ICSID Review, Vol. 31, No. 1 (2016), pp. 5–11
doi:10.1093/icsidreview/siv048
SPECIAL FOCUS ISSUE NOTE
State-Owned Enterprises in International
Investment
Paul Michael Blyschak1
Abstract—This note conducts a survey of recent academic and professional
commentary across multiple disciplines regarding the involvement of State-owned
enterprises (SOEs) in the global economy with a view to illuminating considerations
pertinent to the interpretation and application of international investment law in the
context of SOE activity. A number of potentially problematic conceptual complexities
raised by the interaction of SOE activity and international investment law are also
highlighted.
When first faced with the honour of preparing a note for this important
anniversary edition of the ICSID Review, introducing sovereign participation in
international investment and the issues such participation raises under international
investment law, I was struck by two somewhat contradictory realizations.
The first was that my assignment could hardly be clearer. The second was that it
raised a number of issues of great intricacy.
Sovereign participation in international investment is in many respects without
complication. The last several decades—and the last decade in particular—have
witnessed a tremendous growth in the number, capitalization and influence of
State-owned enterprises (SOEs) engaging in overseas investment, whether in the
form of State-owned companies,2
sovereign wealth funds (SWFs)3
or similar
sovereign commercial vehicles.4
The concerns such sovereign investment raise with
host governments have received much attention and include the concern that
SOEs will pursue political objectives rather than purely commercial objectives, that
1
Blake, Cassels and Graydon LLP, Calgary, Alberta, Canada. Email: paul.blyschak@blakes.com. The views expressed
in this note are those of the author alone and not of his firm or any of its clients.
2
State-owned enterprises (SOEs) can generally be understood to include business enterprises ‘in which the state has
significant control, through full, majority, or significant minority ownership’ and are often involved in the infrastructure
and utilities sectors, including energy, transportation and telecommunication. See Kathryn Gordon and David
Gaukrodger, ‘Foreign Government-Controlled Investors and Host Country Investment Policies: OECD Perspectives’ in
Karl P Sauvant and others (eds), Sovereign Investment: Concerns and Policy Reactions (OUP 2012) 496, at 497.
3
The term ‘sovereign wealth funds’ has come to be used to refer to ‘special purpose investment funds or
arrangements’ that are State-owned, whether at the central or sub-national level, and that are ‘commonly established
out of balance of payment surpluses, official foreign currency operations, the proceeds of privatizations, fiscal
surpluses and/or receipts resulting from commodity exports’. ibid.
4
Some other State-owned investment vehicles sometimes included in discourse regarding SOEs include public
pension plans and public pension reserve funds. ibid 497–8.
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their ties to foreign governments may pose national security risks and that they
may be more likely to engage in anti-competitive behaviour.5
SOEs, on the other
hand, have fears of their own, including that such host State anxieties may lead to
‘discriminatory or arbitrary governmental, regulatory or administrative treatment
motivated more by political considerations than by genuine cause to be concerned
with the nature, scope or purpose of their operations’.6
Beyond these high-level observations, however, what synopsis could be either
certain or comprehensive? Invariably, my survey would be speculative, selective or
incomplete.7
SOEs diverge too widely in their histories, organization, mandates and
operations. International investment law is in many ways equally disparate, varying
significantly from jurisdiction to jurisdiction and even among international investment
treaties. Moreover, the exact tensions that may arise where SOE activity
intersects with international investment law cannot be predicted with specificity in
advance—many material details will likely turn on the particular circumstances.
With this in mind, I thought it would be useful to consider the most recent
academic and professional commentary on the involvement of SOEs in the global
economy. In particular, I hoped that a broad survey of contemporary commentary
across multiple disciplines would be of use to those seeking to interpret and apply
international investment law to the activity of SOEs. And as I began on this
endeavour, the degree to which SOEs and their participation in international
investment has rapidly become the subject of an immensely wide array of scrutiny
and analysis became instantly apparent. Indeed, SOEs and SOE activity are the
subject of much complex thinking and debate not only among experts in law but
also in economics, political science, international finance, international development
and business management, among many others.
