RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTI/M/5
29 July 1998
(98-2792)
Working Group on the Relationship
between Trade and Investment
REPORT ON THE MEETING OF 16 AND 17 JUNE 1998
Note by the Secretariat
1. The Working Group on the Relationship between Trade and Investment held its fifth meeting
on 16 and 17 June 1998 under the Chairmanship of Ambassador Krirk-Krai Jirapaet.
2. The substantive agenda for this meeting comprised items I-IV of the Checklist of Issues
Suggested for Study (WT/WGTI/M/1, Annex 1). Under "other business," the Working Group
discussed the arrangements for the next meeting, including the preparation of a report to the GeneralCouncil at the end of the year.
A. IMPLICATIONS OF THE RELATIONSHIP BETWEEN TRADE AND INVESTMENT
FOR DEVELOPMENT AND ECONOMIC GROWTH  (ITEM I OF THE CHECKLIST OF
ISSUES SUGGESTED FOR STUDY)
3. The Working Group heard a statement by the representative of India on the relationship
between foreign direct investment ("FDI") and tran sfer of technology and discussed a Secretariat Note
providing a synthesis of the information made available to the Working Group on the relationship
between FDI and development (WT/WGTI/W/38).
4. The representative of India stated that, in pursuing policies to open up economies to FDI,
many developing countries had believed that FDI could be an important channel for technology
transfer and for enhancing organizational, managerial and marketing skills.  The technological
superiority of multinational enterprises had led some researchers to emphasize the efficiency-enhancing characteristics of FDI by multinational enterprises.  Some researchers had also collected
empirical evidence suggesting that new technologies were introduced abroad through FDI rather than
through exports and that such transfers of technologies to subsidiaries of multinational enterprises
were better effected through outright sales, licensing or joint ventures.  As regards the effects of FDI
on managerial skills, empirical evidence had not conclusively demonstrated the existence of atechnological spillover,  although there seemed to  be some circumstantial evidence.  The dependence
of developing countries like India on modern indu strial technology could not be overemphasized.  In
owning critical technology, multinational enterprises seemed to be in possession of what were called
intangible assets that provided them with superior  competitive power with which they could enter into
a bargain over technology with recipients. Therefore, the monopoly acquired by these enterprises onaccount of owning critical technology in fact allowed them to restrict the effective transfer of
technology to developing countries.  The advantages that multinational enterprises derived through
their ownership of technology arose from several imperfections in technology markets. A typical
imperfection was the disadvantageous negotiating position of technology recipients.  It had been
pointed out that, while technology transfer was not effective in the absence of meaningful transfer ofskills by multinational enterprises, diffusion of technology was rarely seen. Some studies had shown
that the costs of technology imports from multinational enterprises were excessive and put strains on
the balance of payments of developing countries.   The total foreign exchange costs of technologyWT/WGTI/M/5
Page 2
supplies were often excessively high.  The experience of several developing countries, including
India, had shown that the prices to be paid for the import of technology were relatively high and that
in several cases licensing fees were to be remitted during a very long, and sometimes open-ended,
period of time. The indirect costs of technology transfer had also been documented, particularly with
respect to confidentiality and export restrictions. In more recent years, technology transfer agreementshad continued to display the asymmetry between buyers and sellers of technology.  The generation
and transfer of technology, innovation capabilities and skills by multinational enterprises within their
corporate networks and their effects on other firms through linkages and spillovers had important
implications for country performances.  A number of contributions to the Working Group had
documented the effects of transfer of technology between developed countries.  Technology transfer
at a broader level had also been documented, albeit primarily through anecdotal evidence.  At the
same time, it had been recognized that the evid ence of technology transfer from home to host
countries, particularly to developing countries, had sometimes been disappointing.  There was
therefore a need to study in the Working Group possible disciplines necessary for ensuring effective
transfer of technology along with FDI.
5. The representative of India further observed that it had been pointed out that various measures
adopted by host governments to augment the transfer of technology, such as joint venturerequirements, mandatory transfer of technology, compulsory licensing, local content requirements,
may have had the opposite effect, i.e. they may have reduced investment and product and process
technology flows.  The reason was that technology owners considered technology as a proprietary
product to be used as a competitive tool. In fact, there were companies that refused to participate in
joint ventures and others that kept most up-to-date technology to themselves.  At the same time,  ithad to be recognized that joint ventures and investment policies involving training of local employees
were more beneficial for the effective transfer of technology to host countries, resulting in increasing
the competitive strength and in assisting in the development of these economies. His delegation
therefore considered that studies might be needed for suggesting ways in which domestic capacity
could be built up through FDI.  In another WTO body, his delegation had raised the issue of transferof technology on non-commercial, preferential terms for achieving the global objective of sustainable
development.  At least in cases where high technology was specifically mandated under national,
international or multilateral regimes, transfer of technology at fair and most favourable terms needed
to be ensured.  With the gradual reduction of overseas development assistance and the increased
reliance on corporate flows, it became all the more important that technologies be made available to
developing countries at prices that were affordable, commercially viable and effective in building
domestic capacity.
6. The representatives of Canada, Egypt
 and Hong Kong, China  welcomed the proposal by India
for further examination in the Working Group of  the relationship between FDI and transfer of
technology.  In this connection, the representative of Canada observed that several contributions to the
Working Group had made the point that import substitution policies might enable multinationalenterprises to undertake market-seeking investment that failed to incorporate state-of-the-arttechnologies, whereas export-oriented policies, under which production had to be internationally
competitive, were more likely to encourage th e introduction into the host country of the most
advanced technology.  In Canada, where the economic contribution of foreign firms in technology-
intensive industries was substantial,  the pursuit of an open and stable trade regime had been a key
component to economic policy success in terms of advanced technology policies.  The points raisedby India appeared to pertain more to disseminati on of technology than to the import of technology as
such. In discussing further what policies could assist in the dissemination of technology, it was
necessary to bear in mind the fact that FDI involved relationships between private parties.
7. The Chairman drew attention to a Note by the Secretariat (WT/WGTI/W/38) prepared at the
request of the Working Group which contained a synthesis of the information made available by
Members and international intergovernmental organizations on the links between FDI andWT/WGTI/M/5
Page 3
development, both historically and in the present situation.  As the Note had been circulated only very
recently and only in English, the discussion of the Note at this meeting was necessarily of a
preliminary nature.  He also recalled that it had been agreed that the Note would not be regarded as
exhaustive but would be capable of further evolution as the work progressed.
8. The representatives of the European Community, the United States , Canada , Brazil ,
Argentina, Australia  and Japan  welcomed the Secretariat Note as an accurate, balanced and
comprehensive reflection of the information provided and the discussions that had taken place so far
on the relationship between FDI and development. The point was made that the Note showed that the
information presented to the Working Group indicated that the effects of FDI on development were on
the whole beneficial. Another observation made was that, if a particular aspect was missing from the
Note, this was because no information had been presented so far on the issue and that the Note thus
played a useful role in helping identify areas wher e more specific evidence might be necessary. In this
regard,  the representative of the European Community said that the Community was ready to explore
further the issue of possible negative effects of FDI in order to understand better the concerns raisedby some delegations. The fact that the Note by the Secretariat did not shed as much light on this issue
as some delegations would wish was explained by the lack of concrete evidence presented to the
Working Group.  He also believed that there should have been more emphasis on the importance ofthe general economic environment as a determinant of FDI, as distinguished from specific FDI
legislation. The representative of Brazil, referring to the section of the Note on the impact of FDI on
the balance of payments and macroeconomic stability,  considered that the implications of portfolioinvestment flows for development and the balance of payments merited a more thorough examination
and suggested that this matter could perhaps be  studied by using the OECD and UNCTAD reports
referred to in the Note.  The representative of Switzerland observed that there had been insufficient
analysis in the Working Group of the interaction be tween various types of restrictions on FDI, on the
one hand, and fiscal policies designed to offset such restrictions and other disincentives, on the other.
