WORLD TRADE
ORGANIZATIONWT/WGTI/W/92
24 October 2000
(00-4395)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM JAPAN
The following communication, dated 11 October 2000, has been received from the Permanent
Mission of Japan.
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Definition of “Investment” in the WTO Rules on Investment
1. In recent years, as the result of globalization of business activities, the flow of foreign
investment has grown at a much faster pace than that of trade. There have been presentations to this
Working Group from many Members on the positive effects of foreign direct investment (FDI) to the
host country, especially to developing countries, FDI provides a long-term stable capital, createsdomestic employment and demand, and transfers technology and management skills.
2. In particular, the stabilizing role of FDI in fi nancially crises because of its long-term nature,
as demonstrated in the Asian financial crisis, has once again proved the importance of FDI, in
comparison to the volatile movement of short-term capital.
3. From this viewpoint, some Members have focused their discussion on FDI in this Working
Group. However, in Japan’s view, further discussion is necessary regarding the definition of
investment. This paper’s purpose is to consider the definition of investment, based on the previousdiscussions in the working group. This paper does not prejudge any purpose or provisions of
multilateral rules on investment.
1. Overview of existing treaties
4. Most of the existing investment agreements do not limit their scope to FDI, and define
investment comprehensively. On the other hand, although not limiting their scope to FDI alone, someagreements do contain a definition of investment in order to meet certain objectives of the agreement.
In the following, we would like to provide an overview of the definitions of FDI in existing
agreements.
A. B
ROAD DEFINITION OF INVESTMENT
5. Many investment agreements concluded recently, such as the APPI (ASEAN Agreement for
the Promotion and Protection of Investments), adopt an “asset-based” approach, which defines the
scope of investment as including all assets relating to business activities (e.g. the establishment of a
subsidiary and the purchase of stock or real estate). Under this broad approach, elements, such as
portfolio investment and intellectual property, are included.WT/WGTI/W/92
Page 2
6. Furthermore, generally speaking, most bilateral investment treaties (BITs) adopt this broad
approach. This may be because BITs, in their origins, were designed exclusively for the protection of
investment. In addition, it may be broadly defined because BITs are tailor-made, adjusting to the
specific circumstances of each country.
7. An example of this type of provision is to state generally that investment includes “every kind
of asset”, virtually without limitation, accompanied by an illustrative list of investment categories.
A model BIT
“Investment” of a national or company means every kind of investment owned or controlled
directly or indirectly by that national or co mpany, and includes investment consisting or taking
the form of:
(i)  a company;
(ii) shares stock, and other forms of equity participation, and bonds, debentures, and
other forms of debt interests, in a company;
(iii) contractual rights, such as under turnkey, construction or management contracts,
production or revenue-sharing contracts, concessions, or other similar contracts;
(iv) tangible property, including real property; and intangible property, including rights,
such as leases, mortgages, liens and pledges;
(v) intellectual property, including; copyrights and related rights, patents, rights in plant
varieties, industrial designs,……etc.;
(vi) rights conferred pursuant to law, such as licenses and permits.
B. EXCLUDING A CERTAIN SECTOR FROM THE BROAD DEFINITION
8. For example, the NAFTA adopts a broad “asset-based” approach, including portfolio
investment, but limits the scope of the agreement by excluding certain sectors.
NAFTA
investment means ,
(a) an enterprise;
(b) an equity security of an enterprise;
(c) a debt security of an enterprise……,
(d) a loan to an enterprise ……,
(e) an interest in an enterprise that entitles the owner to share in the income or profits of
the enterprise;WT/WGTI/W/92
Page 3
(f) an interest in an enterprise that entitles the owner to share in the assets of that
enterprise on dissolution, other than a debt security or a loan excluded from
subparagraph (c) or (d);
(g) real estate or other property, tangible or intangible, acquired in the expectation, or
used for the purpose of economic benefit, or other business purposes;
(h) interests arising from the commitment of capital or other resources in the territory of
a Party to an economic activity in such a territory, such as under……,
but investment does not mean ,
(i) claims to money that arise solely from
(i) commercial contracts for the sale of goods or services by a national or
enterprise in the territory of a Party to an enterprise in the territory ofanother Party, or
(ii) the extension of credit in connection with a commercial transaction, such as
trade financing, other than a loan co vered by subparagraph (d); or
(j) any other claims to money, that does not involve the kinds of interests set out in
subparagraphs (a) through (h).