With respect to identifying or defining government control, some observers
stress that undue focus on the fact of State ownership can stymie a holistic
understanding of a SOE’s activities to the extent that such fixation diverts
attention from other relevant governmental interfaces and networks within which
SOEs operate.8
Power and influence are obscure concepts, it is highlighted, and
‘focusing on equity structures [is unlikely to] capture the full picture’.9
Influence
can exist in the absence of ownership, including through senior executives and
directors who simultaneously hold positions within the State’s political apparatus
or through other governmental affiliations.10
By contrast, the effects of State
ownership can be neutralized through ‘institutional buffers’ charged with isolating
a SOE from the ‘regulatory, political and policy-making functions’ of its home
5
ibid 498–506. Note that host governments may also approach (and react to) the possible consequences of SOE
activity on their domestic markets and national security not only through SOE activity in their own territory but also
through SOE activity in overseas jurisdictions, including different jurisdictions that have varying levels of regulatory
sophistication and resources (in addition to varying regulatory policies in regard to SOE investment). See Paul Rose,
‘Sovereigns As Shareholders’ (2008) 87 NC L Rev 84, 88–9; Gordon and Gaukrodger (n 2) 505.
6
Paul Blyschak, ‘State-Owned Enterprises and International Investment Treaties: When Are State-Owned Entities
and Their Investments Protected?’ (2011) 6(2) J Intl L & Intl Rel 1, 14.
7
For a review of existing approaches to SOE investment activity under both national and international policy
frameworks, see Yuri Shima, The Policy Landscape for International Investment by Government-Controlled Investors: A Fact
Finding Survey, OECD Working Papers on International Investment 2015/01 (OECD Publishing 2015).
8
See Filippo Belloc, ‘Innovation in State-Owned Enterprises: Reconsidering the Conventional Wisdom’ (2014) 48
J Econ Issues 821.
9
Gil Lan, ‘Foreign Direct Investment in the United States and Canada: Fractured Neoliberalism and the
Regulatory Imperative’ (2014) 47 Vand J Transnatl L 1261, 1297.
10
See Hao Liang and others, ‘An Anatomy of State Control in the Globalization of State-Owned Enterprises’
(2015) 46 J Intl Bus Stud 223.
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government.11
We should also remember that the economic activity of States ‘can be
substantially separated from [their] public policy objectives’,12
with the result that
various forms of sovereign investment ‘are indistinguishable in form and motivation
from that pursued by wholly private parties’.13
Alternatively, the reality is that some
SWFs have an express mandate not only to seek economic returns on investments but
also to advance their home State’s public policy abroad (that is, to also seek ‘regulatory
returns’, so to speak).14
There may even be instances where it is appropriate to pierce
the corporate veil of a SOE to look through to its sovereign owner.15
Regarding SOE investment activity in the capacity of shareholders themselves, it
is underscored that sovereign equity investment vehicles are essentially ‘constrained
investors’ that will typically (and very consciously) ‘refrain from taking an
active corporate governance role in target companies’—whether by means of
‘offensive’ or ‘defensive’ shareholder activism—to avoid attracting host State
regulatory backlash.16
This apprehension raises complicated questions for SWFs
regarding the rules of engagement with their portfolio companies, including how
to hold management accountable for lacklustre performance in ways that will not
alarm regulators.17
Other writers note that the traditional view of SWFs as
conservative long-term investors is beginning to wane in light of ‘an increasing
trend amongst state capital actors . . . towards investment diversification and a
growing desire and capacity for risk’.18
For host governments, the question
remains the appropriate balance between the oversight of foreign sovereign
financial interests within their borders and maintaining a comparatively attractive
and predictable inbound investment climate.19
Notable compromises to date
include the ‘Santiago Principles’, a set of voluntary guidelines regarding disclosure
and transparency intended to help assuage host State trepidation that SWFs will
not operate in a benign fashion (that is, in the pursuit of ‘purely commercial
objectives or risk-adjusted financial returns’).20
Where a SOE adopts, but fails to
comply with, the Santiago Principles, some have cautioned that, given the
‘inherent political nature of SWFs’, the appropriate response is consideration of
‘when and why . . . certain non-disclosures are legitimate, or more importantly,
when and why transparency in one domain may diminish the significance of
11
See WM Wolfe and AS Leung Evans, ‘China’s Energy Investments and the Corporate Social Responsibility
Imperative’ (2011) 6 J Intl L & Intl Rel 83.
12
Larry Cata´ Backer, ‘Sovereign Wealth Funds As Regulatory Chameleons: The Norwegian Sovereign Wealth
Funds and Public Global Governance through Private Global Investment’ (2010) 41 Geo J Intl L 425, 500.
