Investment disputes can often turn bitter and damage a country’s image. Karl Sauvant explores the idea of establishing an investment mediator.

FDI has been an upbeat story for the past decade. As the United Nation’s Conference on Trade and Development’s (Unctad) annual World Investment Report states, global cross-border investment has risen from $202bn in 1990 to $331bn in 1995, and to $1271bn in 2000.

FDI is good for you if you are the host country: it can bring capital, technology, management know-how and access to new markets. Developing countries have made real efforts to improve both the conditions they offer investors and their own capacity to absorb FDI in a fruitful manner.

Unfortunately, the FDI story is no longer as upbeat. In 2001, for the first time in 10 years FDI declined by some 40%. And competition for FDI is about to get much fiercer.

So what can developing countries do, not only to attract new FDI but also to retain what they already have? While FDI is not as footloose as portfolio investment, more competition among locations does mean that multinationals in particular have more options open to them.

There are many things host countries can review to become more competitive – from administrative practices to land laws. One area is that of differences and disagreements between investors and governments that could potentially discourage investment. Such differences can often be resolved relatively easily (and inexpensively) if they are attended to in time. If left to fester, they can damage relations, eat up time and money, and generate bad publicity.

One option to consider is the establishment of an office of investment mediation, to deal with complaints before they turn into conflicts of a sort that only courts can resolve.

The idea is similar to that of an ombudsperson. This is two ideas rolled into one: that of a champion and that of an arbitrator. As a champion, the ombudsperson fights in the citizen’s corner; as an arbitrator, he is both an impartial adjudicator and a partisan.

I would like to stress the second, impartial, aspect of the idea. An investment mediator would be above the dispute (or potential dispute). Their function would be that of a communicator, adviser, facilitator – not that of an administrator or judge – and they would respond to requests from governments as well as investors.

So how would this idea work and would it be a useful tool for host countries anxious not to lose FDI?

The answer is to take account of the special circumstances of developing countries. They often suffer from a certain mistrust of the efficiency of their public administration and the transparency of their procedures. Such mistrust has deterred foreign investors from entering a developing country or from expanding their investment.

Among the measures that could be tried is to have someone in place, to whom both investors and governments could turn, essentially to prevent the rise of conflicts. This is a pre-emptive function. How effectively it is discharged would depend on whether the mediator is seen as both trustworthy and competent. The trust is partly a matter of the office being established in the right way; the competence partly a matter of its being given the right mandate.

To take the latter condition first, such an office would be effective only if its scope were sharply limited. It must not duplicate any existing government machinery and must not be loaded with a range of tasks that would blur its focus.

The one indispensable virtue of the mediator is impartiality. To guarantee this in the eyes of both investors and governments is not easy and is more likely to succeed if the appointment process is genuinely neutral. One way to ensure neutrality is to have the mediator appointed by a third party.

Developing countries must take the initiative here, if they think the idea worth pursuing and developing.

Karl Sauvant is director of the division on investment, technology and enterprise development at the United Nations Conference on Trade and Development