9. The representative of the Philippines, speaking on behalf of ASEAN WTO Members,
expressed the view that, although the Secretariat Note provided a good factual presentation of
information submitted and views expressed thus far in the Working Group, it did not obviate the need
for the studies requested by his delegation at previo us meetings of the historical evolution of FDI
policies, especially of the developed countries, and of the possible negative effects of FDI. Because
the Note was based on the information and views presented to the Working Group,  it did not contain
as elaborate a treatment of the historical dimension of FDI policies and of possible negative effects
FDI as his delegation considered necessary. As an example illustrating the need for further analysis of
the historical evolution of FDI policies, he referre d to the view mentioned in paragraph 10 of the Note
that in the present circumstances, because of the accelarating pace of technological change, restrictive
FDI policies pursued by some countries in the past would deprive countries of vital technological
spillovers.  This view overlooked the fact that du ring the time more advanced countries had pursued
restrictive FDI policies technology was similarly making advances at an accelerating pace and
multinational enterprises were already playing an impor tant role in world trade. With respect to the
possible negative effects of FDI, the Secretariat Note dealt with this issue in several paragraphs but it
simply summarized and synthesized what had been said. In the light of these considerations, he
reiterated his delegation's request that the Secretaria t conduct studies of the hi storical evolution of FDI
policies and of possible negative effects of FDI. The representative of Pakistan expressed the view
that the Secretariat Note did not represent an adeq uate, balanced treatment of the issues arising in
regard to the effects of FDI on development because it was largely based on written contributions,
which tended to endorse a certain point of view, and did not take sufficient account of the concerns
that were not always expressed in written contributions.  In this connection, he questioned the validity
of the statement in paragraph 9 that Members had generally endorsed the analysis described in the
preceding paragraphs of the implications of a changing global environment for the relationship
between FDI and development.  In particular, it was doubtful that there was general agreement on the
importance of open trade policies as a determinant of FDI.  In addition, while paragraph 24 observedWT/WGTI/M/5
Page 4
correctly that the level of local recruitment was a key factor determining the extent of technology
transfer and diffusion, it failed to make the important point that this in turn presupposed that there was
a need to ensure scope for adequate local recruitment.  More generally, this part of the Note was
questionable in that it seemed to suggest that FDI au tomatically resulted in the transfer and diffusion
of technology to host countries.
10. In response to the comments of the representative of Brazil on portfolio investment, the
representative of the Secretariat explained that portfolio investment had not been treated extensively
in the Secretariat Note because the mandate for the Note referred only to FDI.  In response to the
comments made by the representative of Pakistan, he stressed that  every effort had been made to
include points made in oral statements, as could be seen from the many references made in the Note to
reports on the meetings.
11. Delegations expressed their views on the proposals made by the representative of the
Philippines, particularly on the issue of whether further examination by the Working Group of
possible negative effects of FDI should be based on a study by the Secretariat or on contributions to
be made by Members based on their individual experiences.  In respect of the need for a balanced
treatment of the effects of FDI, which was stressed by many delegations, the point was made that the
notion of balance in relation to the effects of FDI should not be interpreted to mean that, whenpositive effects outweighed negative effects, the latter could be ignored. Rather, this should be viewed
from the perspective of the need to maximize the positive effects and minimize any negative effects of
FDI.  A related observation was that in some cases the problem was not that FDI had negative effects
but that there were factors that prevented the potentially positive effects of FDI to be fully realized, as
in the case of the example mentioned by some delegations of practices in the field of transfer oftechnology.  The comment was also made that alleged negative effects of FDI could not be analysed
in isolation from the existing regulatory environment in host countries. A number of specific subjects
were mentioned as warranting further attention in regard to the effects of FDI, including transfer of
technology, balance of payments, competition, regulatory powers of government, unemployment,
labour standards, environmental conditions, rela tions between foreign enterprises and small and
medium-sized domestic suppliers, and the relationship between FDI restrictions and fiscal incentives.
12. Following this debate, the Chairman proposed that the Secretariat conduct in a balanced
manner a study of the effects of FDI on development and economic growth, with inputs from
Members, if they so desired.  The study would include, but not be limited to, issues already raised by
Members. He also proposed that the Secretariat c onduct a study of the historical evolution of FDI
policies, with the help of other international intergovernmental organizations. Both studies would be
capable of evolution.  It was so agreed.
13. In response to a question from the floor, the representative of the Secretariat said that he could
not give an assurance as to the timing of these studies without further consultations in the Secretariat
as to the availability of the necessary resources.
14. The Working Group took note of the statements made and agreed  to revert to item I of the
Checklist at its next meeting.
B. THE ECONOMIC RELATIONSHIP BETWEEN TRADE AND INVESTMENT
(INDENTS 1-7 OF ITEM II OF THE CHECKLIST OF ISSUES SUGGESTED FOR
STUDY)
15. The Working Group discussed a submission by India on the relationship between the mobility
of capital and the mobility of labour and a submission by ASEAN WTO Members on investment
incentives.WT/WGTI/M/5
Page 5
16. The representative of India drew attention to a recent submission by his delegation
(WT/WGTI/W/39) on the relationship between the mobility of capital and the mobility of labour,
which had been introduced by his delegation at the previous meeting of the Working Group.1 In
commenting on this submission, the representative of Egypt expressed support for the view that, while
the focus of debate on the relationship between investment and movement of persons had always been
on the issue of movement of selected categories of key personnel that were essential to the proper
functioning of enterprises, a more comprehensive treatment of this subject was required to include
other forms of movement of labour. Certain elements of the Indian submission would benefit from
further clarification, for example the notion of a labour crunch. Given that restrictions on movement
of labour inside the European Community had largely been abolished, it might be interesting for the
Working Group to study the experience of the Community regarding the relationship between
investment and movement of labour in the Community. In this regard, he asked the representative ofthe European Community if he could provide studies on this issue. In response, the representative of
the European Community stated that the free movement of workers was one of the fundamental
freedoms which constituted the foundation of the EC's single market, along with the free movement of
goods, the free movement of capital and the right of establishment. There was a close and complex
relationship between these freedoms.  His delegation would look to see whether it could provideinformation useful to the Working Group on the issue raised by the representative of Egypt.
17. The representative of Switzerland asked the representative of India how India treated the
migration of labour from neighbouring countries. The representative of India replied that India had
large segments of the populations from neighbouring countries coming to India to seek jobs and that
the issue of how to deal with the migration of job seekers from neighbouring countries was animportant aspect of the movement of labour.  However, it was not pertinent to the work of the
Working Group because the issue to be addressed by the Working Group was not the movement of
labour per se  but the movement of labour in the context of a demand for free movement of capital.  As
explained in his delegation's submission, promoting mobility of capital without ensuring mobility of
labour would have several negative consequences.
18. The representative of the Philippines, speaking on behalf of ASEAN WTO Members,
introduced a submission (WT/WGTI/W/41) on the role of investment incentives.  The purpose of this
submission was to show that, notwithstanding argu ments advanced in recent academic literature,
investment incentives remained a useful policy inst rument in the pursuit of development strategies.
The argument that incentives were nothing more than a transfer of income from countries to firms and
that the more intense the competition among potential hosts, the greater was the proportion of
potential gains that was transferred to multinational enterprises, failed to give due recognition to thefact that incentives were not intended to support enterprises that were not viable.  Rather, they were
geared towards attracting growth, income and employ ment-creating investment.  The part transfer of
income through incentives would not be politically feasible if not for this wealth-creating impact of
FDI. The submission highlighted three particular aspects of the positive role of investment incentives.
First, investment incentives could be considered to fulfil a risk premium function insofar as theyprovided a partial counterweight to poor economic fundamentals, for example in the field of
infrastructure. By compensating investors for their perceived country-specific risks, they provided a
reason for investors to go ahead with a project which otherwise would not have been viable at the
normal rate of return. Secondly, even in a situation where the economic fundamentals were sound,
investment incentives had an essential role to play as tools by which investment could be directed tomeeting particular development or regional objectives. This was illustrated by the role of incentives to
direct FDI to particular industrial sectors and the us e of incentives to regulate the type and nature of
FDI received. In the latter regard, he noted that the granting of incentives could be tied to a
commitment to sequential investment in the form of additional production capacity, modernization,
upgrading or diversification into related products. Thirdly, investment incentives also contributed to
                                                     
1 WT/WGTI/M/4, paragraph 36WT/WGTI/M/5
Page 6
long-term competitiveness in that they could help countries to secure dynamic gains from economies
of scale and learning by doing.
19. The representatives of Canada, the European Community , Japan , Mexico , New Zealand  and
Switzerland expressed their delegations' interest in th e issues raised in the submission by the ASEAN
Members. It was pointed out that investment incentives were widely regarded by countries at all
levels of development as important policy instruments but that a comprehensive and balanced
consideration of this subject should include not only the issue of the effectiveness of incentives in
attracting FDI and the benefits derived from the investment attracted with incentives but also the
negative implications of the increasing competit ion between countries to attract FDI by granting
incentives. Distortions of investment patterns and the erosion of the tax base were mentioned as
examples of such negative effects.  Attention wa s drawn to the points made on investment incentives
in submissions by the intergovernmental organizations, as summarized in paragraph 64 ofWT/WGTI/W/38.  It was also suggested that a more detailed examination be undertaken of the
various different forms in which investment incentives were granted. The representative of Mexico
proposed that the effects of tax havens in distorting  investment flows be taken into consideration and
that it might be useful for the Working Group to receive information on studies done on this subject
by organizations such as the IMF and the UN. He also requested an explanation of the concept of "flyby night" investors used in paragraph 11 of the ASEAN submission. The representative of the
European Community pointed out that the issue of whether investment incentives should be granted
on a non-discriminatory basis to domestic and foreign investors required further attention.