13
Jose´ E Alvarez, ‘Sovereign Concerns and the International Investment Regime’ in Sauvant and others (n 2) 258,
282. See also Gordon and Gaukrodger (n 2) 499–501.
14
See Larry Cata´ Backer, ‘Sovereign Investing and Markets-Based Transnational Rule of Law Building: The
Norwegian Sovereign Wealth Fund in Global Markets’ (2013) 29(1) Am U Intl L Rev 1.
15
See Albert Badia, Piercing the Veil of State Enterprises in International Arbitration (Wolters Kluwer 2014).
According to Badia, although tribunals commonly pierce the corporate veil of privately held corporations, this practice
is far less common (if not unheard of) with respect to SOEs. However, Badia continues to argue that there are a
number of different scenarios in which piercing the corporate veil of a SOE may be warranted, particularly where the
Articles on Responsibility of States for Internationally Wrongful Acts fall short or fail to apply. International Law
Commission, Articles on Responsibility of States for Internationally Wrongful Acts, UN Doc A/56/83 (2001).
16
Paul Rose, Sovereign Shareholder Activism: How SWFs Can Engage in Corporate Governance, Bocconi SWF
Investment Lab Annual Report 2013, Ohio State Public Law Working Paper No 264 (1 July 2014).
17
ibid; Paul Rose, ‘Sovereign Wealth Funds: Active or Passive Investors?’ (2008) 118 Yale L J Pocket Part 104, 107.
18
George Gilligan and Megan Bowman, ‘State Capital: Global and Australian Perspectives’ (2014) 37 Seattle U L
Rev 597, 610.
19
Alvarez (n 13) 269; Edwin M. Truman, ‘Do the Rules Need to Be Changed for State-Controlled Entities? The
Case of Sovereign Wealth Funds’ in Sauvant and others (n 2) 404.
20
Adam D Dixon, ‘Enhancing the Transparency Dialogue in the ‘‘Santiago Principles’’ for Sovereign Wealth
Funds’ (2014) 37 Seattle L Rev 581. See also Joseph J Norton, ‘The ‘‘Santiago Principles’’ for Sovereign Wealth
Funds: A Case Study on International Financial Standard-Setting Processes’ (2010) 13(3) J Intl Econ L 645.
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disclosure in other areas, thus reducing the significance of non-disclosure in those
areas’.21
Others have more simply argued that the appropriate solution to
sovereign investment as shareholders is to temporarily suspend the voting rights of
equity acquired by foreign SOEs for so long as such equity is held by a SOE.22
Additional illuminating insights are nearly limitless. The investment patterns and
motivations of SOEs have been studied and compared to those of their privately held
counterparts, including, for example, in the contexts of resource exploration and
development23
and technological innovation.24
Different varieties of SOEs from the
same jurisdiction have been analysed and contrasted, including in consideration of the
different ‘institutional pressures’ to which they may be subject, either at the national
or local level, and how the strength or absence of such pressures can significantly
impact international investment decisions and objectives, including investment
structure, location and whether to expand heretofore exclusively domestic operations
internationally in the first place.25
It is emphasized that many SOEs increasingly face
the difficult task of balancing global public and political support for corporate social
responsibility, sustainable development and environmental protection with the policies
and prerogatives of their home governments as well as with profit-generation
directives.26
Similarly, it is argued that home governments are increasingly
appreciating that the overseas activities of their SOEs and ‘national champions’ can
impact the public perception of their country’s ‘brand’ globally.27
It is also noted that
some SOEs have grown to such a stature that they can be described as ‘states within
states’ capable at times of ‘so dominating national politics that, rather than defending
government interests, their agendas have come to direct government affairs’.28
Other analysts are somewhat more dismissive in their critiques, asserting that
‘the spread of SWFs best resembles the diffusion of a fashion or a fad’, considering
that observable evidence fails to support the theory that governments create them
‘as effective solutions to the challenges generated by reserve accumulation’.29
Here, the submission is that ‘peer group emulation has . . . been crucial in shaping
the decision of many countries to create SWFs—especially in fuel-exporting
countries’ and that the proliferation of SWFs can be taken as proof of ‘a decline in
confidence in free-market economics in favour of state-orientated economic
policies’.30
By contrast, other publicists more conventionally attempt to draw
correlations between the prevalence of SOEs and political ideology as well as with
trends in income inequality, including gauging the effectiveness of SOEs in
21
Dixon (n 20) 584.
22
See Ronald J Gilson and Curtis J Milhaupt, ‘Sovereign Wealth Funds and Corporate Governance: A Minimalist
Response to the New Mercantilism’ (2008) 60 Stan L Rev 1345.
