The dependency theory is a criticism of the classical theory. It does focus on an entirely different meaning of economic development. It redefines development as requiring not wealth transfer to the host state, but the development of the people of a state as a whole.

It is popular among Latin American economists. The proponents of the dependency theory analyze that multinational corporations have their headquarters in developed countries and the branches they establish in developing countries work in the interest of their parent companies and their shareholders. Hence, development becomes impossible in developing countries since their economy is subservient/dependent to the developed countries. Thus, they propose that indigenization measures and efforts be made to control foreign investment. because Attempts to permit foreign investments through joint ventures are seen as a failure and the foreign investor defeated it through his/her alliance with the elite in the host state. According to the dependency theory, foreign investment is a way for developed countries to gain power in developing countries. It influenced many nationalizations of foreign direct investment.

For example, nationalizations in Peru, Jamaica, and Chile were the results of such a theory. Further, it influences the restructuring of the economy by deriving out foreign investment and providing policy justifications for such restructuring. According to this view, there cannot be development until the people as a whole are free from poverty and exploitation. Development becomes a right of the people rather than that of the state.

For More please read Joho H. Barton and Bart S. Fisher, International Trade and Investment: Regulating International Business, Little, Brown and Company,1986, p. 28

QUESTIONS

1) Dependency theory is a criticism of classical theory on foreign investment. Discuss.

2) Cite examples where the dependency theory was applied.

3) Cite examples where the dependency theory is popular and explain its importance.

According to classical economic theory, foreign investment is wholly beneficial to the host economy. In other words, pursuant to the classical economic theory, it is the economy where the investment is made that benefited wholly from the investment. What are the reasons upon which classical economic theory is based?

• Capital inflow – The first reason for the classical theory is that foreign investment makes available capital in the host state that flows from the capital sending country. The proponents of classical economic theory argue that foreign investment is beneficial to develop countries by making available capital. The capital, then, is used to promote the development of the economy of the host state.

Do you believe that foreign investment is wholly beneficial to the host state? Those who reject the theory argue that the existence of capital in a host country soaks local capital. Thus, the inflow of capital to the host state is like a big fish that swallows a small one. Hence, the local capital that would be used to invest could not be invested. What is more, foreign investors will export the high profits obtained from the investment to their home state.

Therefore, the capital will benefit the shareholders who are foreigners.  In short, the justification that foreign investment is wholly beneficial to the host state on the basis of capital flow is rejected.

• Transfer of technology: - is the second reason on which the classical economic theory bases its justification. The proponents of the classical economic theory propagate that foreign investment transfers technology that is not available in the host state. They further argue that investment is beneficial to the host state since it diffuses the transferred technology to the host economy. Foreign investment will help the workers who are the citizens of the host state to learn how to run the technology the investment uses. They will use their technical knowledge and skill in a similar field in their country.

 Do you agree that foreign investment is wholly beneficial to Ethiopia by transferring technology?

The fact that foreign investment transfers technology could not be denied. However, foreign investors may transfer technology that is outdated. Foreign investors may need to use a technology that is already not up to date. They may not have the chance to use the outdated technology in their country because it may be dangerous to the environment, or it may not be efficient. In addition, the technology used by foreign investors may be capital intensive; using such a technology may be expensive. Further, the technology may be unsuitable to developing countries, for example, the goods that are produced may be outdated, i.e., they are replaced by other goods or products based on newer technology. Thus, the product could not be exported because it is replaced. It cannot bring foreign exchange to the host state. Sometimes the technology may be new and the products may be new to the society of the host state. In this case, the consumers may develop or not tastes to luxury goods.

• Creation of employment: - It is argued that foreign investment creates new employment opportunities.

Accordingly, the unemployment problem that exists in a host state will be solved.

No doubt that foreign investment creates a new job. However, the fact that it creates a new job opportunity should not be taken as a benefit only to the host state. The foreign investor is highly beneficial from the creation of employment because labour is usually not expensive. Rather, the workers will not be fully paid, or the rate of wages is very low that is not commensurate with the service rendered by the workers.

