The realm of foreign direct investment (FDI) regulation is undergoing a paradigm shift, navigating towards a concept increasingly known as ‘domestication’. Emerging as a focal point in scholarly discourse, domestication captures the progressive pivot away from international legal mechanisms towards domestic rules. 

Notably, this transformation is underscored by domestic investment laws, a subset of legislation that seeks to promote and regulate foreign investment, safeguarding both domestic and foreign investors. 

This shift does not herald an epoch of economic isolationism for nations. Instead, it signals an innovative strategy to allure international investors via a myriad of conduits, all while retaining unilateral dominion over foreign investments.

Major events such as the 2008 global financial crisis and the Covid-19 pandemic sparked the domestication of investment law. By hindering globalisation and its architecture of international norms and treaties, the spotlight fell on domestic law. 

Domestic investment laws are far from homogeneous. They regulate  foreign investment in many different ways. They primarily fall into two categories: outright prohibition and screening. Outright prohibition entails restricting foreign investment in specific industries or sectors. Screening aims to control the entry of foreign investors, imposing specific conditions when necessary.

But domestic investment laws are not the only legislation influencing foreign investment. Laws surrounding data, special economic zones, recovery and energy transition plans, property and arbitration also have a considerable impact. However, unlike the explicitly promotional domestic investment laws, these are part of a country’s broader legal structure.

Domestic investment laws have also found utility in international arbitration, aiding in investor-state disputes. In some cases, investment tribunals perceive domestic investment obligations as the host state’s unilaterally adopted international obligations. In others, they are simply seen as domestic law. This dual classification bears significant implications for their use in investor-state claims. Remarkably, regardless of the classification, domestic investment laws can often reflect international law norms.

The role of domestic investment laws as an alternative to investment treaties warrants analysis. Four possible scenarios have to be considered. They could suffer the same fate as investment treaties, undergoing revisions or termination due to the same concerns. Alternatively, some states may advocate for their continuation, or seek a middle ground, advocating their effectiveness in attracting investment. Finally, they may face challenges in domestic and international courts and tribunals, even if consent to arbitration is withdrawn.

In sum, the domestication of FDI regulation heralds an anticipated rise in the complexity and number of domestic investment laws. We can expect an expansion in investment screening, restrictions in sensitive sectors, as well as further incentives for foreign capital, green investment directives and regulations in the growing digital economy. As states respond to shifting economic global environments, these laws will embody a unilateral and careful balance between attracting foreign investment and safeguarding national interests, reflecting different perspectives on the future of the liberal international order.

Julien Chaisse is professor of Law at City University of Hong Kong and president of the Asia-Pacific FDI Network

Twitter: @jchaisse

This article first appeared in the August/September issue of fDi Intelligence