23
See A Erin Bass and Subrata Chakrabarty, ‘Resource Security: Competition for Global Resources, Strategic
Intent, and Governments As Owners’ (2014) 45 J Intl Bus Stud 961.
24
See Belloc (n 8).
25
See Ming Hua Li and others, ‘Varieties in State Capitalism: Outward FDI Strategies of Central and Local StateOwned
Enterprises from Emerging Economy Countries’ (2014) 45 J Intl Bus Stud 980; Liang (n 10).
26
See Wolfe and Evans (n 11); Juliet Roper and Miche`le Schoenberger-Orgad, ‘State-Owned Enterprises: Issues of
Accountability and Legitimacy’ (2011) Mgmt Comm Q 693; May Tan-Mullins and Giles Mohan, ‘The Potential of
Corporate Environmental Responsibility of Chinese State-Owned Enterprises in Africa’ (2013) 15 Envt, Dev & Sust
265; Anita M Halvorseen and Cody D Eldredge, ‘Investing in Sustainability: Ethics Guidelines and the Norwegian
Sovereign Wealth Fund’ (2013–14) 42 Denver J Intl L & Poly 389.
27
Wolfe and Evans (n 11).
28
Blyschak (n 6) 7, referring to Paul Stevens, ‘National Oil Companies and International Oil Companies in the Middle
East: Under the Shadow of Government and the Resource Nationalism Cycle’ (2008) 1 J World Energy L & Bus 5, 18.
29
Jeffrey M Chwieroth, ‘Fashions and Fads in Finance: The Political Foundations of Sovereign Wealth Fund
Creation’ (2014) 58(4) Intl Stud Q 752.
30
ibid.
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shouldering the ‘income redistribution’ and ‘social welfare’ responsibilities with
which they are sometimes charged.31
A not dissimilar chorus maintains that SOEs
should be viewed as tools of development and as affording the countries of their
origin ‘an opportunity to achieve something more [than] simply accumulating
wealth for its own sake: equitable participation in the wealth of all nations’.32
Regardless of the analytical perspective, a common issue raised points to the
various ‘methodological difficulties’ involved in researching sovereign investment
as well as the ‘importance of acknowledging and responding to these methodological
challenges in public discourse and policy development on foreign direct
investment’.33
Interestingly, some thinkers approach SOEs and SOE activity not as topics of
study in their own right but, rather, as valuable tools for understanding broader
developments in international development, trade and geopolitics. For example,
Adam Dixon and Ashby Monk argue that ‘SWFs offer a unique and powerful lens
for studying the changing dynamics of contemporary capitalism, global economic
integration and state sovereignty’, and, towards this end, the authors advance a
‘stylised typology’ of SWFs, which is intended to ‘provide further understanding to
the potential long-term significance of SWFs and the factors that might underpin
further development of new SWFs in different countries’.34
‘Postcolonial SWFs’,
according to the authors, are aimed at providing their sovereign—a postcolonial
State—with a means to increase their ability to engage with other ‘more powerful’
States and international market players.35
‘Rentier SWFs’ are said to hail from
States whose (often authoritarian) governments depend heavily on resource
exports to satisfy public welfare expectations and are thus relied on to ‘provide
long-term assurance that domestic sovereignty’ and the status quo can be
maintained.36
By contrast, ‘productivist SWFs’ attempt to ‘build the Westphalian
and domestic sovereignty’ of their State through strategic investments in valuegenerating
networks. These SWFs are described as having a very sophisticated
understanding of value capture and extraction amid global production systems and
are therefore those SWFs ‘that inspire the most protectionist rhetoric’ in host
jurisdictions.37
Even deeper theoretical explorations into the significance of SOEs can be
identified. In particular, it is posited that SOEs are ‘conceptually problematic
because they blend elements of hitherto separate categories’ and that such
complexities have led to certain policy responses based on two incorrect
assumptions.38
The first is that private enterprise is without any regulatory or
31
See Veysel Avsar and others, ‘State-owned Enterprises, Inequality, and Political Ideology’ (2013) 25 Econ & Pol
387, 388.
32
Rumu Sarkar, ‘Sovereign Wealth Funds As a Development Tool for ASEAN Nations: From Social Wealth to
Social Responsibility’ (2010) 41 Geo J Intl L 621, 645. See also Organisation for Economic Co-operation and
Development, State-Owned Enterprises in the Middle East and North Africa: Engines of Development and Competitiveness?