• Transfer of managerial skills – Foreign investment transfers managerial skills to the host state, particularly skills in the management of large projects. The foreign investor may recruit local experts in higher managerial positions. For example, the local employees could be assistants to foreigners in structure in the business organization, marketing the product of the business organization, administration of employees, etc. Hence, the proponents of classical economic theory argue that foreign investment will result in transfer of managerial skills from the foreign investor to the local professions. Therefore, they conclude that foreign investment is beneficial to host states.

Do you agree with this?

Transfer of managerial skills to local personnel is illusory because the foreign investor do not allow higher managerial positions such as departmental head for local professionals. Therefore, local personnel who are employed cannot acquire new skills.

• Building infrastructure- It is also argued that foreign investment makes sure the building of infrastructure in a host country. Fundamentally, the state builds necessary infrastructures in areas where foreign investment is made. For example, health, and education facilities are delivered by the state. The investor may also build infrastructure facilities in host countries. Therefore, proponents of classical economic theory on foreign investment argue that it is beneficial to the host state. Do you believe that a host state will really benefit from foreign investment since infrastructure could be built? The infrastructure that is built is based on the standard of foreigners. It is only those who can pay for the facilities who could benefit from the building of the infrastructure. For example, a school fee may be high and only elites that can afford may benefit from it.

• Upgrades infrastructure- It is also argued that foreign investment upgrades facilities such as transport, health, and education that will benefit society as a whole.
• Brings economic development- Foreign investment brings about economic development for the less developed countries. However, it is revealed that foreign investors engage themselves directly or indirectly in the suppression of human rights to ensure the continued maintenance of regimes favorable to foreign investors.
• The classical economic theory does not explain other reasons for state interference in foreign investment. However, it is worth noting that it influences international law on foreign investment. For example, the preambular statements of bilateral agreement emphasize the importance of foreign investment to benefit the development of both parties. In addition, the theory is accepted by World Bank. Thus, in 1992 the World Bank guideline on the treatment of foreign direct investment incorporates the philosophy of the classical theory. The first paragraph of the guideline reads as follows:

       … that a greater flow of foreign direct investment brings substantial benefits to bring on the world economy and on the economies of developing countries in particular, in terms of improving the log term efficiency of the host country through greater competition, transfer of capital, technological and managerial skills and enhancement of market access and in terms of the expansion of international trade.

What is more, the classical theory also provides a policy basis for the formulation of many documents that relate to international as well as national laws on foreign investment.

Nevertheless, strong criticism has been directed against this theory. It is argued that the flow of resources to a host country does not bring about the development of the state. Foreign investment only benefits the elites. It also leads to unequal development within a state because the elites benefit while the large group of the society is exploited by the foreigners. Thus, another theory has been developed with the intent of providing another reason as justification for foreign investment.

Throughout the history of capitalism, investment has been primarily the function of private business; during the 20th century, however, governments in planned economies and developing countries have become important investors.

Before 1930, investment was thought to be strongly affected by the growing rate of interest, with the rate of investment likely to rise as the rate of interest fell. Since then, the empirical investigation has shown business investment to be less responsive to interest rates and more dependent on businessmen’s expectations about future demand and profit, technical changes in production methods, and the expected relative costs of labour and capital.

Foreign investment, as one form of investment, was necessitated to ensure raw materials for production in the Western states continued. At the time of colonization, resources were transferred from colonies to the metropolitan powers so that they could be converted into manufactured products or used to fuel the industries in these states. In the earlier stages, the petroleum sector was the most prominent sector for foreign investments. At that time, concession agreements were used to tie up resources for foreign investments.

As time went, on the concession agreements ceased to be the norm in investment and were replaced by the production sharing agreements. These agreements reflect the shift in the power equations that have taken place within the investment, particularly in oil industry. Indonesia was a pioneer in the field of devising new arrangements for the oil industry. Such a shift was aided by the formulation of international law doctrines such as the doctrine on the permanent sovereignty over natural resources. The doctrine of permanent sovereignty over natural resources has been translated into national legislation. Thus, constitutions and foreign investment legislation incorporated the doctrine. It was also possible to draft investment contracts that ensure the host state having greater control over the process of the exploitation of the mineral resources. As a result of this development, it was recognized that host states have the power to control their natural resources. Thus, international agreements which have provided significant rights for investors began in 1959.