20. The representative of UNCTAD, responding to a question by the representative of the United
States, drew attention to a study of investment incentives conducted by his organization and
summarized in the World Investment Report 1996.   This study focused on the costs and benefits of
investment incentives, the different types of incentives and the increasing competition between
countries regarding the use of such incentives.  As regards the costs and benefits of incentives, it was
true that in theory incentives made sense to the extent they covered the difference between the private
gains for the firms involved and the social gain s for the countries involved. However, it was very
difficult to measure precisely this gap between private and social gains, especially when long-term
effects were taken into account. For example, while it might make sense to attract a firm at great
expense if that firm generated sequential investments, it was difficult to know whether this would
happen and whether enterprises paid much attention to incentives when they made their investment
decisions. Empirical evidence suggested that firms typically based their investment decisions on the
long-term rationale of a particular investment location, with incentives typically playing only a
marginal role.  Thus, the assessment of the costs and benefits of investment incentives in a given caserequired a  very careful and complex analysis.  A second theme of the UNCTAD study  concerned the
type of investment incentives used.  A distinction could be made between fiscal incentives, financial
incentives and other incentives, such as the provision infrastructure.  Obviously, it might make more
sense, especially for developing countries with limited resources, to focus on other incentives which
also benefited domestic firms or on fiscal incentives which only came into play once an investmentproject became profitable, as opposed to financial incentives, which were typically granted up front.
Regarding the issue of competition between countries in the use of investment incentives,
transparency and efforts at exchange of information could perhaps help to avoid the most serious
negative implications of this competition. UNCTAD's experience indicated, however, that policy
makers considered incentives as a tool that they were not easily prepared to give up but instead triedto use as efficiently as possible.
21. The representative of Egypt agreed that there were advantages and disadvantages to the
granting of incentives and welcomed the work done by UNCTAD in this area.  Although some of the
UNCTAD studies seemed to suggest that incentives  were not as important as some other factors,
some developing countries believed that incentives did play an essential role in attracting FDI.  HeWT/WGTI/M/5
Page 7
looked forward to a more comprehensive debate on this subject once the Working Group had received
the study being prepared by the Secretariat.
22. In response to a question posed by the representative of Switzerland, the representative of the
Philippines, speaking on behalf of the ASEAN WTO Members, stated that his delegation could
conceive of circumstances in which investment incentives would have negative effects. As explained
in the ASEAN submission, this depended upon the way incentives were used. In regard to a point
made by the representative of Switzerland that, where an incentive was granted to offset a restrictive
measure, such as a performance requirement, the first best solution was to remove both the restrictive
measure and the incentive, he observed that this might be desirable in theory but was not always
feasible in an imperfect world.
23. The representative of the European Community,  referring to the Secretariat Note introduced
at the previous meeting on outward investment  from developing countries (WT/WGTI/W/25),
observed that, as a number of developing countries had become net outward investors, there was no
longer a clear cut difference of interest between developed countries as home countries and
developing countries as host countries.  It was also important to note that FDI from developing
countries was essentially of the same type as FDI fr om developed countries, i.e. mainly vertical FDI
and that it was trade creating. Given the limite d empirical data on outward FDI from developing
countries, he encouraged developing country Members to supplement this information contained in
the Secretariat paper with their experiences.
24. The Working Group took note of the statements made and agreed  to revert to item II of the
Checklist at the next meeting. At that meeting the Working Group would also discuss the indent
concerning the relationship between investment and competition, taking into account the discussion ofthat issue at a forthcoming meeting of the Wo rking Group on the Interaction between Trade and
Competition Policy.  In this regard, the Working Group agreed to invite the Chairman of that Working
Group, Professor Jenny, to make a presentation on the results of that discussion.
C. STOCKTAKING AND ANALYSIS OF EXISTING INTERNATIONAL INSTRUMENTS
AND ACTIVITIES REGARDING TRADE AND INVESTMENT (ITEM III OF THECHECKLIST OF ISSUES SUGGESTED FOR STUDY)
(i) WTO provisions on matters related to investment
25. No statements were made.  The Working Group agreed to keep this indent on the agenda of
its next meeting.
(ii) Bilateral, regional, plurilateral and multilateral agreements and initiatives;
implications for trade and investment flows of existing international instruments
26. Representatives of several delegations presented information on the experiences of their
countries with bilateral investment treaties or offered comments of a more general nature on existing
investment agreements. A submission was introduced by the representative of Cuba on recent
developments regarding the Helms-Burton Act. Finally, information was provided on relevant
ongoing activities in other fora.
27. The representative of Korea introduced a submission (WT/WGTI/W/42) on Korea's
experience with bilateral investment treaties. Korea regarded bilateral investment treaties as an
important tool to protect its outward FDI. To date , Korea had concluded 53 such treaties, the majority
of which in the 1990s, which reflected the signific ant growth in Korea's outward FDI since the mid-
1980s.  Korea used a model bilateral investment treaty that was aimed at providing protection of
foreign investment through provisions on fair and equitable treatment, full protection and security,WT/WGTI/M/5
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national treatment and MFN treatment, free transfer of funds, rules on expropriation and dispute
settlement. Although Korea's existing bilateral investment treaties did not provide for obligations
regarding the admission of investment, a recent development of interest was that, in connection with
the ambitious package of reforms of FDI legislation adopted by Korea to overcome the current
financial difficulties, Korea had agreed to start negotiations with the United States on acomprehensive bilateral investment treaty covering both the establishment and the post-establishment
treatment of investments. The representative of Peru, introducing a submission on his country's
experience with bilateral investment treaties (WT/WGTI/W/47), explained how, in the context of theoverall reform of Peru's investment regime initiated in 1990, it had been considered necessary to
combine the liberalization of Peru's FDI legislation with the provision of assurances regarding the
protection of investment through the conclusion of bilateral investment treaties.  Between 1992 and
1996, Peru had signed 26 such treaties.  The experience of Peru with these treaties showed that theywere important as one of many factors influencing investment decisions. At the same time, the
significant recent increases in investment into Peru  from the United States and Chile, countries with
which no bilateral investment treaties existed, could be seen as evidence that the absence of a bilateral
investment treaty might not be a determining factor. His delegation believed that in the long term the
establishment of a multilateral framework for investment was desirable, although the negotiation ofsuch a framework would raise difficulties, particularly as regards the issue of market access.
28. The representative of India stated that his country had pursued a policy of entering into
bilateral investment treaties with a view to prov iding a predictable climate for foreign investment in
India as well as to protect Indian investments abroad.  Since signing its first bilateral investment treaty
with the United Kingdom in March 1994, India had signed such treaties with 25 countries.Agreements had also been finalized with nine other countries and negotiations were under way with
seven more countries.  Many of these countries were developed countries. Typically, the treaties
entered into by India tried to promote foreign investment by providing protection, i.e. by giving
assurances that foreign investments that had been ad mitted in accordance with the host country's laws,
regulations and policies were guaranteed fair and equitable treatment, including national and MFNtreatment, full and consistent legal security and dispute resolution through international mechanisms,
including for investor-state disputes.  Some of the main features of these treaties were:  the definition
of investment;  the scope of the treaty;  MFN treatment;  expropriation and compensation; repatriation
facilities;  dispute settlement mechanisms;  entry and sojourn of personnel;  and duration and
termination of the treaty.  The Indian legal system had in-built provisions for the various elements of
bilateral investment treaties.  It was an accepted principle in India that at the post-establishment stage
all investments were accorded non-discriminatory treatment. Similarly, India's exchange control
regulations already provided for facilities for the repatriation of investment proceeds.  In the matter of
dispute settlement, the Indian Parliament had adop ted a provision which enabled foreign investors to
seek redress either directly under the domestic legal regime or through international arbitration.
Similarly, for entry and sojourn of personnel, India's immigration law and the exchange control
regulations contained provisions for foreigners taking up employment in India.  Bilateral investmenttreaties had found favour with developing countries like India because they did not place restrictions
on host countries in following their own FDI policies in the light of the countries' unique
circumstances.  Generally, these treaties aimed at the protection and equitable treatment of FDI after
the investment had taken place in accordance with the host country's laws and regulations.  The
increasing number of such treaties was a recognition of the positive role that foreign investment couldmake to economic development.  However, as many such treaties had been concluded only in the very
recent past, there was little empirical evidence to establish a correlation between the conclusion of
such treaties and the growth of investment. His de legation was of the opinion that bilateral investment
treaties were one of the factors in creating a favourable investment climate, in addition to factors, such
as size and growth of the market, the quality of infrastructure, manpower skills, and political,economic and legal stability.  Finally, he observed that India was engaged in improving its investment
climate and attracting FDI flows through its own autonomous measures regarding the liberalization of
its policy and regulatory framework relating to FDI.WT/WGTI/M/5
Page 9
29. The representative of Norway stated that there were many similarities between bilateral
investment treaties in regard to certain core provisions but that an important area of difference
concerned the admission of investment. A point that merited further consideration in this respect was
the observation made in a submission by the European Community and its member States
(WT/WGTI/W/30) regarding the difficulty of drawing a distinction between the pre- and post-establishment stage of an investment.  Since most WTO Members were bound to some type of non-
discrimination rules regarding foreign investment, for example in the context of the GATS rules as
they related to commercial presence, a pertinent question was whether a multilateral approach
including common rules in respect of the pre-establishment phase but with a flexible scope for
exceptions would be more transparent and efficient than today's varied legal situation. The
representative of the European Community stated that the existence of a multitude of similar
provisions contained in bilateral investment treaties posed a problem of transparency and efficient
administration which needed to be considered in the context of item IV of the Checklist.  In addition,
a fundamental issue requiring further consideration concerned the differences between bilateral
investment treaties as regards the application of national treatment and MFN treatment to the pre-
establishment phase of investments. Referring to the submission by Canada in WT/WGTI/W/36, he
underlined the fact that recent agreements clearly showed a trend towards integrated treatment oftrade and investment matters and endorsed the considerations set forth in that submission regarding
the desirability of multilateral rules, notably in view of the complexity for governments of
administering a growing number of investment agreements and of ensuring the consistency of those
agreements with WTO principles of non-discrimination. The representative of Canada observed that
the information presented to the Working Group on widespread rule-making on investment in bilateral
and regional settings showed that Members had chosen to build rules-based investment relationships.