C. L
IMITED DEFINITION
9. Some investment agreements limit the definition of investment in order to achieve certain
objectives. This approach limits the scope depending for instance on the host country’ domestic laws,
the time of establishment, the scale of investment sectors, or the nature of investment. For example,
the GATS can be referred to as an investment agreement that limits the definition to the supplying aservice through commercial presence.
10. The approach of limiting the scope, which is most relevant to our current discussions for
defining investment, is the approach that limits the scope according to the nature of investment.
11. There is an approach called the “enterprise-based” definition that refers to investment with the
objective of obtaining a lasting interest in a foreign enterprise, and a significant degree of influencefor the investor regarding the management of an enterprise.
12. Basically, in this approach, portfolio investment and real estate are not included. An example
of this approach seen in the IMF Balance of Payment manual and the OECD benchmark, as
mentioned, although these are in no way agreements.
13. Furthermore, the GATS adopts the definition of supplying of a service through “commercial
presence”, which means a business establishment, such as the constitution of a juridical person or the
creation of a branch, limiting the scope to FDI. In addition, the GATS contains a provision definingthe objective criteria of an “owned” or a “controlled” juridical person, which helps to enhance the
objectivity of provisions. (GATS Article XXVIII)
14. However, there is a trade-off between enhancing the objectivity of provision and accurately
defining the concept of investment. As strategic international M&A is becoming more active, there
are cases where long-term strategy and alliance may be formed by acquiring low percent of the totalstock of a foreign enterprise. Such cases of obtaining low percentage of stock will not be included inWT/WGTI/W/92
Page 4
the scope of investment defined by objective standards as in the GATS. In future investment
agreements, it may be useful to consider a provision that provides a substantial standard for defining
of “owned” or “controlled” juridical person in addition to the objective standard seen in the GATS.
IMF Balance Of Payment Manual (5th edition)
Direct investment:
“international investment by a resident entity in one economy in an enterprise resident in
another economy with the objective of obtaining a lasting interest. The lasting interest implies
the existence of a long-term relationship between the direct investor and the enterprise and a
significant degree of influence on the management of the enterprise. Direct investment involves
both the initial transaction establishing the relationship between the two entities and all
subsequent transactions between them and among affiliated enterprises, both incorporated and
unincorporated.”
Direct investment enterprise:
“incorporated or unincorporated enterprise in which a direct investor, who is resident of
another economy, has 10 per cent or more of the ordinary share or voting power (for an
incorporated enterprise) or the equivalent (for an unincorporated enterprise)….
…The numerical guideline of ownership of 10 per cent of ordinary shares or voting stock
determines the existence of a direct investment relationship.”
OECD Code of Liberalization of Capital Movements
Direct investment:
“Investment for the purpose of establishing lasting economic relations with an undertaking such
as, in particular, investments which give the possibility of exercising an effective influence on
the management thereof:…
…1 Creation or extension of a wholly-owned enterprise, subsidiary or branch, acquisition of
full ownership of an existing enterprise:
  2 Participation in a new or existing enterprise:
  3 A loan of five years or longer.
GATS Article XXVIII
(d) “commercial presence” means any type of business or professional establishment,
including through
(i) the constitution, acquisition or maintenance of a juridical person, or(ii) the creation or maintenance of a branch or a representative office, within the 
territory of a Member for the purpose of supplying a service.
(n) a juridical person is:WT/WGTI/W/92
Page 5
(i) “owned” by persons of a Member if more than 50 per cent of the equity 
interest in it is beneficially owned by persons of that Member”
(ii) “controlled” by persons of a Member if such persons have the power to name 
a majority of its directors or otherwise to legally direct its actions;
(iii) “affiliated” with another person when it controls, or is controlled by, that 
other person; or when it and the other person are both controlled by the same 
person;
2. Options for a definition of FDI
15. Concerning the definition of investment, there is an argument that investment rules should
have a broad scope including portfolio and indirect investments. Actually, most of the existing BITs
are for the protection of investment and therefore investment broadly defined, including portfolio
investment.