HISTORY OF INTERNATIONAL LAW ON FOREIGN INVESTMENT

International Law on Foreign Investment has passed through some history. The first attempt to create rules to govern the conduct of foreign investment was made by the United Nations conference held in Havana after World War II. At that time, it was felt essential to reconstruct the damage caused by the war. Having in mind this reconstruction purpose, a general attempt has been made to create an International Trade Organization (ITO). The proposed law of ITO under Article 12 provides provisions for the conduct of foreign investment that include the host states’ ability to regulate investment. This provision was opposed by some countries, particularly the United States of America. Such countries argued that the provision is contrary to liberal economic principles and public international law. The opposition contributed to the demise of the ITO.

In place of ITO, the General Agreement on Tariffs and Trade (GATT) came into being. However, GATT deals with a reciprocal tariff reduction agreement and it does not directly deal with foreign investment. In addition, the provisions of GATT will only be applicable if states have concluded agreements to govern international trade between them.

When countries became free from colonization during the early 1960s, they wanted to control their resources. Consequently, there was a conflict between the interest of host countries and the principles of international law that determined the relations between investors and host states.

What do you think is the cause of such conflict? The newly independent developing countries desired to control their natural resources in order to realize their dreams of development. On the other hand, the rules of public international law concerning foreign direct investment lacked a development-focused approach. Consequently, there emerged a conflict between the interest of the host states and the rules of international law on the field. Developing countries wanted rules of international law that would promote their desire to develop by sharing fair profits from foreign investment. Thus, developing countries advocated the reconstruction of international economic order in a manner that would expedite their economic growth and development. They succeeded in having the Charter of Economic Rights and Duties of States by using their majority at the United Nations. According to this Charter, the right of all states to regulate, supervise, expropriate and nationalize foreign investment has been reasserted. Nevertheless, the developed states argued that the resolution contradicts the rules of public international law on foreign investment.

The evolution of international rulemaking in the field of foreign investment is marked by the growing prominence of bilateral, regional and plurilateral agreements aiming at encouraging foreign investment. Such arrangements have also an advantage in providing substantive standards with regard to the admission and treatment of foreign investment by host states.

HISTORY OF INVESTMENT LAW IN ETHIOPIA

Coming to Ethiopia, though it is not possible to pinpoint the date investment was started, it is not new to Ethiopia.

I. The Imperial Era

The Ethiopian economy after the war with Italy was described as a mixed economy in which the private and public sectors worked hand-in-hand to achieve economic progress. The private sector was having good ground during this period since there was no any law that limited the private business.

In the Emperial era, Proc. No 60/1944 and 107/1949 were enacted to promote foreign investment in Ethiopia. In 1950, the Minister of Finance gave an income tax exemption notice with a view to encouraging investment. After that, in 1956, the Income Tax Decree which provided for income tax emption to encourage investment was promulgated. However, this Decree was replaced by the Income Tax Proclamation of 1963. This Decree was the first proper law to regulate investment transactions in Ethiopia. After three years, i.e. in 1966, the Investment Proclamation No. 242/1966 was enacted.

What is special to those laws was that they did not provide investment areas for the government. Thus, investors could invest in all areas of the economy with no restriction. They also provided investment incentives which included: import-export income tax exemptions, income tax holidays. It was also possible for foreign investors to own land required for their investment.

Though the private sector was in good condition, the share of the domestic investors was very small due to lack of entrepreneurship.

II) The Derg Regime

Then, the 1974 Revolution got rid of the concept of private property including private investment. This retarded the development in the sector. During the Derg regime, it was only the state that invests. After all that was considered investment proper.

The Derg regime adopted a socialist economic policy through National Democratic Revolution (NDR), which disfavours private investment. During this period, it was witnessed that nationalization was exercised repeatedly.

Proclamation No 26/1977 heralded the start of nationalization. The proclamation clearly stated that it was necessary to transfer to government ownership all resources that were crucial for economic development.