Relatively sophisticated agreements were being put in place that had many elements in common, for
example in regard to definition, admission, national treatment and MFN treatment, transfer of
payments, expropriation and dispute settlement. The representative of Mexico identified various
subjects that he believed had not received suffic ient attention in existing international investment
agreements, including the social responsibility of states towards marginalized groups, the adverse
effects of volatile, short-term capital movements, and the distortive effects of certain kinds of
incentives.
30. The representative of Cuba, introducing a recent submission by his delegation
(WT/WGTI/W/45), stated that expropriation of foreign investment in Cuba had occurred in
conformity with established norms of international law, including with respect to the compensation
paid for such expropriation, as evidenced by th e lump-sum agreements reached by the Cuban
Government with a number of European countries.  Notwithstanding the declared willingness of the
Cuban Government to negotiate settlements of outstanding claims relating to expropriated property,
the United States had never been interested in receiving compensation.  In this connection, he
expressed the concerns of his delegation regarding the Helms-Burton Act and the bilateral
understanding that had recently been reached between the United States and the European Union intheir dispute over the Helms-Burton Act.  He also pointed to negative consequences that he believed
would flow from the possible incorporation of this understanding into the Multilateral Agreement on
Investment that was being negotiated in the OECD.
31. The representative of Canada, referring to a statement made at the last meeting by the
representative of Costa Rica on the launch of negotiations on a western hemispheric free trade
agreement and on the mandate of a working group on investment established in that context2, stated
that it had been agreed that negotiations on a framework for investment would cover the following
subjects:  basic definitions; scope of application; national treatment and sectoral reservations; MFN
treatment and sectoral reservations; fair and equitable treatment; expropriation and compensation;
                                                     
2 WT/WGTI/M/4, paragraph 52WT/WGTI/M/5
Page 10
compensation for other losses besides expropriation; movement of managerial personnel; transfer of
funds; performance requirements; general exceptions; and dispute settlement.
32.  In response to a request made at the last meeting by the representative of Switzerland, the
representative of the Secretariat provided information on developments regarding negotiations on a
Supplementary Treaty to the Energy Charter Treaty ("ECT"). The ECT had entered into force on
16 April 1998 and as of the end of May 1998 had been ratified by 35 countries. Negotiations on a
Supplementary Treaty regarding investments had been concluded in December 1997.  The ECT
contained an obligation to accord non-discriminatory treatment (the better of MFN and national
treatment) post-establishment without exceptions.  For the pre-establishment phase, however, the ECT
contained only a best endeavours commitment with respect to non-discrimination.  The
Supplementary Treaty negotiations had been concerned with the conditions for a legally binding non-
discrimination pre-establishment obligation.  The hook-up between the two Treaties meant that all
articles of the ECT (other than Articles 10(2) to  (5)) applied to the Supplementary Treaty.  The pre-
establishment obligation of the Supplementary Treaty covered the making of investments, defined in
the ECT as establishing new investments, acquiring all or part of existing investments or moving into
different fields of investment activity.  The Supplementary Treaty provided for two types of
exceptions from the non-discrimination principle.  First, it grandfathered existing restrictions whichwere identified in a country-by-country list of non-conforming measures in an annex to the Treaty.
The Supplementary Treaty also provided an option for listed countries to reserve all or some of the
state's share or assets which were being privatized to its own nationals.  The Supplementary Treaty
was scheduled for adoption at the end of June and would be opened for signature at the end of
September 1998.
33. The representative of Switzerland said that it was important for WTO delegates to study
carefully the commitments contained in the Suppleme ntary Treaty, especially as they related to the
MFN and national treatment obligations of Members under the WTO instruments.
34. The Working Group took note of the statements made and agreed  to revert to item III of the
Checklist at its next meeting.
D. ITEM IV OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY
35. The Working Group:  (i) heard a statement by the representative of the European Community
on different approaches to the admission of investment in existing international investment
agreements;  (ii) discussed three specific subjects which the Group had agreed at its previous meeting
would be the focus of debate at this meeting (OECD Guidelines for Multinational Enterprises;  criteria
for evaluating investment agreements from a development perspective;  and the definition of
investment in international investment agreements); and  (iii) heard comments on other issues coveredby item IV of the Checklist.
36. The representative of the European Community  pointed to the need for the Working Group to
develop a better understanding of the different legal standards and concepts used in existing
international investment agreements in regard to the admission of foreign investment. A basic
consideration in relation to this matter was that there was no rule of customary international lawrequiring a state to allow the entry of foreign investment. Four approaches could be distinguished.
First, while it was possible to conceive of an unconditional right to investment, this was a purely
theoretical notion which was not reflected in any existing agreement. Secondly, a narrower concept
was that of "right of establishment", which referred to the setting up of enterprises or the provision of
services by a natural person in another country.  This concept was contained in the EC Treaty, theAgreement on the European Economic Area and the Europe Agreements between the European
Community and its member States, on the one hand, and a number of countries in Central and Eastern
Europe on the other. Since the standard of right of establishment went beyond a requirement toWT/WGTI/M/5
Page 11
eliminate measures that were discriminatory against foreign investors,  it was to be distinguished from
a third approach which involved the application of non-discrimination standards to the pre-
establishment phase. This was the standard most frequently used in international agreements that
contained binding rules on the admission of investme nt. The application of the standards of national
treatment and MFN treatment to the admission of investment was typically associated with a "topdown" approach that provided for a general application of non-discrimination standards, subject to
country-specific exceptions. A fourth approach to the admission of investment, which could be
characterized as a "market access, bottom up" approach, was exemplified by the GATS, in which
Members had obligations regarding the admission of investment only to the extent that a specific
sector had been inscribed in their schedules of commitments, although the GATS also contained some
obligations of a general nature, such as MFN.  The scope of application of these various standards
depended crucially on the definition of the term investment used.  The distinction between pre- andpost-establishment phases of an investment was somewhat difficult in relation to definitions that
encompassed not only enterprises but also intangible assets and contractual rights. This was illustrated
by the NAFTA in which the standard of no less favourable treatment of foreign investment  appeared
in a single clause which applied to both pre- and post establishment.  He underlined that each of the
above-mentioned approaches to the admission of investment was qualified by various types ofexceptions, for example exceptions relating to screening procedures, national security, public order,
privatization and balance of payments, sectoral reservations, exceptions relating to performance
requirements and exceptions regarding the movement of natural persons. Elaborating on the meaning
of the concept of non-discrimination in existing international investment agreements,  he pointed out
that in the context of the existing OECD investme nt instruments it had been made clear that the
standard of "no less favourable treatment" did not necessarily mean "identical treatment" and that in
certain circumstances this standard could allow for different treatment, provided that the treatment
was equivalent. The GATS showed an interesting further evolution of the non-discrimination standard
in the sense that, compared to the more legalistic orientation of the non-discrimination rules found in
the OECD instruments, the provisions of the GATS on market access and national treatment reflecteda more economic orientation, as evidenced by the emphasis on the removal of numerical restrictions
and on equality of competitive opportunities.
37. In response to requests by the representatives of Brazil, Canada and Peru for a further
clarification of the distinction between the right of establishment, on the one hand, and the application
of national treatment to pre-establishment, on the other, the representative of the European
Community stated that the concept of right of estab lishment, as applied in the EC Treaty, required the
removal of obstacles to the establishment of nationals of other member States irrespective of thetreatment accorded by a member State to its own nationals, whereas the application of national
treatment to the establishment phase involved a relative standard which rested on a comparison
between the treatment of foreigners and the treatment of nationals. To illustrate this difference, he
pointed out that a monopoly could be incompatible with the absolute standard of right of
establishment as an obstacle to establishment by foreigners even though the maintenance of amonopoly might not involve discrimination against foreign investors. However, a monopoly would
not be captured by the relative standard of national treatment insofar as there was no discrimination
against foreign investors. Thus, most internatio nal investment agreements that dealt with the
admission of investment did not contemplate obligations  that were as far reaching as the obligations in
agreements based on the principle of the right of establishment.