16. However, after the recent Asian financial crisis, the legitimacy of regulating short-term
capital is particularly being discussed, and the importance of FDI due to its long, stable nature is
stressed. Therefore, it is important to consider FDI as the basis of the discussions and, at the sametime, to discuss how broad the scope should be in the context of the protection of investment
17. When considering a broad-scope approach, the issue of what degree the room for the
regulating short-term capital should be provided is one of the key points. Regulation of short-term
capital is now being internationally discussed. To date, there seems to be no clear vision of an
international financial architecture. When discussing multilateral investment rules, it seemsappropriate to consider the situation of those developing countries still in the process of commencing
market liberalization unlike developed countries that have progressively liberalized their capital
markets.
18. The following points are possible options for a definition of investment based on the above
examinations.
Option 1
19. This option defines “investment” as FDI (investment with the objective of obtaining a lasting
interest in a foreign enterprise/influence by the in vestor on the management of the enterprise). For
instance it covers investment through a subsidiary of an enterprise, but excludes portfolio or real
estate investment. This is the “enterprise based” approach as mentioned above regarding the IMF and
OECD standards.
20. Furthermore, an approach similar to the GATS may be possible, defining investment as
providing products and services through a commercial presence in a foreign country. It will be easy to
coordinate with the GATS in this approach.
(i) Merit
• By excluding portfolio investment, there would not be much need to make adjustments during the
discussions on short-term capital regulation in international financial institutions. In addition,
there is already a certain level of understanding world-wide of the concept on FDI owning to the
architecture in the IMF and the OECD and other fora.
• By narrowing the scope of discussion, the rule-making process will be made easier and could lead
to an early realization of improving predictability in the world investment market.WT/WGTI/W/92
Page 6
(ii) Demerit
• By limiting the scope to FDI, while providing a subs tantial criteria that is not easy to specify
(such as a “control” standard), there could be room for different interpretations and thus couldlower the predictability of the scope of the rule. Moreover, there is concern that a part of FDI will
not be included in the definition.
• By excluding portfolio investment, these assets will not be protected by the agreement, this could
become an impeding the promotion of investment  activities. (As BITs can provide the protection
of investment, this could play a role in supporting the multilateral rule in providing protection to
these assets.
Option 2-a
21. Another approach is to define investment as “every kind of asset”. It embraces a broad scope,
including portfolio and real estate investment. At the same time, provisions are included that would
enable each country to regulate investment in orde r to achieve certain objectives such as maintaining
domestic financial system. It may be an idea to make provisions that enable some regulatory measures
(e.g. taxation or capital movements) in addition to a general prudential provision and a safeguardprovision.
(i) Merit
• It could enhance the predictability for an investor by protecting a broad scope of investment and,
at the same time, address the needs of the host country by allowing certain measures to regulateshort-term capital.
• The technical difficulty of objectively defining FDI, or short-term capital, will not be relevant.
(ii) Demerit
• Taking the broad approach, it may be conceived by some countries that it could mean bearing a
burden for further liberalization of their market. A lthough this concern can be solved by limiting
the scope of liberalization, or by allowing each country to adopt certain measures including
prudential measures.
• If the regulatory measures are abused, the effect of investment rule could be diminished.
• Adjustments to the discussions on the regulation of short-term capital in international institutions
will be necessary.
*It should be recognized that there are cases where certain regulatory measures
should be admitted. On the other hand, if such measures are abused, the effect of the
investment rule could be diminished. Therefore the choice should be made cautiously.WT/WGTI/W/92
Page 7
(Possible regulation on short-term capital)
1. Direct regulation
This is a traditional measure to control the inflow of capital, by directly regulating foreign exchange. An
example of this policy is: restricting or prohibiting its residents to own assets in a foreign country, or the
restricting foreign exchange transactions of banks.
2. Request of reserves
This measure takes the form of a request to establish a certain amount of reserve (e.g. legal reserve,
current assets) at the central bank in accordance with the categories of capital inflow (e.g. foreign
currency deposit, external loans) through such fi nancial institutions as banks. The obligation can be
imposed either on the bank or on the investor. The introduction of this measure is relatively easy but the
demerit is that only the capital inflow through banks can be captured by this measure.
