ARE INVESTOR-STATE DISPUTES AFFECTING FOREIGN DIRECT INVESTMENT INTO LATIN AMERICA?

Foreign direct investment (FDI) is generally defined as a lasting interest in a cross-border investment by a resident of one country (the investor) holding control or significant influence in a business or enterprise residing in another country (the host country).

In deciding where to invest, investors usually seek a secure legal environment coupled with an adequate financial return. They take financial risks in exchange for host country governments providing legal stability and certainty. In recent times, FDI has generally flowed from more developed nations into less developed (or developing) nations.

This article focuses on the Latin America and Caribbean region, most of which is categorised as developing nations.

Developing nations are frequently dependent upon FDI to sustain their internal economic growth, and, ideally, their people’s wellbeing. Accordingly, countries seeking to attract foreign investment must adapt their legal systems to make such investments attractive financially. This process requires the enactment of internal laws to facilitate and incentivise the allocation of financial resources flowing from the investor nation into the host country. It also requires countries to build a reputation for fair treatment of foreign investors and acting fairly when faced with investment disputes.

While the existence of internal incentives legislation is a catalyst for foreign investment, political and economic volatility makes such legislation fragile at times. Therefore, developed and developing nations have sought to increase legal stability through the adoption of international agreements focusing on the protection of foreign investments.

This is one of the reasons why, toward the end of the 20th century, many countries in Central America, South America and the Caribbean entered into international investment agreements (IIAs) with more developed countries. IIAs generally took the form of bilateral investment treaties (BITs). However, most recent IIAs take the form of trade promotion agreements (TPAs).

Apr-Jun 2025 issue

MDU Legal