38. The representative of the United States stated that his delegation would make a submission
before the next meeting on the application of national treatment in the pre-establishment phase, which
his delegation considered to be an integral aspe ct of a state-of-the-art investment agreement.WT/WGTI/M/5
Page 12
OECD Guidelines for Multinational Enterprises
39. The representative of the OECD introduced  a submission (WT/WGTI/W/40) on the OECD
Guidelines for Multinational Enterprises which had been prepared in response to a request by the
Working Group at its last meeting.  The Guidelines had been adopted in 1976 as part of the
Declaration on International Investment and Multinational Enterprises, which reflected a desire ofOECD member countries to address in a balanced manner related issues of international cooperation
in the field of international investment. Thus, key elements of the Declaration were a commitment of
a political character by the member countries to offer foreign-controlled enterprises operating on their
territories national treatment and a set of recommendations to multinational enterprises how they
should behave in the territory of OECD member countries.  While the Guidelines were not legally
binding, OECD governments were committed to promote their observance and they were the subject
of tripartite cooperation involving the business a nd labour communities. The object of the Guidelines
was the behaviour of multinational enterprises within the territories of the OECD member countries
but the introductory paragraphs of the Guidelines made it clear that there was an expectation on the
part of OECD governments that these enterprises would behave in a manner in accordance with the
Guidelines wherever they operated around the world.  The Guidelines were not designed to introduce
different norms for multinational enterprises and domestic enterprises.  Areas covered by theGuidelines included competition policy, environment, disclosure of information and employment and
industrial relations. Regarding the implementation of the Guidelines, provision had been made for the
establishment by member countries of national contact points that were responsible for conducting
relations with parties interested in the Guidelin es, particularly the business and labour communities,
and that were also to act as channels for contacts with governments of other countries that might beinterested in a particular case. The national contact points in various countries were expected to
consult one another and seek to resolve whatever problems might have arisen and also had a role in
promoting knowledge of the Guidelines.  Within the OECD, the Committee on International
Investment and Multinational Enterprises ("CIME") had the responsibility for matters relating to the
implementation of the Guidelines, for conducting periodic reviews and for handling specific issues
that arose. Such issues could be brought to the attention of the Committee by a member government
or by advisory bodies established in the OECD representing the business and labour communities.
These advisory bodies also held regular consultations with the Committee.  One of the features of the
follow-up process was the possibility of the adopti on by CIME of clarifications of the Guidelines
when a particular case had not been resolvable at the national level and raised issues that warranted a
clarification of the Guidelines.  Most of the clarifications adopted to date related to the sections on
labour relations.  The Guidelines were reviewed periodically, normally every five years.  A reviewwas aimed primarily at assessing the experience with the implementation of the Guidelines and did
not necessarily lead to changes in their text.  However, it was possible that such textual changes
resulted from reviews, as for example on the occasion of the last review when a chapter on
environmental protection had been added.  The question of launching a new review of the Guidelines
was expected to be discussed at a meeting of CIME at the end of June.  Preliminary discussionsindicated that environmental protection might again attract particular attention in such a review as
well as several questions relating to labour and industrial relations, particularly the issue of
international core labour standards.  The issue of the overall effectiveness and profile of the
Guidelines was also expected to be dealt with.
40. In regard to the relationship between the Guidelines and the Multilateral Agreement on
Investment being negotiated in the OECD, the representative of the OECD stated that there was rather
broad support among the countries participating in these negotiations on the following principles.
First, countries would use this occasion to reaffirm their commitment to the Guidelines.  Secondly,
non-OECD countries acceding to the MAI would be expe cted to join in this commitment and establish
national contact points to ensure effective follow- up in their countries.  Thirdly, the text of the
Guidelines would be annexed to the MAI without however altering their legal status.  Finally,
arrangements would need to be put into place within the OECD to ensure that non-OECD memberWT/WGTI/M/5
Page 13
countries would be able to participate fully in  the CIME on an equal footing with OECD member
countries.
41. The representative of Hong Kong, China aske d how the observance of the Guidelines could
be ensured in areas where they contained recommendations of a very general nature, such as the
recommendation that multinational enterprises should take fully into account the established generalpolicy objectives of the member countries in which they operated. The representative of the OECD
stated that the recommendation mentioned by the re presentative of Hong Kong, China was intended to
encourage enterprises to be sensitive to general policies and policy developments in host countries
and that this recommendation should be seen in conjunction with more specific recommendations.
Consultations were an important means of achieving the objective of this recommendation. In
response to a request by the representative of India for an explanation of the reasons for the legally
non-binding character of the Guidelines, he stated that, since multinational enterprises were subject tothe national laws of the countries in which they operated, there was already a legal framework
applying to them wherever they might be.  To create an additional layer of obligations was therefore
not necessary.  Responding to a question by the representative of Egypt on the experience with
specific issues that had arisen in the implementation of the Guidelines, he pointed out that, in
connection with a provision of the Guidelines recommending that enterprises provide reasonablenotice to representatives of employees of changes in their operations which would have major effects
on the livelihood of their employees, the CIME had adopted clarifications of the concept of
"reasonable notice".  Responding to a question posed by the representative of Brazil on the
relationship between the Guidelines and the OECD National Treatment Instrument,  he said that the
Guidelines and the National Treatment Instrument were adopted at the same time to provide abalanced framework for cooperation on international investment in which multinational enterprises
were asked to respect certain standards of conduct, while governments undertook to give them a
political commitment of national treatment, subject to exceptions.  In response to a question posed by
the representative of Pakistan whether it would be  possible for a non-OECD member to raise an issue
relating to the non-compliance with the Guidelines by an enterprise from an OECD country operating
in its territory before the relevant OECD bodies, he stated that there was no impediment to a non-
OECD member country drawing attention to the Guid elines in discussions with enterprises operating
in its territory but that in a formal sense it would not be possible for a non-member to have recourse to
the follow-up procedures in the CIME.  He note d that three non-OECD member countries, Argentina,
Brazil and Chile, had recently adhered to the National Treatment Instrument and the Guidelines and
had thereby acquired observer status in the CIME.
42. The representative of Canada pointed to the complementarity between the Guidelines and
recent Canadian, business-driven initiatives to develop voluntary codes of conduct for domestic and
international business activities by Canadian businesses.
43. The representative of Pakistan requested an explanation of the differences between the OECD
Guidelines for Multinational Enterprises and the draft UN Code of Conduct for Transnational
Corporations. The representative of UNCTAD said  that the OECD Guidelines were part of a package
that also contained decisions on national treatment, investment incentives and conflicting
requirements as part of the Declaration on International Investments and Multinational Enterprises.
On the other hand, the draft UN Code, negotiations on which had been terminated in the early 1990s
without adoption of a Code, would have addressed in a single, comprehensive instrument both the
rights and responsibilities of states and foreign investors. Like the Guidelines, the draft UN Code hadbeen intended to be a legally non-binding instrument. As regards the definition of foreign investors,
both the Guidelines and the draft UN Code adopted a broad definition of transnational corporations,
covering public and private enterprises and equity and non-equity forms of investment.  Both the draft
UN Code and the Guidelines established procedures for follow-up review and amendment.  In regard
to norms for conduct of enterprises, subjects that were dealt with in both the draft UN Code and theGuidelines included:  applicability of host country national laws to foreign enterprises;  adherence toWT/WGTI/M/5
Page 14
general policy goals and development objectives of host countries;  cooperation with host country
governments;  non-interference in internal political affairs of host countries;  abstention from corrupt
practices;  disclosure of information;  competition;  balance of payments and financing; taxation and
transfer pricing;  employment and labour relations;  environmental protection;  consumer protection
and transfer of technology.  In addition, the draft UN Code contained provisions on respect for humanrights and fundamental freedoms, adherence to socio-cultural values of host countries and review and
renegotiation of contracts.  Regarding standards of treatment of transnational corporations by host
governments, the draft UN Code covered a number of issues not dealt with in the OECD Declaration,
such as expropriation and compensation and the settlement of disputes.  In regard to geographical
coverage, the draft UN Code was intended to be a universal instrument while the Guidelines were
formally applicable only within the OECD area.  Finally, he noted that it was difficult to compare the
precise formulations of standards in the draft UN Code and the OECD Guidelines as there had beenmany versions proposed and discussed during the course of the negotiations of the draft UN Code.
The representative of the OECD stated that one important difference between the OECD Guidelines
and the draft UN Code was that the Guidelines were addressed only to the behaviour of enterprisesand did not contain provisions involving commitments by governments.  However, the Guidelines
were part of a package that included other elements that brought into play commitments bygovernments, notably a commitment to accord foreig n enterprises national treatment.  The Guidelines
themselves and other elements of the Declaration on International Investment and Multinational
Enterprises were in the nature of political commitments but certain follow-up procedures had been
established through a legally binding OECD Council Decision. The Guidelines did not contain a
formal definition of multinational enterprises. They contained a sentence that described the fact thatthey were enterprises operating in more than one country but there was no attempt to define the term
"enterprise" as such.
