The Transformation of the Concept of the Digital Economy
The concept of the digital economy is not easy to define, and its meaning is continuously evolving alongside the development of the internet. From the early era of the World Wide Web, we have arrived at platform-based, data-driven, and increasingly interconnected digital environments in which economic activity no longer appears merely as a digital reflection of the physical world. For this reason, the literature has increasingly embraced the view that we should no longer speak of a single digital economy, but rather of several partially overlapping digital economic spaces. On the one hand, there is the digital economy that supports the functioning of the traditional economy through digital technologies; on the other hand, new economic spaces have emerged that were created specifically within the digital world and operate there autonomously. One example is the market for virtual goods related to the metaverse. In this virtual space, users can purchase clothing, accessories, artworks, real estate, and other goods for their avatars.
International Investment Law and the Digital Turn
International investment law was not originally designed for such an economic environment. The classical investment protection regime was built on the assumption that a foreign investor invests in physical assets, or at least in assets that are clearly localizable, within the territory of another state, and that the state protects that investment according to certain minimum standards of international law. The digital economy fundamentally challenges this structure. It does so not only because it creates new forms of investment, but also because it casts doubt on the traditional categories of investment, investor, territorial link, and connection to the host state. Consequently, the digital economy simultaneously poses a challenge to the existing system of investment protection and reshapes it.
The Two Fundamental Challenges of the Digital Era
The rise of the digital economy presents two main challenges for investment law.
The first is the emergence of new forms of the digital divide. Many believe that the digital economy does not reduce economic inequality, but rather exacerbates it. Unless this process is constrained, digital globalization may reproduce inequalities similar to those generated by earlier forms of economic globalization. The “Fourth Industrial Revolution” may place developing countries at a particular disadvantage, as it may reduce their chances of improving their future economic prospects.
The second challenge is the emergence of a new geopolitical and geoeconomic environment. As a result of competition in the development of digital technologies, a new geoeconomic world order is taking shape, one that challenges the previously dominant role of neoliberalism in the political economy of the contemporary world, especially in the digital sphere.
The Multilevel Transformation of Investment Law in the Digital Age
One of the most important developments of the digital era is that investment law is increasingly becoming a multilevel regulatory structure. The first level is domestic law, where states impose on foreign investors market-entry requirements tailored to the digital economy. These may include data localization requirements, obligations concerning access to source code, rules requiring technology transfer, or investment-screening mechanisms based on national security considerations. Such measures often represent responses aimed at protecting sovereignty from the global nature of the digital economy.
The second level is bilateral and regional regulation. An increasing number of international agreements are being concluded that specifically seek to regulate or promote the digital economy. Recent regional trade agreements almost without exception contain chapters on “electronic commerce” or “digital trade.” In addition, a new type of digital economy agreement has emerged, such as the Digital Economy Partnership Agreement signed by Chile, New Zealand, Singapore, and South Korea. These treaties seek to create cross-border digital economic spaces based on the free flow of data and the prohibition of discrimination against digital products, while also preserving adequate regulatory space for the participating states.
Such agreements are increasingly shaping international investment law as well, since they influence the conditions of market access for digital services. They redefine state regulatory autonomy, for example in the field of data governance, and thereby create a new framework for investments connected to the digital economy.
The Emergence of Digital Foreign Direct Investment
The digital economy not only raises new regulatory questions, but also creates a new type of investment: digital foreign direct investment. The literature generally describes this as investment in areas such as the platform economy, social media, cloud computing, data-driven services, or other sectors related to digital infrastructure and digital services. According to Bruno Casella and Lorenzo Formenti, one of the most important features of foreign direct investment (FDI) in the digital economy is an “asset-light” international presence, meaning that digital multinational enterprises are able to establish a significant international economic presence with a much smaller stock of physical assets.
According to some analyses, digital transactions can be categorized based on the mode of performance and the nature of the participating parties. These forms of operation all rely on the flow of data, and nearly all types of digital transactions enable even household actors to engage in cross-border economic activity. The internet is thus gradually becoming one of the primary platforms for international sales and service provision, fundamentally transforming the operation of international trade and investment.
In this context, Matthew Stephenson points out that attracting digital FDI has now become a distinct area of public policy. It is no longer sufficient for states to rely on general investment promotion tools. Rather, they must create an environment that is attractive to digital investment through regulation specifically tailored to the digital economy, infrastructure development, and institutional measures. This is significant because, in the digital economy, investment decisions are shaped not only by tax or labor-market conditions, but also by the freedom of data flows, interoperability, digital payment systems, cybersecurity, and digital identification solutions.
The Limits of Traditional Investment Law
International investment law was not originally designed for these new types of economies. At the same time, given the growth of investment in the digital economy, it is almost certain that more and more disputes of this kind will arise in the future.
In the context of digital foreign direct investment and assets existing exclusively in digital space, three fundamental questions arise. First, whether such investments are permitted at all under the legal system of the state concerned. Second, whether activities carried out in the digital economy qualify as investments, and whether the actors engaging in them can be considered investors; this also requires that a territorial link to the host state can be established. Third, how the substantive standards of investment protection can be applied to investors in the digital economy.
