It aggressively attracted FDI in the interest of developing and modernizing the Chinese economy while providing a place for international investors where they could tap new markets and benefit from low labor cost72. Although China in theory afforded wide-ranging protection to foreign investors, in practice this protection has not always proven true73. Some national courts refuse to be bound by the international conventions on the enforcement of international awards and it appears difficult to seek arbitration against the state. As a result, China ranks far behind the UK, the US and other developed country with regard to protection of investment74.

69 70

Shen, 2010a; Rooney, 2007, p. 691 Rooney, 2007, p. 691 71 Anwar, 2012, p. 236; OECD, 2003, p. 47 72 Anwar, 2012, p. 213 73 ibid. 74 Anwar, 2012, p. 222

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2. Foreign direct investment as a result of openness to arbitration To find out how significant openness to international arbitration is for attracting FDI,
$9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0
Figure 1 - GDP from 1980 to 2012; Unit: Billion US$; Data: IMF; Chart: Author's calculations

it is important to know what factors investors consider before making an investment. UNCTAD
"China" "Brazil"

(2004) asserts that some of the most important factors are an economys growth potential, market size, regulatory frameworks, availability of a skilled workforce, export potential,

availability and cost of inputs, costs in general, natural resources, access to financing, the cost and sourcing possibilities of energy, and FDI incentives by the government75. Some of these aspects will be analyzed in detail and contrasted with international arbitration. It could be argued first that both Chinas and Brazils market size and their economic growth provide a very strong incentive to invest. Figure 1 shows GDP growth in both the Chinese and the Brazilian economy. China has the second-biggest economy in the world, only second to the United States and has seen high GDP growth rates since the beginning of its economic opening. When questioned about their investment in China, investors stated that they were attracted by Chinas cheap land and labour [and] the promise of a large market76. China henceforth became a host for resource-seeking FDI. This kind of FDI attempts to use the abundant resources of a country in order to produce and export products at a lower price than elsewhere77. Resource-seeking FDI mainly went into the Chinese manufacturing sector, as investment in agriculture and extractive industries was heavily restricted78. As a result, 60.9% of the FDI disbursed during the period of 1978

75 76

UNCTAD in ECLAC, 2004, p. 106 OECD, 2003, Abstract, p. 42; 77 ECLAC, 2004, p. 69 78 OECD, 2003, p. 47

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to 2000 was in industry79. The Chinese government saw foreign investors as important drivers of economic growth and relied upon them to bring foreign technology, modern business techniques and a system of commercial lending to China80. As the economy continued to grow, however, FDI shifted from mainly
$14,000 $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0
Figure 2 - GDP per capita from 1980 to 2012; Unit: US$; Data: IMF; Chart: Author's calculations

resource-seeking to predominantly market-seeking FDI81. This

Brazil China

describes FDI that is channeled into a country to capture the domestic market82. In other words, investors

turned from encouraging Chinas growth to profiting from its growth. Zhang (2006) has conducted a quantitative study and found out that after 2000, the causal impact of Chinas economic development on FDI was larger than the impact of FDI on Chinas economic development83. The continuous economic growth of China appeared to have much allure for investors. Brazil showed lower growth rates than China, but they were nonetheless positive. Counted per capita, Brazils GDP even largely surpassed Chinas (Figure 2). Brazil was the largest market in Latin America and its sheer size and relative wealth compared with China, in combination with protective tariffs, made it very attractive as a place of production for cars and other industrial goods84. Other than China, Brazil from the beginning attracted a great amount of market-seeking FDI coupled with a lower degree of resource-seeking FDI85. Brazilian purchasing power was not the only factor that made investors interested, however. They also saw involvement in the Brazilian market as a precursor to conquering the rest of Latin America86. The
79 80

OECD, 2003, p. 47 OECD, 2003, p. 32f; Chandler, 2010, para 18 81 OECD, 2003, p. 43; Zhang, 2009, p. 7 82 ECLAC, 2004, p. 69 83 Zhang, 2009. p. 3 84 OECD, 1998b, p. 91 85 ECLAC, 2004, p. 73 86 ECLAC, 2004, p. 69, p. 109

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Brazilian economy had been stabilized in the 1990s87, so that it would provide a good environment in which products could develop, mature and then be exported to other Latin American countries. The Brazilian government enhanced the natural attractiveness of the Brazilian market with preferential (but conditional) import tariffs and government incentives in favor of investors88. In a period that became known as the Fiscal War, different regions in Brazil competed by pushing down corporate tax rates to attract investment in car manufacturing89. ECLAC (2004) asserts that this inspired many foreign carmakers to enter the Brazilian economy90; indeed, three of the ten biggest foreign
$120,000 $100,000 $80,000 $60,000 $40,000 $20,000 $0
Figure 3 Total FDI flows between 1985 and 2010; Unit: Million US$; Data: ECLAC (Brazil)/OECD (China). Chart: Authors calculations

enterprises in 2003 were car producers91. One of the biggest

Brazil China

government initiatives, however, was the liberalization of public utility companies. When Brazil

opened telecommunications, electricity, oil and other sectors to FDI in 1995, investment quickly surged from an annual average of $2229.3 million FDI between 1990 and 1995 to an annual average of $24823.6 million between 1996 and 200092 (cf. Figure 3, first Brazilian surge). Again, the size of the Brazilian market, coupled with a decrease in FDI restrictions, had a big allure for foreign investors. In China, government incentives also proved a viable means to attract foreign investors. As mentioned above, the government used preferential tariffs and preferential taxes and provided special infrastructure such as technology parks for the