44. The representative of Brazil stated that it was interesting that both the draft UN Code of
Conduct for Transnational Corporations and the OECD  Guidelines had attempted to strike a balance
between obligations of governments and obligations of enterprises.  In the draft UN Code this balancehad been sought within a single instrument, while in the case of the Guidelines, it was reflected in
separate but related instruments. This notion of balance should also be kept in mind in discussions in
the WTO and was particularly pertinent to the relationship between work on investment and work on
competition.
45. The representative of India requested that the Secretariat circulate as documents of the
Working Group the UN Set of Multilaterally Agreed Equitable Principles for the Control of
Restrictive Business Practices, the draft UN Code of Conduct for Transnational Corporations and thedraft UN Code on Transfer of Technology. The representative of UNCTAD said that the documents
mentioned by the representative of India were contained in the UNCTAD Compendium of
International Investment Instruments which had been made available to delegations, additional copies
of which could be made available. The Working Group agreed to this suggestion.
Criteria for evaluating international investment agreements from a development perspective
46. Pursuant to a request made by the Working Group at the last meeting, the representative of
UNCTAD informed the Working Group of UNCTAD's work on criteria to evaluate the development
dimension of international investment agreements.  The development dimension of internationalinvestment agreements was a key area of UNCTAD's work.  UNCTAD had started its work on this
subject in connection with the first expert meeting devoted to bilateral investment treaties bycataloguing  development issues. This work had continued at the last expert meeting, held in
April 1998 on regional and multilateral agreements.  Before going further down this path, however,
UNCTAD had realized that there was a question as to whether this was the best approach to the issue
of the development dimension of investment agre ements. The starting point of UNCTAD's work in
this area was the consideration that development was the fundamental objective of developing countryWT/WGTI/M/5
Page 15
governments and of the international community as a whole.  To what extent and how this objective
could be served by international agreements that addressed specifically investment issues was a matter
that was currently receiving considerable attentio n.  If international agreements could indeed be
helpful in this respect, an important issue was how th e concerns of the principal actors in this regard -
host countries, home countries, investors - could be addressed in a mutually beneficial manner.  Itneeded to be recalled in this context that to a large extent an investment-friendly environment was
also a development-friendly environment.  The requir ements of such an environment needed of course
to be determined carefully.  There were various appr oaches that could be taken in this respect which
were not necessarily mutually exclusive.  One approach was to establish a catalogue of development-
friendly elements of international investment agreements.  Such a catalogue could be a checklist of
elements, without establishing priorities or a hierar chy among them, of issues and concerns that could
be consulted when negotiating international investment agreements.  It would be compiled to makesure that, when negotiating agreements, negotiators had indeed considered all relevant issues.  Given
the congruence to a large extent of an investme nt-friendly environment and a development-friendly
environment, such a catalogue would include virtually all issues that needed to be considered in the
context of investment agreements.  A  more elaborate version of this approach was to analyse each of
these elements in greater detail, including to determine how they contributed, singly or collectively, tothe development objective of host countries.  Indeed, this kind of analysis might be necessary in any
event because in practice it was possible that one element would counteract another. A second
approach began with the recognition that not only the contents, i.e. the specific treaty provisions of
investment agreements, needed to be development- friendly, but that their very structure needed to
reflect this objective, as should their implementation in terms of specific actions by various partiesinvolved.  The challenge was of course to spell out in operational detail what "structure" meant
beyond the statement of objectives.  On the other hand, when it came to the contents, the catalogue of
development-friendly elements was of course relevant.  A third approach would be to identify a set of
development objectives that international investment  agreements should serve.  Such objectives could
include, for example, securing a stable, predictable and transparent investment climate, increasing thelevel and quality of FDI flows; strengthening domestic entrepreneurship; and recognizing the non-
discriminatory exercise of governmental regula tory power in pursuing development objectives.
UNCTAD's efforts at identifying the development di mension of international investment agreements
were still at an early stage.  Any ideas, sugges tions and feedback from this meeting would help it
refine and develop further its work and would therefore be most welcome. He also hoped that the next
session of the UNCTAD Commission on Investment, which would be held in September would
address this issue of the development dimension of international investment agreements. If theWorking Group so wished, UNCTAD might be able to submit a more elaborate contribution on this
subject to the next meeting.
47. The representatives of Venezuela, Switzerland
, Egypt , the Philippines  on behalf of ASEAN
WTO Members, Mexico, the European Community , Pakistan , Argentina , India , Japan  and Costa Rica
expressed appreciation for the work done by UNCTAD regarding the development aspects of
international investment agreements and looked forward to the more elaborate contribution announced
by the representative of UNCTAD. It was said that the three approaches outlined by the representative
of UNCTAD were complementary, that the devel opment dimension of an investment agreement
should be reflected in concrete legally operative provisions and that consideration should also be
given to the social dimension of development.
48. The representative of India stated that UNCTAD's work on this subject seemed to be aimed at
exploring how the development dimension could be taken into account in individual elements of a
multilateral framework for investment. He questioned whether this approach adequately addressed the
fundamental concern raised by his delegation on previous occasions that a multilateral agreement, in
particular if it included rules on pre-establishment, would inherently remove the flexibility fordeveloping countries to pursue development policies tailored to their specific needs. Thus, rather than
assuming that the development dimension could be accommodated in specific provisions of anWT/WGTI/M/5
Page 16
agreement, it was necessary to deal first with the basic question of whether the very notion of a
multilateral framework on investment was per se  compatible with the need to preserve the ability of
governments to pursue development strategies suited to the specific problems confronted by
individual countries. The representative of Pakistan expressed agreement with these observations. The
representative of Japan stated that his delegation understood the concern expressed by the
representative of India but that it should also be acknowledged that, as stated by the representative ofUNCTAD, in order to be development-friendly a regime had to be investment-friendly. In the absence
of disciplines to encourage inward investment, the attainment of development objectives of an
agreement would be difficult. The representative of the European Community considered that a basic
question that had to be addressed in relation to both the pre- and post-establishment phases ofinvestment was whether the policy flexibility empha sized by the representative of India, which was
important to all governments, necessitated discrimination against foreign investment.
49. The representative of UNCTAD agreed with th e comment that the three approaches he had
described were complementary and that the challenge was how to give them concrete operational
content.  The statement made by India was important in terms of providing overall guidance.  It was
of course in the very nature of things that there was a tension between the establishment of a
multilateral framework in any area and retaining flex ibility for national governments and that finding
a proper balance between them was perhaps the single biggest challenge.  He agreed that this could
not be met by simply adding the development dimension to individual elements of an agreement.  As
indicated by the approaches explained earlier, one also had to look into the structure and the design of
an instrument and the guiding objectives which informed its concrete content.
50. More generally with respect to activities in UNCTAD in the field of investment, the
representative of UNCTAD drew attention to several publications and reports that had been made
available in the meeting room, including a recent study of bilateral investment treaties and a report on
the expert meeting held on 1-3 April 1998, and provided information on recent and forthcoming
meetings on investment in the framework of UNCTAD.
51. Following requests from the floor, the Working Group agreed that the statements made by the
representative of UNCTAD at this meeting, the report on the expert meeting held in April, reports on
future meetings in UNCTAD on investment, and the more elaborate paper announced by the
representative of UNCTAD on the development dimension of international investment agreements
would be circulated to Members.  It also agreed  to request UNCTAD to prepare an up-to-date list of
relevant UNCTAD publications and a timetable of future UNCTAD activities in the field of
investment. The Chairman drew attention to previ ously circulated documents containing information
on work done in UNCTAD (WT/WGTI/W/6 and 21).
Definition of investment in international investment agreements
52. The Working Group had before it written contributions from the delegations of Japan, Canada
and Korea on the issue of the definition of invest ment in international investment agreements.3 The
representatives of Japan and Canada  pointed to the merits of a broad, asset-based definition of
investment covering both direct and portfolio invest ment, consistent with the approach taken in most
existing international investment agreements.  In this connection, the representative of Canada
identified several specific questions arising in regard  to particular assets covered by such a definition:
whether branches and other unincorporated forms of business enterprise should be covered as
investments; the need to cover both majority and minority shareholdings; the need to address the
interrelationship between investment agreements and intellectual property agreements whenintellectual property was covered by the definition of investment; whether the coverage of loans as
                                                     
3 The contributions by Japan and Korea have since been circulated in WT/WGTI/W/43 and 49,
respectively.WT/WGTI/M/5
Page 17
investments should be limited to loans of a longer-term nature;  the need for clarifying the coverage of
contracts by distinguishing between contracts which constituted trade (i.e. the sale of goods or
services) and those where an investor had allocated significant financial technical and/or human
resources, and the question of whether the capital or other resources committed should be located in
the host country for an investment to be covered by the agreement. The representative of Korea
explained that Korean domestic law used a narrow, enterprise-based concept of foreign direct
investment in connection with the pre-establishment phase of investment and a broad, asset-based
definition in connection with the protection of investment in the post-establishment phase.  His
delegation considered that the definition of investment depended on its purpose and that the work in
the WTO should be limited to direct investment when considering issues relating to liberalization. It
was the understanding of his delegation that the Ministerial Declaration adopted at Singapore did not
intend the Working Group to deal with portfolio in vestment.  Given that almost all WTO Members
were also IMF members, he suggested that the Working Group use the IMF definition of FDI.