(OECD Publishing 2013).
33
See Gilligan and Bowman (n 18) 598. Such methodological difficulties include often-limited publically available
information and the lack of applicable disclosure requirements.
34
Adam Dixon and Ashby HB Monk, ‘Rethinking the Sovereign in Sovereign Wealth Funds’ (2012) 37
Transactions of the Institute of British Geographers 104, 105.
35
ibid 109.
36
ibid 110.
37
ibid 111–12.
38
Lan (n 9) 1266–7, referring to Larry Cata´ Backer, ‘The Private Law of Public Law: Public Authorities As
Shareholders, Golden Shares, Sovereign Wealth Funds, and the Public Element in Private Choice of Law’ (2008) 82
Tul L Rev 1, 62; Backer (n 12).
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political influence or motivations.39
The second is that the behaviour of ‘private’
actors is a reliable benchmark for distinguishing between benign sovereign activity
and sovereign activity warranting special regulatory attention or treatment.40
Advocates of this doctrine cite the commitment of leading financial institutions to
the ‘Equator Principles’,41
the growth of social impact investing and the
legitimization of non-profit maximizing behaviour in traditional corporations as
evidence that SOEs ‘are not the only entities that seek to advance non-commercial
objectives within an entrepreneurial framework’.42
So too do such theorists view
the contemporary proliferation of corporate lobbying practices and corporate
political advertising and promotion of the type sanctioned by Citizens United v
Federal Election Commission43
as proof that attempts to distinguish SOEs from
privately held market players on the basis that SOEs may act politically are at least
partially misguided.44
It is suggested, in other words, that SOEs and SOE activity
is reflective of ‘the growing irrelevance of the public/private distinction’ and the
‘increasing merger of public and private law’, with the result that the ‘easy
separation of economic and political activity is now more difficult’.45
In summary, a review of the contemporary analysis of SOEs and SOE activity
reveals a multi-layered tapestry of overlapping and at times competing theories, at
least some of which will likely need to be navigated in the institution,
interpretation or application of international investment law, whether at the
national (for example, legislative) or international level. This challenge may at
times be daunting; if the research surveyed has made anything clear, it is that
modern SOEs and SOE activity defy facile categorization while simultaneously
inviting a series of conceptual complexities to be balanced against one another.
On one level, the increased importance or influence of SOEs internationally over
the last several decades stands in stark contrast to a coincident global trend of
privatization. On another level, the ‘rhetoric’ of SOE sceptics has been
characterized as ‘ironically reminiscent of arguments advanced by developing
countries against the ‘‘free trade and market’’ and ‘‘freedom of capital flows and
investment’’ argument of developed countries’.46
On yet another level, much of
the international investment law regime instituted by investment protection treaties
was arguably built on outmoded ‘distinctions between the state and the market
and between capital exporting and capital importing states’.47
Finally, it must be
noted that in many ways ‘the challenges to national governance prompted by
sovereign investment do not differ fundamentally from those posed by [foreign
direct investment] generally’.48
39
Backer (n 12) 430–1.
40
ibid.
41
The ‘Equator Principles’ are a voluntary risk management framework for financial institutions designed to
identify, assess and manage environmental and social risks presented by projects.
42
Lan (n 9) 1306.
43
Citizens United v Federal Election Commission, 558 US 310 (2010). In this US constitutional law decision, the US
Supreme Court held that the First Amendment’s guarantee of free speech prohibited the restriction of independent
political expenditures by corporations (both non-profit and for-profit), labour unions and other associations.
44
Lan (n 9) 1306–7.
45
Backer (n 12) 434, 499–500. See also Alvarez (n 13) 258.
46
Yvonne C Lee, ‘The Governance of Contemporary Sovereign Wealth Funds’ (2010) 6(1) Hastings Bus L J 167,
167.
47
Alvarez (n 13) 260.
48
ibid 262. See also A Edward Safarian, ‘The Canadian Policy Response to Sovereign Direct Investment’ in
Sauvant and others (n 2) 431–3.
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The cumulative result is a set of circumstances that are poised to test the
abilities of policy makers, regulators, government administrators and arbitral
tribunals alike in at least a couple of different, but very important, ways. On the
one hand, SOEs and SOE activity look set to strain many of the principles and
boundaries of international investment law. On the other hand, international
investment law and arbitration may prove a valuable ‘check and balance’ on what
continues to be a relatively fragmented and often politically charged regulatory
response to SOE activity.
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