Are investment treaties worth the political risk?

As investors and innovators alike invest billions in research and development of new technology and products, the fate of their entry into foreign markets is ultimately determined by the naked political ambition of power-hungry ministers. The strength of government institutions and the rule of law in a foreign country frequently reflects the political environment. The weaker the government institutions and the rule of law, the greater the scope for political risk. A country with a high degree of political risk is a challenging place for foreign investors to do business.

In such a place, a bilateral investment treaty (BIT) may be the only silver lining for foreign investors. BITs not only help investors to access and manage political risk but also safeguard their investments from foreign governments. Over recent years, most countries that have sought foreign investment have provided investors with a fall-back protection from inappropriate state activity, in the form of BITs.

While a bold investor may take on a foreign government in its own courts to seek compensation for expropriation of assets or damage caused by unfair treatment, the BIT arbitration mechanism is an effective alternative through which investors can obtain relief. The recent spate of international trade disputes in India is glaring evidence of this.

Shardul Thacker is a partner at Mulla & Mulla & Craigie Blunt & Caroe in Mumbai.