53. The representative of Costa Rica described the asset-based definition of investment used in
bilateral investment treaties concluded by his country and suggested that a definition of investment
should meet three basic criteria.  First, the definition should be comprehensive so as to include any
property susceptible of being invested.  Secondly, the definition should be sufficiently precise toexclude capital movements that were not investments but mere financial transactions with speculative
purposes. Thirdly, the definition should be based on realistic criteria, acknowledging the diverse
forms in which foreign investment occurred.  In the light of these criteria, investment should be
defined to include any type of property, tangible or intangible, including rights of whatever nature,
used in activities susceptible of generating profit that was owned or controlled, directly or indirectly,by an investor of a party and that had been acquired, with resources transferred to the territory of
another party or with resources reinvested in the territory of that party, by an investor of the first
party.
54. The representative of the United States favoured a broad definition of investment, including
equity, certain forms of debts, rights such as licences and permits, certain contractual rights,
intellectual property rights and tangible and intangible property. The definition should be broad
enough to cover new or hybrid forms of doing business that the business community might come to
use in the future and should be illustrative rather than exhaustive.  An investment of a national or
company was one that the national or company owned or controlled directly or indirectly.  Indirect
ownership or control could be through subsidiaries or other intermediate companies or persons,
including those of third countries. Given that control could exist even when there was no majority
ownership of an enterprise, the definition should not attempt to define control specifically. Thedefinition should recognize that a company, if owned or controlled by a national or company of
another party, was an investment and that interests in a company, such as equity, debt or similar
interests, also constituted an investment.  The definition of investor should cover nationals but not
permanent residents.  It should also include companies formed under the laws of another party, even if
the ultimate ownership of the company was held by a non-party investor.  In this connection, shesuggested that a properly drafted "denial of benefits" provision would enable parties to prevent non-
party nationals from establishing "mail box" corporations solely to gain benefits under an agreement.
The definition of investor and investment should capture all types of entity that were recognized by
applicable law even though formal legal registration might not be required.  Government and not-for-
profit organizations should be included in the definition of investor both because they made foreigninvestment and to ensure that foreign investors rece ived the same treatment as local governmental and
not-for-profit organizations under both national treatment and MFN treatment. The definition of
investment should also include contractual interest s involving a level of commitment and risk by the
investor great enough to justify consideration as an investment, such as long-term lease and
management contracts. It was common in international practice to include tangible and intangibleproperty.  Real property was the most common form of investment and was universally recognized as
such.  Rights related to real property, such as leases, mortgages, liens and pledges were also generallyWT/WGTI/M/5
Page 18
accepted as investment.  It was also generally accepted today that all forms of intellectual property
might constitute an investment.  It was important to note that the inclusion of intellectual property
rights in the definition of investment did not require a particular level or nature of protection of
intellectual property rights and that the level of protection of specific forms of intellectual property
rights was addressed in other contexts, e.g. WTO.  Another form of investment that should beexplicitly recognized in the definition was rights conferred pursuant to law, such as licences and
permits.  This would include, for example, mining concessions.
55. The representative of Peru stated that there was likely to be widespread acceptance of an
approach defining investment in terms of any asset owned or controlled by an investor of a party in
the territory of another party that entailed the transfer of resources and was used for a profit
generating activity.  Likewise,  there was likely to be agreement that this definition could be better
understood if accompanied by a non-exhaustive list of covered assets, including enterprises, shares inenterprises, loans, claims to money, elements of intellectual property, rights to concessions, licences,
etc.  However, the precise scope of the items to be included in this list also raised some difficult
questions, for example with regard to the conditions under which real estate and contracts were to be
considered as investment. As to the definition of investor,  he stated that bilateral agreements defined
investors to include natural persons and juridical persons or enterprises. In respect of natural persons,the question could be raised as to whether residents should be covered by the definition of investor.
As to juridical persons, the definition of investor had turned on three criteria:  place of incorporation,
administrative seat and nationality of control. If one wanted to make the definition more precise, a
combined application of these criteria was useful.  It was also possible to add a criterion of effective
production. Finally, it was also necessary to consider the issue of the appropriate treatment ofinvestments made indirectly, i.e. through subsidiaries established in third countries.
56. The representatives of Egypt and India
 stated that the definition of investment should be
considered in the context of the particular agreement in which it appeared. Thus the fact that, as
mentioned in the paper submitted by Canada, bilateral investment treaties concluded by their
countries defined investment in terms of every kind of asset should be seen in conjunction withfeatures of these treaties that narrowed the scope of application of the definition, for example by
providing national treatment only post-establishment. Contrary to the view expressed favouring a
broad, asset-based definition in general, the need to view the definition of investment in its
interrelationship with other aspects of an agreement meant that approaches adopted in bilateral
agreements were not necessarily appropriate in other contexts. The representative of India also stated
in this respect that the decision to establish this Working Group had been taken at the SingaporeMinisterial Conference based on the understanding that  the work would be confined to foreign direct
investment.  He recalled that the entire discussion under item I had focused on the effects of foreign
direct investment, as illustrated by the table of contents of the Secretariat synthesis paper in W/38.  If
a wider definition of investment were to be considered, it might be necessary to broaden the scope of
the debate under item I as well. The representative of Egypt expressed some hesitation as to the
appropriateness of including intellectual property in the definition of investment and pointed to the
need for further consideration as to whether permanent residents should be included in the definition
of investor.
57. The representative of Australia, referring to the question posed by Japan in WT/WGTI/W/34
as to whether consideration should be limited to FDI or should include portfolio investment as well,
noted that the UNCTAD World Investment Report 1997  had observed that there might be a number of
policy implications of portfolio investment which required further study, in particular the causes and
direction of volatility in portfolio investment flows, and the impact on host economies.  Her
delegation was still studying these complicated issu es and their relationship to the work of the
Working Group and had not yet reached a definitive position on this matter. The widest possible
definition of investment had generally been pursued in bilateral investment treaties.  It would beworthwhile examining whether existing internati onal instruments drew any distinction between FDIWT/WGTI/M/5
Page 19
and portfolio investment.  However, in the context of an instrument on trade-related investment
issues, the relevant question was perhaps more whether the approach should be asset-based, as in the
draft Multilateral Agreement on Investment, or based on the concept of commercial presence as in the
GATS but extended to goods as well.  The definition of investment was important in relation to how
certain principles were applied or were relevant.  Within this definition, for example, there might be aneed to make a distinction between pre- and post-es tablishment treatment.  Clearly, some issues such
as security of investment, rather than access, might be better handled through an asset-based
approach.
58. The representative of Brazil highlighted the complexity of the question of how portfolio
investments should be treated for purposes of defining investment.  On the one hand,  there was a
rationale for including portfolio investment in the definition in order to provide protection for such
investment.  On the other hand, governments had legitimate concerns regarding the negativeconsequences of the volatility of portfolio investment flows.  A related problem requiring further
attention was that the distinction between direct and portfolio investment was far from easy to make
in practice.  He suggested that the Working Group request UNCTAD to explain the findings of the
study contained in the recent World Investment Report  on the effects of portfolio investment flows in
the context of balance of payments.  It might also be useful to consider how this issue had been dealtwith in the IMF.
59. The representative of New Zealand stated that a major issue to be addressed in the Working
Group's discussion on investment was the demarc ation between investment and WTO agreements,
particularly the GATS.  This should be resolved in a clear fashion by the Working Group.  She also
observed that in the real world there were some complicated transactions which posed a problem interms of whether they should be treated as investments and proposed that the Working Group examine
a range of such transactions.  For example, the provision of public funds by a government to a
government-owned institution, such as a public hospital or public research institute, should not be
covered by the definition of investment because it did not bear the characteristics of an investment
such as change of ownership or control.  Similarly, government purchases of services from a privatelyowned entity should also not be covered.
60. The representative of the European Community stated that a key issue emerging from the
debate was the need to take account of the close interrelationship between the definition of investment
and the nature of substantive obligations contained in an agreement.  There was clearly a difference
between considering portfolio investment in re lation to the protection of investment against
expropriation and considering portfolio investment in the context of the application of national
treatment to the pre-establishment phase of an investment. Although a possible approach was to usedifferent definitions for the purpose of different obligations, as suggested by Korea, the experience of
his delegation was that using more than one definition could easily lead to unintended results.
Likewise, a narrow definition was undesirable in the context of investment protection.  The most
promising approach appeared to be to start with a single, broad definition but to carefully examine the
applicability of specific substantive obligations to the elements covered by that definition.
61. The representative of the Philippines, speaking on behalf of the ASEAN WTO Members, said
that his delegation might address this issue at some future stage from the perspective that the
definition of investment would depend largely on the objectives of any set of rules on investment.