As a result, the government had controlled all private investments and the private sector was restricted to small industrial activities. However, the government allowed investment through joint venture, i.e. investment in Cooperation with the Ethiopian Government. The intention of the government was to introduce capital know-how, and technology into the country. But the law was taken as a disincentive to the private investors since the share of the government could grow from 51-99% while that of private investors could fall down from 49-1%.

The government felt the necessity to change the economic policy in the late period of the Derg Regime and adopted a mixed economic policy by adopting the Multilateral Investment Guarantee Agency (MIGA) of which Ethiopia became a member. Then, this economic reform was reiterated by the transitional Government of Ethiopia in 1992 after the down fall of Derg Regime.

III) The Period after Derg

The Derg regime was replaced by the Transitional Government. The Transitional Government, which was established in 1991 adopted an economic and investment policy directly opposite to that of the Derg regime. The policy emphasised the role of private investment in the development of the Ethiopian economy. In 1992, Ethiopia embarked upon the liberal economic policy which is deemed to be a favourable condition for investment. To implement this policy, the Transitional Government enacted Investment Proclamation No 15/1992 so as to open the door to private investment. The proclamation also reserved some sectors such as large scale eclectic power and postal service to the government. It also provided for joint investment with the Ethiopian government.

The proclamation provided for incentives to attract and promote private investment. It also guaranteed against nationalization and expropriation. Thus, “no assets of a domestic or foreign investor may be expropriated or nationalized wholly or partially except in accordance with the due process of law”.

The Investment Office was established by the proclamation to regulate and supervise investment activities. The proclamation imposed a higher capital requirement for foreign investors and proclamation No 37/1996 was enacted to rectify this problem.

Thus, the following are essential developments in Proc No 37/1996 and Regulations No 7/1996.

1. The minimum capital required from foreign investors has been reduced from 500,000 USD to 300,000 USD to establish joint venture with our government. The minimum capital of retained profit and dividends reduced to 400,000 USD for expansion. Further, the capital requirement for foreign investors to invest in engineering and consultancy was reduced from 500,000 USD to 100,000 USD.

2. Foreign investors were relieved from the obligation to deposit 1258,000 USD in blocked account.

3. Foreign investors were also allowed to invest in building construction equipment, and in hotels whose standard was below the four star and five grades.

4. Foreign investors were allowed to repatriate capital from sale, liquidation or transfer of residence to their home country, in addition to profits, dividends, interests and payments arising from technological transfer.

5. It also provided for internationally accepted investment dispute settlement procedures where it was not possible to solve the dispute amicably.

6. Investment incentives were also extended to additional sectors such as education, hotels, tourism and health. Further, the period of incentives was extended from 3 to 5 years.

7. Banking and insurance, electricity-generating up to 25 MW, air transport with the capacity of up to 20 passengers or 2,700kg. were reserved for Ethiopian nationals.

8. Both domestic and foreign investors were allowed to borrow money from abroad provided that they are registered with the NBE.

9. It was also provided under the proclamation that investors should be provided land within sixty days from the date of application for land.

In general, despite its constraints and drawbacks, the law seems to be attractive to private investment when compared to the past regime’s restrictive policy.

Investment (Amendment) Proclamation No 116/1998 and Regulations No 36/1998

These laws were enacted with a view to encouraging and facilitating investment (both domestic and foreign). Thus, the amendment was made with the aim of opening more investment areas to the private sector. It also aimed at providing additional investment incentives.

These laws resulted in the following essential changes to the proclamation No 37/1996 and Regulations No 7/1996.

1. The status of foreign nationals of Ethiopian origin: A number of Ethiopians were forced to leave Ethiopia and went abroad for political and other reasons (especially in the past regime).

It is felt important to give them a chance to invest in their country and to contribute in the economic development by investing their capital and know-how that they acquired abroad. Thus, Proclamation No 116/1998 provides that foreign nationals of Ethiopian origin are at liberty to chosse to be treated as domestic investors or foreign investors.

