• Sarah M. Matos Marinho

book symposium - investment treaties and the legal imagination

International Economic Law as Socio-Legal Research

‘Investment Treaties and the Legal Imagination’ by Nicolás M. Perrone is a brilliant piece of legal literature whose analysis relates to critical legal studies and socio-legal research. The book helps fill an important knowledge gap, as the international economic law literature rarely situates foreign investment implications within the array of expectations arising from the host country’s local context. The author successfully explains the legal imagination behind investment treaties and investor-state dispute settlement (ISDS) from the 1990s onwards. He provides a convincing picture of the rise and influence during the 1950s and 1960s of the pioneer work of ‘enlightened’ experts (‘norm entrepreneurs’), who claimed, without immediate success, for an international property and contract law order to address foreign investor rights. The international legal order for foreign direct investment (FDI) dispute settlement later created from the work of norm entrepreneurs provided multinational corporations (MNCs) with ISDS, a safe environment outside national borders to enforce their rights. The hard evidence provided by the author on how norm entrepreneurs’ legal imagination has been orienting ISDS practice since the 1990s is his key contribution, since, as he admits, others before him have criticized investment treaties and ISDS for being captured by foreign investors and detrimental to state sovereignty and local welfare in host countries. Yet, as the result of a socio-legal research, the book’s key finding may have greater implications for the knowledge available on state sovereignty, which I address in this review.


Norm entrepreneurs departed from a business imagination on the role of MNCs in economic development in the mid-20th century. They argued that FDI was key to creating a free enterprise culture in poor countries, which were promoting massive foreign investment expropriation driven in part by decolonization and communism. Nationalist feelings about economic development were also rising in many other rich and poor countries, where state intervention grew to protect the local economy and promote industrialization. In norm entrepreneurs’ business imagination, FDI was essential to achieve economic development and sustain foreign trade.


A legal imagination to address the issues regarding MNCs’ international operations came along with this ‘enlightened business imagination’. Decolonization, communism, and the increasing state intervention in the economy reduced economic predictability and the calculability of return in overseas ventures, as expropriation became commonplace and could then be considered fair even without compensation. Given this context, MNCs wanted to bypass local laws and dispute settlement options by taking disputes between investors and states to international arbitration without exhausting local remedies. In early documents mostly explored by Perrone in Chapter 2, norm entrepreneurs named and explored key concepts in today’s investment treaty formulation and ISDS practice, including indirect expropriation, full compensation, fair and equitable treatment, and legitimate expectations.


Norm entrepreneurs’ proposals never meant to balance MNCs’ interest and the public interest in host states, which is the main reason why a multilateral initiative to regulate FDI never became possible. Throughout the 1970s, different voices associated with the New International Economic Order movement claimed that FDI control by host countries was legitimate in addressing local interests regarding economic development. However, state-led approaches to capitalism and communist economies collapsed in the 1980s, which introduced the prominence of the private allocation of resources in the debate on economic development. Every country was to become a market economy in the early 1990s, and MNCs provided guidance for it.


Initiatives led by the United Nations Conference on Trade and Development and the World Bank revived the debate on international investment law with guidelines and recommendations for FDI attraction. Complex debates surrounded investment treaty negotiations. However, norm entrepreneurs’ legal imagination stood out as a reference, as it was ready for use when the consensus shifted from the need to control to the need to attract foreign investment. This created a distorted legal order in which international arbitrators considered only foreign investors’ global embeddedness and expectations and disregarded foreign investment’s local implications. Any negative impact of state regulation on expectations of return of capital can be interpreted as expropriation, even when the local reaction is attributed to foreign investor misconduct. In contrast to the purely transactional view of arbitrators on foreign investment relations between MNCs and host states, Perrone’s rich ISDS case analysis in Chapters 5, 6, and 7 confers equal weight to domestic, international and contractual legal dimensions of foreign investment relations in his critical assessment of arbitration awards. Case analysis results show that by trying to assess foreign investment relations out of context arbitration awards often compensate MNCs’ for their misconduct and create new social costs for the host states and local communities.


Those familiar with investment treaties and ISDS practice already know that the international legal order they represent privileges foreign investor rights. Global South countries have historically agreed upon investment treaties and accepted ISDS because they learned that they cannot integrate into the global economy without MNCs. Foreign investors received from host countries the ‘extraordinary citizenship status’ described by Perrone, even though the literature has never concluded on the impact of investment treaties and ISDS on investment flows.1 Given the prominence of investors’ rights even without the payoff expected for host countries, Perrone’s contribution to the knowledge on international investment law and relations is relevant. Other critics have claimed for more policy space and human rights without questioning how the core of international investment law could be so explicitly captured by a single interest group, and the author showed us the reason behind the basis of this legal system. As communism and state-led capitalism failed to promote prosperity, Global South and Eastern countries lost their voice in international investment law, and MNCs’ demands gained ground even with no proof of their capacity to promote development.


Other relevant critical legal literature on international investment law has proposed reviews of investment treaties and ISDS to include principles of justice in their language.2 By contrast, Perrone’s contribution points to the imbalance of international investment law in its conception, suggesting to readers that there is no salvation to such a legal order.


The book provides hard evidence of investment treaty omissions and how ISDS operates to maintain the North–South divide in the global division of labor. Therefore, the research findings have great geopolitical implications, addressing a powerful mechanism behind the general imbalance in global wealth and power distribution. Perrone confirmed the perceptions of many about MNCs’ negative social impacts on host states, mostly in the Global South. In addition to and more intensely than local elites, MNCs severely vetoed host governments’ agency and local community choices within their own societies. The book shows the social embeddedness of foreign investment in host countries but requires great fluency from readers in international economic law.


On the one hand, giving more details on the magnitude of ISDS costs would add academic value to the book’s findings by anticipating an answer to possible critics more familiar with quantitative analysis who may argue that ISDS impact is marginal compared to costs attributable to malfunctioning domestic and diplomatic remedies. Thus, critics may oppose Perrone's conclusions by arguing that he overestimated ISDS economic and social costs, since domestic and diplomatic dispute settlement options may impose similar costs and, in addition, last longer. On the other hand, emphasizing in greater detail the book’s interdisciplinary value could amplify generalizations from the research results. The social impact of MNCs is a key subject in various literatures other than international economic law, including corporate law, development studies, economic history, and comparative political economy. Recent studies related to these fields have assessed how during the past decade MNCs directly replaced state functions with market organizations in emerging countries;3 and how in the near future transnational economic digitalization promoted by financial institutions may transpose and replace law enforcement by the state.4 Scholars in other related fields are likely to agree with Perrone’s conclusions and situate his analysis in a broader context in which MNCs can give up on ISDS as it becomes more complicated, since they are progressively becoming more powerful to create and enforce their own laws and redefine the state.



Sarah M. Matos Marinho

Holds a PhD in Corporate Law from University of Sao Paulo, an LLM from University of Wisconsin Law School, and currently works as a Research Associate at Fundação Getulio Vargas’ Center for Politics and Economics of the Public Sector, in Sao Paulo, Brazil


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BOOK SYMPOSIUM - A REACTION FROM NICOLÁS PERRONE

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