62. The Chairman said that the Working Group would need to revert to this matter at its next
meeting. In view of the large number of issues raised, he asked the Secretariat to circulate a list of the
issues raised for further study on this matter. He also urged delegations to make contributions.WT/WGTI/M/5
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Other comments on item IV
63. The representatives of Costa Rica and Australia  commented on issues raised by the delegation
of Japan in paragraph 3 of WT/WGTI/W/34 as requiring attention in regard to possible future
multilateral work. The representative of Costa Rica stated that the principle of national treatment was
the cornerstone of a scheme that promoted growth of  investment flows at a global level and that it was
therefore necessary to guarantee national treatment in the fullest manner possible on the basis of clear
and precise concepts and in a manner that ensured transparency.  National treatment should apply not
only to established investment but also to the pre-establishment phase.  It should apply both de jure
and de facto and at both federal and sub-federal levels of government.  Clear criteria should be
developed to identify the potential investor. Exceptions, reservations and temporary safeguards would
be necessary but these had to be explicit and clearly identified and subject to control.  National
treatment should be of a general character and provision should be made for the removal andprogressive liberalization of sectoral reservations within appropriate timetables.  It might be necessary
to allow for various types of sectoral reservations, for example temporary reservations, that would be
subject to pre-established timetables for their removal and other types of reservations that would be
subject to periodic rounds of negotiation.  General exceptions should not go beyond what had been
established in the WTO agreements. A temporary safeguard might be necessary for serious balance-of-payments difficulties,  the invocation of which would be subject to verification. The preceding
considerations also applied to the issue of MFN treatment, provided however, that MFN treatment
should be considered as a minimum advantage and as such be subject only to general exceptions and
not to sectoral reservations and temporary derogations. MFN treatment should also be accorded
unconditionally.
64. The representative of Australia, referring to the issue raised by Japan regarding the
advantages and disadvantages of negative list and positive list approaches, recalled that her delegation
had already offered some observations on this issue (WT/WGTI/W/23).  If the purpose was
liberalization of rules, the principles of national treatment and MFN should apply.  This therefore
suggested that a negative list approach should as a general point be a temporary exception to MFN.The GATS was a hybrid of the two approaches, containing a positive listing of sectors and a negative
listing of limitations on market access and national treatment.  The purpose of international
instruments on investment was to provide transparency  and predictability in treatment.  Negative lists
outlined exceptions to general treatment.  This raised the issue of whether negative lists should
represent permanent exceptions or areas which were currently not in conformity but which would be
brought into conformity through gradual liberalization.  The majority of bilateral investment treaties
applied MFN and national treatment standards only to the treatment of investment once it had beenadmitted. This underlined the importance of the definition of investment and how certain principles
would be applied to the pre- and post-establishment phases of an investment.  This could also suggest
that any definition relate only to post-establishment investment.  As a general matter, it was important
to ensure that any approach converged with that of the GATS. With respect to the issue raised by
Japan regarding mechanisms for investment approv al, transparency in the mechanism would be an
important factor.  As her delegation had noted previously, a transparent screening process did not
necessarily impede FDI but rather might be a predictable factor in the administration of FDI and not a
determining factor in FDI decisions. Regarding the issues raised by Japan on performance
requirements, she recalled that her delegation had proposed further examination of a number of
measures listed in the World Investment Report 1996  relating to admission and establishment,
ownership and control and operations of enterprise s and had pointed to the need for further study of
investment incentives (WT/WGTI/W/23). On the question of whether mechanisms for investor-state
disputes should be provided and whether the scope of such disputes should be limited to investment
protection, she considered that there might again be a need to make a distinction between the pre- and
post-establishment phases of investment. Given the intergovernmental nature of the WTO, the issue ofinvestor-state dispute settlement in the WTO required careful examination.  However,  conceptually
there could be rules requiring domestic judicial review.WT/WGTI/M/5
Page 21
65. The representative of Egypt stated that issues such as the merits of positive and negative list
approaches and the nature of dispute settlement procedures raised complex questions that might
usefully be discussed in the Working Group from an educational perspective but that it would be
premature to attempt to reach conclusions on these issues.  In regard to negative list and positive list
approaches, he pointed to the difficulties that had been encountered with the negative list approach inthe OECD negotiations on a Multilateral Agreement on Investment  The experience with the GATS
appeared to indicate that a positive list approach was preferable when a new area was for the first time
the subject of liberalization at a multilateral level.
66. The representative of Hong Kong, China made a statement on the advantages and
disadvantages of bilateral, regional and multilateral approaches to investment rule-making.  Bilateral
investment treaties could be tailored to the specific circumstances of the parties concerned and any
specific concerns such as development issues might be addressed.  They were also relatively easy toconclude and could therefore be achieved more quickly than multilateral or regional agreements.
They could also improve bilateral economic and diplomatic relations.  Like bilateral investment
treaties, regional agreements on investment were more politically feasible than multilateral
agreements as they involved a limited number of participants and could be more precisely customized
to address individual concerns. Nevertheless, as the number of bilateral investment treaties andregional agreements continued to proliferate, an economy might sign on to various investment
agreements containing provisions with different standards and disciplines.  This might pose confusion
to multinational enterprises operating on a global scale.  Generally, multilateral investment rules were
likely to represent the lowest common denominators acceptable to the participants. The global
application of broadly the same investment disciplines was less complex for foreign investors than aweb of bilateral investment treaties and regional agreements, thus facilitating compliance.  A
multilateral agreement could diffuse conflicts between economies' rules and reduce distortions of
investment flows and the inefficient allocation of resources caused by the great number and variety of
regulations on investment issues.  A multilateral regime was also likely to be more stable as an open
commitment to investment liberalization could deter economies from backtracking later, thus givinggreater confidence to investors.  However, negotiation of a multilateral framework would take time.
Prolonged negotiations would inevitably create uncertainties to investors.
67. The representative of the European Community st ated that, although the level of ambition of a
multilateral agreement could not be as high as that in a bilateral or regional agreement, it would not
necessarily lead to the lowest common denominator . Another relevant consideration regarding the
advantages of a multilateral framework concerned the benefits of incorporating investment rules into
an existing framework of WTO principles.
68. The Working Group took note of the statements made and agreed  to revert to item IV of the
Checklist at the next meeting. The Chairman encouraged delegations to make contributions.  The
representative of Japan stated that his delegation would welcome further comments on the issues
raised by his delegation in paragraph 3 of WT/WGTI/W/34.
E. OBSERVER STATUS FOR INTERNATIONAL INTERGOVERNMENTAL
ORGANIZATIONS
69. In the light of the ongoing process in the General Council, the Working Group agreed to
maintain the status quo by inviting those organiza tions present at the meeting to attend the next
meeting on the same basis.WT/WGTI/M/5
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F. OTHER BUSINESS
70. The Chairman said that, at the next meeting, to be held on 1 and 2 October, the Working
Group would revert to all items of the Checklist and that the informal Note from the Chair in
document No. 6004/Rev.2 would be revised to take account of the points raised at this meeting.
71. The Chairman stated that another issue for the agenda for the next meeting arose from the
provision in the Singapore Ministerial Declaration that the General Council would keep the work of
the Working Group under review and determine afte r two years how this work should proceed.  An
important question in this connection was what type of report the Working Group should submit at the
end of the year to the General Council so as to enab le the Council to take the decision called for in the
Ministerial Declaration.  At the meeting in October the Group would have to take a decision on the
nature of the report that the Group planned to submit in order to enable the Secretariat to prepare a
draft report for consideration by the Working Group at its meeting scheduled for 23-24 November.  Itwould seem that the report would have to contain two basic elements:  a description of the work done
and any recommendations to the General Council that the Group could agree upon, in particular on
how the work should proceed after 1998.  Delegations would be invited to express their views at the
meeting in October on the nature of such recommendations.  In regard to the descriptive part on the
work done in the Group since its establishment, there would appear to be two basic options.  Oneoption was to present a brief factual report to the General Council similar to the report that had been
submitted at the end of 1997.  This type of report would only identify the main themes discussed in
the Working Group but would not attempt to summarize the substance of the debate that had taken
place. The other option would be to present a longer report that would reflect in a balanced and
descriptive way the substantive points made in regard to the various items of the Checklist.
72. The representative of Switzerland said that an additional element that might need to be
considered at the next meeting in regard to the nature of the report was whether the report should be
by the Working Group or by the Chairman.
73. In response to questions posed by the representative of Japan, the Chairman stated that he
expected delegations to comment at the meeting in October on both the options regarding the
descriptive part and the recommendations that should be contained in the report and that he intended
to consult delegations informally  prior to that meeting.
74. The representative of Hong Kong, China underlin ed the importance of ensuring that the report
to the General Council fully reflect the intens ive work done in the Working Group. In regard to
possible recommendations, an important element to be considered concerned the mandate for, and the
modalities and time-frame of, a possible extension of the Working Group, bearing in mind that
preparations would start soon for the third ministerial conference in 1999.
75. The representative of India reserved his delegation's position on the issues raised.  Until
13 December the Working Group was in a purely educational mode and was not compelled to take
any particular course of action.
76. The representative of the European Community stated the report should at least contain a full
reflection of the substantive work done in the Group.
77. The Working Group took note of the statements made and agreed  to revert to this matter at its
next meeting.
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