In the years after the Second World War global FDI was dominated by the United States, as much of the world recovered from the destruction brought by the conflict. The  US accounted for around three-quarters of new FDI (including reinvested profits) between 1945 and 1960. Since that time FDI has spread to become a truly global phenomenon, no longer the exclusive preserve of OECD countries. FDI has grown in importance in the global economy with FDI stocks now constituting over 20 percent of global GDP.

India is now the third most favoured destination for Foreign Direct Investment behind China and the USA.

It is widely accepted that customary law provides only very weak legal standards for foreign investment.

Bilateral investment treaties, on the other hand, exist in the large number and are of tremendous importance. BITs are of great interest because they represent a solution through public international law of what is, essentially, a private international law issue-offering a solution to the problem of contracting between investors and the host states. A contractual solution (including through a BIT) is, therefore, a more efficient rule for the regulation of foreign investment.

Investments which seek to acquire factors of production that are more efficient than those obtainable in the home economy of the firm. In some cases, these resources may not be available in the home economy at all (e.g. cheap labor and natural resources). This typifies FDI into developing countries, for example seeking natural resources in the Middle East and Africa, or cheap labor in Southeast Asia and Eastern Europe.

Many countries have been recipients of Foreign Investment under bilateral treaties commonly known as Bilateral Investment Treaties (BITS). Hitherto Foreign Investment was regulated domestically and rules of customary international law were applied to it. In the past, State exercised its sovereign function of complete control of foreign investment and the restrictions were imposed on entry of foreign investment, acquisition of property by foreign capital and the operations of foreign companies. In view of opening up of the economy and regulated globalisation, there has been a radical change in foreign investment. Foreign investors now purchase shares of a company, enterprise, commercial establishment in the host country and equity capital is the main ingredient of Foreign Direct Investment. Under Foreign Direct Investment foreign investors keep control over the activities and operations of the company. Controlling interest is one of the basic and key factor of the Foreign Direct Investment. Franchising, licensing, goodwill, alliances and grants which are non-equity forms of investment also come within the definition of Foreign Direct Investment.

The rights and privileges of investors have been extensively protected and promoted and these changes have found their expression in numerous bilateral investment treaties. The host country must take foreign investors no less favourably than its domestic investors. These bilateral treaties provide minimum standards of treatment, performance requirements, and dispute settlement mechanisms. The body of international law on investment has developed with high speed providing extensive rights and privileges to the foreign investors and also increasing investment liberalization. The foreign investment reached 1.4 Trillion dollars in the year 2000 and the next 40 years would see Brazil, Russia, India and China having a greater economy than that of G-8 countries today.

Foreign Investment, as I said, has been coming for the last 50 years but not in the manner in which it is pouring in now. But what is of importance for a developing country is what kind of FDI it wants. The very concept of Foreign Direct investment in spite of four rounds of international meetings starting from Angtak in 1995 which ultimately failed, in Canacun in 1998 and then in Doha is not clear. What constitutes Foreign Direct Investment? Foreign Direct investment is investment in infrastructure, in production, in distribution, in consumer goods or it is an investment in portfolio or an investment in share market.     

We in the developed country feel that foreign investment should be for a longer period and for development of infrastructure so that the effort of such Foreign Direct Investment can generate economic growth. It must mean an investment for the economic development of the host country, i.e. investment in infrastructure or investment in production. FDI in infrastructure development in terms of roads, flyovers, express-ways so that goods and services move at faster rate and accelerate economic growth and FDI in these sectors is of great relevance and importance to our country.

But that kind of investment is not yet coming and when we talk of Foreign Direct Investment that investment should be in our key sectors, like energy and other key sectors of economic growth. If India becomes energy-wise self-sufficient, India can achieve the goal of a developed nation in the world. Even today in India we have got, a deficit in our current account of 20 Billion Dollars with trade deficit 50 to 60 Billion Dollars, in spite of  our remittances from Indians abroad to the tune of  24 Billion Dollars. But we have a deficit of 20 Billion Dollars and the major portion of it is on account of import of fuel. The FDI investment is not coming into industrial development that is of concern. In share market we got an investment of 10.1 Billion Dollars in this year. When we want this country to become a self-reliant and self-sustaining economy, then the Foreign Direct Investment also has to sub-serve that purpose.

  India is not a poor country, it is a country inhabited by poor people. What is the difference between the two. If a country is poor, the chances of its becoming rich are very remote. But if the people are poor and you have got such vast natural resources at your end, India can always and in the future will become a developed country. Now with our natural resources, with our quality of education, with our sound banking system and a competent judiciary, India is a hot destination for Foreign Direct Investment. Therefore, what I feel is that when people come to this country, it is because of its great institutions which we have developed in the last 60 years, which no other developing country in the world provide, to give confidence to the investors. But as a Judge and as a student of contemporary development in international law, I feel that whatever BITS are, when we in India, as lawyers or Judges, have to take all these parameters into consideration, we have to understand that we cannot ignore the interest of the Indian Economy, we cannot disregard the interests of the national entrepreneurs while dealing with foreign BITs i.e., Bilateral International Treaties in Foreign Direct Investment. The main difference of opinion between the developing countries and the other developed countries is in determining the definition of FDI as the result of these considerations.

The host country is to legislate and regulate and decide the area and to the parameters to regulate foreign investments. Now as far as the developed countries are concerned, they want that the host country should not lay down any law or any regulation which is discriminatory in relation to the entrepreneurs of host country. I personally feel when we allow FDI investment, we cannot act as protectionist. But a sovereign nation, has to take into consideration the interest of the people who are going to be affected by this Foreign Direct Investment. For example, multinational companies hire people in thousands. These people are young students and young girls from Universities. After they come out from the schools or colleges, they are hired by Call Centres and get about Rs.15,000 to Rs.20,000 per month. But because they always have to remain on telephones the chances of their developing hearing impairment will be quite high.

Some regulation in this regard is framed by the State to compensate our citizens on account of such hiring which affects hearing disorder then that may not amount to protectionism. These are certain issues which we as Judges and lawyers, have to answer. These are areas which require some regulatory work. The FDI regime wants that there should not be any regulatory authority or regulatory mechanism over the FDI. FDI will come if there is a complete protection to the investors and there is a complete protection to their taking away the money. I have no quarrel on this score and none of you will have any. So far so good. But if it adversely affects the recipients then that  area should be left for domestic regulation. These are certain issues I thought that I will share with you.

FDI policy in India is reckoned to be among the most liberal in emerging economies. FDI policy permits FDI upto 100% from foreign/NRI investor without prior approval in most of the sectors including the services sector under automatic route.

Foreign companies after globalisation can have majority shareholding and sometimes even more. Now the share market you know how it works. There is nothing like a bull run, or other things. Even the functioning of corporate world has undergone a dramatic change. These are changes which may not be discernible on the face of it, but has wider repercussions and have to be understood in the larger context of the development of our national economy. These are very interesting issues which you will be confronted in future.