Governments must understand that foreign direct investment brings responsibilities as well as benefits. Failing to realise this can lead to a government paying out millions in compensation.

Foreign direct investment brings many benefits to countries but is not without its costs. Countries and regions are often seduced by the upside: the jobs, the contracts, the technology, the growth. But they do not always want to keep their part of the bargain: honouring contracts to the letter, explaining the rationale of the investment to the local electorate, and accepting a certain loss of sovereignty and independence.

In this month’s cover story, fDI journalists have investigated the bitter experience of US company Metalclad when it invested in Mexico. After several years of frustration caused by bureaucratic intransigence and outright political hostility, Metalclad took the Mexican federal government before an international arbitration panel under the terms of the North American Free Trade Agreement (Nafta). As a result, Metalclad was awarded $16m compensation on the basis that the government had effectively expropriated the firm’s land.

Unsurprisingly, neither side is happy with the outcome. The company feels the award was too little considering the money it lost on the investment. Mexico feels its sovereignty has been eroded, thinks the company was not up to the mark for the job and that the federal government – which picked up the tab – cannot be held responsible for everything that happens at a local level.

The reality is that governments need to think before they sign treaties. Being a member of Nafta or any other international agreement clearly does involve a loss of sovereignty. Governments that sign up to such agreements to improve their trade and FDI prospects need to understand this. They have responsibilities as well rights under such treaties.

Much better for everyone of course if investment disputes never get to this stage. That’s why Unctad director Karl Sauvant’s idea (pg 10) for an investment mediator is worth consideration.

Equally, the World Trade Organization’s attempt to create a multilateral framework for FDI (page 50) would promote investment by giving companies the comfort of knowing what to expect. Countries signed up would reap the consequent benefits of greater FDI but they would have to pay the price of keeping to the rules. That’s reality folks.