Market Entry and State Regulation
One of the first questions in investment disputes related to the digital economy is whether the investment in question is permitted at all under the legal system of the host state. The Washington Convention, that is, the ICSID Convention, does not grant foreign investors a general right of market entry or establishment. International investment law has traditionally focused on the protection of investments that have already been made, rather than on guaranteeing a right to establish an investment. The market-entry rights of foreign investors are usually regulated by states in their domestic law or in newer types of international economic agreements, rather than in classical European BITs.
Moreover, under most investment agreements, an investment is protected only if it complies with the law of the host state. Even in the case of investments that have already been made, it is increasingly common for newer investment treaties to contain exceptions allowing the application of certain domestic regulatory measures.
The Global Nature of the Digital Economy and National Measures
The digital economy is global by nature. Digital technologies cross state borders seamlessly, and the various actors are deeply interdependent. However, this does not mean that national regulatory measures are receding into the background. On the contrary, domestic state measures relating to the digital economy may, as a general rule, be permissible under international investment law, including investment-screening mechanisms.
What Qualifies as an Investment in Digital Space?
For a given activity to benefit from international investment protection, it must generally satisfy a dual set of conditions. On the one hand, the investment must meet the requirements of the Washington Convention; on the other hand, it must also satisfy the criteria of the applicable international investment agreement.
According to Article 25(1) of the Washington Convention, ICSID jurisdiction extends to any legal dispute arising directly out of an investment and involving nationals of another contracting state as protected investors. Most bilateral investment treaties contain general references to “investors” and “investments.” At the same time, the concept of investment may vary considerably across the thousands of treaties concluded by states. Formulations such as “every asset,” “assets of every kind,” or “every kind of asset” are common, and these are typically followed by illustrative lists. However, some treaties contain closed or more detailed lists of protected assets. Multilateral treaties follow a similar approach.
A broad interpretation of the concepts of investment and asset usually includes non-corporeal rights, such as intangible property and intellectual property. Consequently, digital assets may also fall within the scope of protected investments, even if they do not fit within the traditional notion of a physical asset. Digital assets are, after all, means of recording and storing data, much like websites. Accordingly, they may be classified as intangible property or intellectual property, reinforcing the view that they may benefit from investment protection.
Protection Afforded to Digital Investors
International investment agreements provide eligible investors and investments not only with protection against unlawful expropriation, but also with substantive and procedural guarantees.
Substantive protection includes national treatment, the most-favored-nation principle, fair and equitable treatment, and the requirement of full protection and security. Domestic state measures affecting the digital economy may fall within the scope of these protection standards. Such measures may include, for example, rules relating to data protection and cybersecurity, but especially data localization requirements or obligations to disclose source code, which may discriminate against foreign investors.
The Development Policy Significance of the Digital Economy
At the same time, the digital economy may make a substantial contribution to states’ economic development. It is widely accepted that the digital economy can improve the productivity and competitiveness of developing countries. Few sectors are as decisive for the functioning of all other goods-producing and service-providing sectors as the information technology industry. The widespread application of information technologies triggers organizational and technological innovation throughout the economy, generating positive externalities.
States seeking to attract foreign direct investment increasingly recognize that digital policies are, in fact, also investment policies. Existing agreements concerning the digital economy have generally focused on the liberalization of digital markets, for example by excluding local content requirements or obligations to disclose source code. In the future, however, a shift in perspective will be necessary.
The Way Forward: Investment Protection and Digital Development
International investment law may play a key role both in addressing the digital divide and in promoting digital development. Two main paths can be envisaged.
On the one hand, new investment agreements may be drafted in ways that show greater respect for the regulatory space of states in their domestic legal orders. On the other hand, the promotion and facilitation of investment in digital infrastructure may come to the fore, both in a physical and a non-physical sense. The former may include data centers, antennas, and cables, while the latter may encompass digital payment systems and digital identity frameworks.
The digital economy therefore not only creates new forms of investment, but also compels international investment law to rethink its own foundational concepts, protection mechanisms, and development-policy role. One of the central questions of the future will be whether the system of investment protection will be able to adapt to this new era in a way that serves not only investors’ interests, but also more just and balanced conditions for digital development.
The author of this article is Igor Márk Beznoszka, a student at Mathias Corvinus Collegium (MCC).
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This document has been prepared by Gránit Alapkezelő Zrt. (registered office: 1134 Budapest, Váci út 17; company registration number: 01-10-046307) for marketing and informational purposes. Accordingly, it has not been produced in accordance with legal requirements designed to promote the independence of investment research. Nor is it subject to any prohibition on dealing ahead of the dissemination of investment research. This document does not constitute investment research or investment advice. Any data presented refers to past performance, and past performance is not a reliable indicator of future results. Each investor must make investment decisions at their own discretion and responsibility.