3. Tobin tax
 This is an idea to impose a certain percentage of tax on foreign exchange transactions world-wide. This
tax will be imposed according to the volume of the transaction, making the tax burden on short-termcapital relatively large. A world-wide cooperation is necessary to introduce this measure.
Option 2-b
22. Another approach is to define generally, as in Option 2-a, investment to include “every kind
of asset”, embracing both FDI and portfolio, and then exclude capital movements, that are merely
financial transactions of a speculative nature.
23. In this approach, special prudential measures, such as those noted above in Option 2-a are
also allowed. It is close to the NAFTA approach mentioned above.
(i) Merit
• This could enhance the predictability for an investor by protecting a broad scope of investment
and, at the same time, address the needs of the host country by allowing certain measures to
regulate short-term capital.
• A broad definition can be seen in most existing agreements, and coordination with the existing
agreements should be made easier.
(ii) Demerit
• In practice, identifying “capital movements that are merely financial transactions of a speculative
nature” is technically difficult.
• By taking the broad approach, it may be conceived by some countries that this could lead a too
large a burden for liberalizing their market. However, this concern can be solved by limiting the
scope of liberalization, or by allowing each country to adopt prudential measures.
• Adjustments to the discussions on the regulation of short-term capital in international institutions
will be necessary.WT/WGTI/W/92
Page 8
Option 3
24. The concept of this option is to change the scope of the definition according to each element
of the agreement. For instance, definition of invest ment concerning the protection of investment could
be broadly scoped, embracing portfolio investme nt, while definition of investment for certain
provisions, such as those concerning national treatment in the pre-establishment stage, would be
limited to a narrower concept of FDI.
(i) Merit
• By changing the scope of investment according to provisions and taking into account the level of
obligation that arises from each provision, making a consensus could be facilitated. Such an
approach may provide protection of investment and, at the same time, it allows using narrow
definition of FDI in certain sensitive areas.
(ii) Demerit
• Use of unclear criteria could make a room for various interpretations, which could lower the
predictability for investors. Moreover, there is concern that a part of investment will not beincluded unintentionally in the definition of some provisions, which may not be beneficial.
• Excluding assets, such as portfolio investment, in some of the provisions could lead to impeding
the promotion of investment activities.
• There may be a need for adjustment to the discussions in financial institutions.
• Compared to Option 1, more workload may be necessary as the contents of the agreement are too
sophisticated.
Other issues:  Intangible assets
25. In Options 2 and 3 above, there is question whether the definition should be limited to
tangible assets or it should include intangible assets, such as intellectual property. In the case of the
latter, a coordination with the TRIPS Agreement will be necessary.
26. In the light of the concerns of developing countries, investment rules which only covers
tangible assets could be appropriate.
Other issues:  Coordination with existing rules
27. In a new investment rule, the balance and coordination between the existing agreements such
as the GATS, TRIMs and TRIPS must be considered.
3. Conclusion
28. The importance of considering the needs of developing countries has been stressed in the
Working Group. A future rule must be mutually beneficial and implementable to both developing and
developed countries. From our previous discussions in the Working Group and our experience from
the failure of the MAI it is necessary to adopt a different approach.
29. This principle applies to the discussion of definition of FDI. For instance, it is important to
consider a certain room for manoeuvre for each government in order to regulate short-term capital to
obtain speculative profit. Furthermore, from the viewpoint of easing the workload for developingWT/WGTI/W/92
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countries, and from the viewpoint of the importance of a promptly providing predictability for foreign
direct investors in the world market, it would be better to perhaps take the “enterprise-based”
approach as in Option 1 above.
30. On the other hand, to improve the predictability for investors and promote foreign direct
investment activities world-wide, the definition of investment should reflect the nature and trend ofactual investment, at the same time, the definition should be objective and should not be unclear or
subjective. As there seems to be a common understanding on the importance of the protection of
investment, the definition could embrace a broad scope of assets.
31. From these viewpoints, it may be necessary to define FDI from an “enterprise-based”
approach and, at the same time, consider a way so that a wider definition applies to provisions on the
protection of investment.
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