If they opt to be considered as domestic investors they must apply to the then Ethiopian Investment Authority (EIA) and fill a form which is taken as a promise not to be considered as a foreign investor. Thus, they are relieved from a capital restriction on a foreign investors and be able to take part in investment with a capital of 250,000 Ethiopian Birr rather than 500,000 USD, 300,000 USD or 100, 000 USD.

In addition, they will acquire a right to invest in areas exclusively reserved to domestic investors by Regulations No 35/1998. On the other hand, they will lose the rights of foreign investors. Thus, they may not claim to repatriate their profits and capital outside Ethiopia, because such a right is given to foreign investors.

Once an investor is considered a domestic investor, s/he/it may participate in investment areas exclusively reserved for Ethiopian nationals such as banking and insurance.

Employment of Expatriates

According to Proclamation No 37/1996, there were restrictions in employing expatriates imposed on investors both domestic or foreign.  First, they must ascertain that a person of the required qualification cannot be found in Ethiopia Second, they must arrange to replace such foreigners by Ethiopians within a limited period.[29] Nonetheless, Proclamation No 116/1998 avoided these restrictions with regard to foreign investors while maintaining the restrictions for domestic investors.

However, it is worth noting that Proc. No 116/98 gave a discretion to the EIA to allow or refuse the recruitment because prior consent of the Authority is a requirement. The restriction is also limited to top managerial positions though the term top managerial position was not defined by the law.

Ownership of immovable properties by foreigners to create conducive atmosphere for foreign investors and to make them feel at home in Ethiopia, Proclamation No 116/1998 allows foreigners to own immovable property required for their investment. Immovable property in this context means buildings only since land is not the subject of private ownership but is made available for investors by lease.

Areas of Investment

One of the achievements of investment Proclamation No 116/1998 was that it fully opened the hydroelectric power generation for private sectors. However, the distribution of the electricity was still made to continue as the exclusive monopoly of the government. Thus, private investors were allowed to generate electric power and to sell it to a state-owned electric distribution agency.

Further, the proclamation allowed private investors to invest in the telecommunication sector jointly with the government,[32] although it which was reserved only for the government as per Proclamation No 37/1996.

Defence industries may be important to produce civilian goods and services in addition to weapons. Thus, it was felt important to allow private investors to participate in order to have the know-how to efficiently run the defence industries that were inherited from the Derg regime.[33] Thus, Proclamation No 116/1998 allowed private investors to participate jointly with the government.

Proclamation No 116/1998 also expanded the scope of consultancy services to include accounting and auditing services in addition to engineering, architectural or other technical services.

Regulation No 35/1998 also recognized oil companies such as Shell, Mobil, Agip and Total as areas of investment for foreigners with a view to maintaining efficient service in supplying petroleum and its by-products.

Another important change made to Proclamation No 37/1996 was that Proclamation No 116/1998 conferred on the Ethiopian Investment Board the power to decide on additional investment incentives other than those provided under the Investment Regulations No.

Thus, the Board was given the power to initiate and propose additional investment incentives so as to promote investment, but the power to approve was given to the Council of Ministers.

Law of investment, in general, is a branch of a law consisting of set of rules that regulate investment. Investment law may be either international law on foreign investment or national law.

International law on foreign investment may be defined as a set of rules that govern international investment. International law on foreign investment has been and is being shaped by on interplay of various economic, political and historical factors. It is generated by the eventual resolution of conflicting national interests. The interests of capital-exporting states have clashed with those of the capital-importing states. The international law on foreign investment is a resultant resolution to such conflicts. It is a field by which economic theories, political science and related areas have helped to shape the arguments in the field.[1]

It is a field of international law which calls for a creation of alternative theory because
it cannot be explained in accordance with any existing theory of international law.[2] Now, the rules are not clear.[3]

National investment law -Investment is a commercial or business activity. Business activities are governed by Commercial Code/law. Commercial law cuts across both the law of obligations and the law of property. That means commercial law includes some part of the law of obligations and the law of property.[4]
For instance, the transactions of business in general and investment in particular require the application of the law of contract since it involves contractual transactions. Properties are the subject of contracts in investment.
Let us consider another example. An investor may import or export products or other goods that are related to his/her investment. An investor should import machineries and equipment for his/her investment. Those machineries and equipment should be transported to Ethiopia. In such a case, a bill of lading may be used. A bill of lading is a receipt for the bailment of a specific object and possesses the quality of being ‘negotiable’. Thus, it represents the goods in some way. It is also a document that contains a contract for the carriage of the goods.[5] In short, it both includes contract and property. This shows that an investment involves the application of the law of contract and property.

