Modernising Foreign Investment Protection in Malaysia: International Investment Agreements

* An International Investment Agreement (IIA) is an agreement signed between two (or more) countries, setting the minimum standard of treatment that the Host State should provide to foreign investors. When negotiating recent international trade agreements, Malaysian policymakers have been adjusting to a new generation of IIAs to consider the new trend of IIA reforms, especially in view of Investor-State Dispute Settlement (ISDS) cases. The ISDS mechanism allows for a foreign investor to bring a State to international arbitration for breaches of IIA commitments.

* IIA reform is important to ensure that Malaysia’s older IIAs are modernised to reflect current policy thinking. Modernising IIAs should occur soon as Malaysia’s recent experience negotiating international trade agreements has afforded sufficient policy direction, resources and know-how to modernise the old stock of IIAs signed by Malaysia. Moreover, the ongoing Covid-19 pandemic has made many countries realise the importance of regulatory space to respond to crises effectively.  

* Role of IIAs and their history. IIAs contribute to predictability, stability and transparency in the investment environment. IIAs were introduced during the era of de-colonisation, when foreign investors were weary of uncompensated expropriations. IIAs were proliferated in the late 1980s due in part to the economic boom in Asian economies and the shift toward fund sourcing from private foreign investors rather than private lending or public financing.

* Challenges in modernising IIAs. The United Nations Conference on Trade and Development’s (UNCTAD) IIA Reform Accelerator suggests three different approaches for IIA reform: (a) joint interpretation of current treaty provisions, (b) amend existing treaty provisions, and (c) substitute an old treaty provision with a new one. Malaysia should assess the extent of modernisation required for each IIA in order to determine which of the three approaches best fits the need. This assessment could also be done in tandem with larger reforms on the treatment of foreign investors in Malaysia. Termination of treaties is an alternative to IIA reform but the presence of ‘sunset clauses’ make termination difficult.

* Investment facilitation, investment aftercare and conflict management mechanism. These initiatives are aimed at improving the existing investment environment. Investment facilitation aims to reduce the inefficiencies that arise from unnecessary regulation, bureaucratic overlap and outdated procedures. Investment aftercare relates to a range of activities from post-establishment facilitation, to encouraging follow-on investments, and to achieving greater local economic impact. A conflict management mechanism aims to address problems faced by foreign investors at an early stage before said issues have escalated to grievances, or even investment withdrawal.

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