87 88

OECD, 1998b, p. 92 ECLAC, 2004, p. 72 89 Christiansen, Oman & Charlton, 2003, pp. 15f 90 ECLAC, 2004, p. 72 91 ECLAC, 2004, p. 79 92 ECLAC, 2004, p. 35

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benefit of the investors93. Besides, Anwar (2012) asserts that China is by now one of the most open economies as far as FDI flows are concerned, because the approval mechanism between MOFCOM and provincial governments has been streamlined94. Taken together, these two have been important factors securing FDI for China95. Recourse to international arbitration has also been put forward as a factor that attracts FDI flows, both in the cases of Brazil and China96. Kalicki & Medeiros (2008) have asserted that in the face of recent nationalization of industries in Venezuela and Bolivia, the possibility of investor-state arbitration could give investors confidence that Brazil remains a safe place for investment97. They have also asserted that competition for FDI is increasing in the world, and that those countries that have so far been able to rely only on their market size can no longer consider this as a sufficient condition98. Instead, joining the international arbitration regime may give Brazil a competitive edge to secure FDI, given that it has already reformed its arbitration system quite substantially99. In opposition to this view, Brazil-David (2011) has argued that
studies show that the relation between BITs and the flow of FDI is weak and it is usually agreed that investment treaties do not themselves attract investment, but merely complement the main determinants of FDI flows100.

Kalicki & Medeiros (2008) have supported this with the view that Brazil has no history of broad violations of international law standards regarding treatment of aliens101. It could therefore be assumed that investors would take positive experiences with the Brazilian arbitration system as a sufficient guarantee for their investments. In addition, Garcia-Herrero & Santabrbera (2007) have calculated that the rise of China has not diverted any significant flows of FDI away from Brazil, or even from the six biggest Latin American countries as a whole102 . This reinforces the idea that despite global competition for FDI, the mere existence of a BIT is not a guarantee for FDI inflow but other reinforcing factors are necessary. Following this
93 94

Zhang, 2009, p. 10 Anwar, 2012, p. 234 95 OECD, 2003, p. 42 96 Kalicki & Medeiros, 2008 97 Kalicki & Medeiros, 2008, pp. 440f 98 Kalicki & Medeiros, 2008, p. 444; OECD, 1998a, p. 81 99 Kalicki & Medeiros, 2008, p. 444 100 Brazil-David, 2011, p. 66f 101 Kalicki & Medeiros, 2008, p. 444 102 Garcia-Herrero & Santabrbera, 2007, pp. 142f

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logic, international arbitration could be considered a soft issue that gives reassurance to investors but that comes after more substantive hard issues. The Chinese experience with international arbitration is different from the Brazilian experience. China has signed 117 BITs and the ICSID Convention, thus formally granting extended protection to many investors in China103. However, it has been argued above that the enforcement of international awards in China has been difficult because of insufficient knowledge of the courts or a conflict of the award with national interest. Investors have criticized the enforcement of intellectual property rights in particular104. Hence, on a 2012 ranking of countries according to the protection they give to FDI, China is ranked 93rd, on the same rank as Germany and far behind the United States, the United Kingdom and Australia105 . It could also been seen as a negative indicator that the Chinese government has not yet been subject to investor-state arbitration although it is party to the secondmost BITs in the world. While this could be an indication that the government has not given investors reason to fear for their investment, it has been argued above that the government made several reservations with regard to its own liability when it acceded to the ICSID Convention. Shen (2010) holds that these reservations denied investors the possibility to seek international arbitration with ICSID, adding that it compromises the effectiveness [of international arbitration] as a mechanism for investment protection106. As a result, it appears that a BIT with China cannot give an investor the same security as a BIT with another country. The fact that China nonetheless attracts the largest FDI flow in the world must indicate that investors consider access to investor-state arbitration a secondary aspect when deciding to invest in China. It reinforces the assumption made above that international arbitration can be considered a soft issue that complements hard issues such as the size of a market and the stability of an economy.

103 104

Rooney, 2007, p. 690 European Parliament, 2005, para. 20 105 Anwar, 2012, p. 217 106 Shen, 2010b, p. 393

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Conclusion This paper underlines the argument made by Van Harten (2010) that openness to international arbitration does not constitute a crucial factor for attracting FDI into a developing country. The examples of Brazil and China have shown that factors such as market size, economic growth and macroeconomic stability are more significant aspects than international arbitration. In China, which had the stated goal of developing the economy with help from FDI, economic development came to influence FDI flows more than vice versa. Conversely, the example of Brazil has shown that concerns over the states sovereignty may provide a strong reason against the acceptance of investor-state arbitration. However, this does not necessarily lead to a loss of FDI inflow. The paper has furthermore taken the view that adhesion to the international arbitration regime and the conclusion of BITs could be seen as a soft issue, an optional reassurance for investors in addition to more substantive hard issues. Paradoxically, although China has subjected itself to the international arbitration regime it appears that Brazil is a more secure destination for FDI. Brazil has embraced the idea of FDI protection and reformed its national arbitration system. To what degree legal practitioners in Brazil have accepted the idea of international arbitration can be seen in the fact that Brazil is today ranked seventh as country of origin of arbitrators in commercial disputes at the ICC107. Meanwhile, China has pursued an FDI regime that aimed first at the healthy development of the socialist market economy108 and only then at the protection of foreign investment. It has been successful in attracting FDI, but scholars assert that investors may have been lured by more than just rational facts of FDI protection; instead, the herd instinct among rivaling multinational companies109 and the alluring mysticism of doing business in China110 may have contributed to attracting FDI.

107 108

Brazil-David, 2011, p. 72 Lianbin, Jian & Hong, 2003, pp. 172f; Shen, 2010a, p. 172 109 OECD, 2003, p. 43 110 Chandler in Anwar, 2012, p. 248

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