Further, we have seen that investment activity is governed by commercial law. Commercial law developed through practice by merchants and the state ‘received’ it into a legal system.[6]

Recently, state regulations grows to regulate the industry and with the creation of public utilities owned by the State have led to the intrusion of public law into the realm of commerce.[7] This shows that commercial law is also a public law. Do you remember what public law means?

Public law is a body of law dealing with the relations between individuals and the government.[8] Investors are individuals and the government regulates investment. Therefore, law of investment is a public law.

One of the purposes of our Commercial Cod is, as indicated under the preface as follows:

We have directed that in the expansion and consolidation of our commercial laws, great attention should be given to the control of all trading,

This clearly shows that commercial code is public law by its nature because the government regulates the transaction of investment as a commercial activity.

Investment law regulates investment in general and among others addresses the following issues among:

It defines important terms like investment and investor. International investment agreements are international investment law that define these terms. National laws also devote certain provisions to define investment and investor.[9] In so doing, the investment law regulates investment. For example, many international agreements define investment as something established according to the laws of the host country.[10] The main purpose of such definition is to ensure that investment has been properly registered and licensed in accordance with the laws of the host country. As was have discussed earlier, investment law classifies investment in to varies categories, such as foreign direct investment, portfolio investment, domestic investment etc.

Admission and Establishment of Investment – Investment law regulates the entry of foreign investment in a host country. Each state may wish to restrict investment in certain sectors of the economy to the state or to domestic inventors. Investment law puts requirements to establish enterprises to undertake investment activities, and the forms of enterprises. It also includes ownership restrictions and related issues.

National Treatment – A host country is required by international investment law to treat foreign investors in the same manner as national/domestic investors. However, the host country may not treat foreign investors equally with domestic investors. It is worth noting that a customary international law does not necessarily require states to extend national treatment to foreign investors. Such national treatment is provided by bilateral investment treaties or/and national laws.

Guarantees- Investment law provides guarantees to investors. International investment law is aimed at guaranteeing foreign investors. History has shown nationalization and expropriation of foreign direct investment. Thus, customary international investment law guarantees investors against those and other forms of expropriation of investment.

Environmental Issues:- are also addressed by investment law. Today, it is realized that economic activities are closely linked to the protection of the environment. Thus, investment treaties have begun to include provisions addressing environmental protection.

Labour Issues –The inclusion of labour provisions in investment treaties is growing although they are always included. The International Labour organization’s Tripartite Declaration of Principles Concerning Multinational Enterprises and social policy (1977) and the DECD’S Guidelines on Investment and Multinational Enterprises (1976) are the two international agreements that address labour issue.  Promotion of employment of host country’s nationals is one of the labour issues treated by the investment law. For example, the Ethiopian Investment Law requires, in some cases, that foreigners be replaced within a specified period of time by Ethiopians who have been trained by the investors (employer).[11] Investment treaties may provide for minimum standards as to wages and working labour conditions. It may also address the right of workers to organize labour union.

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[1] M. Sornarajah; The International Law on Foreign Investment, Grotius Publications, Cambridge University Press, New York, 1996, Pp. 2-3
[2] Ibid, P-3
[3] Ibid, P-4
[4] George Whitecross Paton; A Text Book of Jurisprudence,(third Edition),Oxford, London, 1967,pp. 245-46
[5] Ibid, p. 246
[6] Ibid
[7] Ibid
[8] Bryan.; Ibid, p. 1267
[9] See for example Proc, No 280/2002, Ibid,  Art.2
[10] UNCTAD, International Investment Agreements: Volume 1(2004), P.122
[11] See Proc. No 280/2002, Ibid, Art. 38.

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