WORLD TRADE
ORGANIZATIONWT/WGTI/W/111
12 April 2002
(02-2011)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM JAPAN
The following communication, dated 11 April 2002, has been received from the Permanent
Mission of Japan.
_______________
SCOPE AND DEFINITION
I. INTRODUCTION
1. The November 2001 Doha Ministerial Declaration (WT/MIN(01)/DEC/W/1) clearly focuses
the work of the Working Group (WG) in the period until the Fifth Session of the Ministerial
Conference on clarification of the various elements of a future multilateral investment framework.
2. Of the elements in question, this paper explores "scope and definition", examining a number
of related points. Scope and definition are key clarification issues in that they will affect the shape of
the entire framework, and as such, they will require ongoing discussion at this and future WG
meetings.
3. Regarding the theme of scope and definitions, a number of submissions have been presented
in the past meetings of the WG, and they should serve as a useful reference1.
II. SCOPE
4. In terms of scope, this paper concentrates on the relation between the possible investment
framework and GATS. As GATS provides disciplines for services related investment, discussion on
the relation between the two disciplines will be an  essential part of considering the scope of an
investment framework.
A. SCOPE OF GATS
5. GATS applies to "measures by Members affecting trade in services" (Article 1.1). However, it
excludes those measures related to protecting public morals, maintaining public order, protecting life
or health, and protecting security interests (Articles 14 and 14 bis). (These exclusions should be borne
in mind when considering exemptions to investment rules.)
                                                     
1 WT/WGTI/W/43 ("Definition of Investment" – Japan) , W/49 ("Definition of Investment" – Korea), W/60
("Definition of Investment" – Costa Rica), W/61 ("Definition of Foreign Investment" – IMF), W/76 ("Issues raised and
points made on the definition of investment" – WTO Secretariat), W/80 ("Definition of Investment" – Australia), W92("Definition of ‘Investment’ in the WTO Rules on Investment" – Japan).WT/WGTI/W/111
Page 2
6. For the purposes of GATS, trade in services is defined as the supply of a service in one of the
following modes:
(a) from the territory of one Member into the territory of any other Member;
(b) in the territory of one Member to the service consumer of any other Member;
(c) by a service supplier in the territory of one Member, through commercial presence in
the territory of any other Member;
(d) by a service supplier of one Member, through the presence of natural persons of a
Member in the territory of any other Member.
7. These modes are presented in diagram form in Annex 1. The third mode, namely the supply
of services through commercial presence, applies to direct investment in the services area, such as a
bank’s establishment of a branch. GATS can therefore be said to include disciplines related to direct
investment in services.
8. Clearly, then, direct investment in services is already included within the scope of the WTO
Agreement. At the same time, no comprehensive agreement exists for direct investment in areas
outside services, and given the enormous impact which direct investment has on trade in
manufacturing, the lack of rules in this regard creates a striking imbalance in the WTO Agreement.
B. DISTINCTION BETWEEN GOODS AND SERVICES
9. In 1998, the share of the direct investment flow absorbed by manufacturing sectors and
services sectors was 44.0% and 38.9% respectively on a world basis, 37.5% and 42.9% in the case of
developed countries, and 66.8% and 25.0% in the case of developing countries2. The scale of direct
investment in manufacturing is therefore much the same as for services, with the manufacturing ratio
particularly large in developing countries (see Annex 2). Given the reality of such large-scaleeconomic transactions, the Doha Ministerial Declaration recognized the "case for a multilateral
framework to secure transparent, stable and predictable conditions for long-term cross-border direct
investment, particularly foreign direct investment, that will contribute to the expansion of trade"
(Paragraph 20).
10. With regard to extending the scope of an investment framework as far as direct investment in
services is concerned, we need further careful consideration. Even in the case that investment in
services sectors is excluded, it may prove unexpectedly difficult to categorize individual investment
activities as belonging to either manufacturing or services. In fact, even the 1998 UNCTAD statistics
on FDI inflow by industry (Annex 2) indicate that  8.4% of world investment (1.6% for developing
countries, 10.3% for developed countries) belongs to industries which cannot be specified. However,
if a possible agreement on investment follows the precedent of many international investment
agreements and sets the provision regarding investment as the establishment, acquisition, holding, oroperation, etc. of investment assets (companies, stocks, real estate, etc.) by investors, it naturally
covers direct investment in the services sector and there is a strong likelihood of duplication with
GATS on economic activities through commercial presence.
11. Where an investment framework is created, we could well find the same case subject to both
GATS and the new investment framework. The WG  should give consideration to whether a
preference/subordination clause should be designed in relation to GATS and the investment
framework, or whether panels should be left to resolve any problems that occur.
                                                     
2 "World Investment Report" (UNCTAD, 1999).WT/WGTI/W/111
Page 3
C. INDUSTRY CLASSIFICATIONS
12. Given that the future investment framework could adopt a "positive list" approach (included
among the elements for clarification in the Doha Ministerial Declaration), the WG needs to conduct
some sort of consideration of industry classifications. It is desirable that the deliberation on the scope
of a possible investment framework should proceed through this work.
13. The GATS experience should prove a valuable reference in approaching this work. A
commitment schedule was created for GATS based on a service classification table
(MTN.GNS/W/120) drawing on the United Nati ons’ Central Product Classification (CPC)3 system.
The commitment schedule covers 155 types of services, with Members listing those service areas
where they can guarantee fulfilment of national treatment and market access obligations.
(Transparency and MFN treatment are as a rule co nsidered obligatory for all service areas, with
Members required to list up exemptions.) As with the GATS, a classification table could be createdfor the investment framework that deals with non-se rvice (or manufacturing) areas, using this as the
basis for a commitment schedule. Another option of using the Harmonized Commodity Description
and Coding System (HS) deserves deliberation. In that case, taking into consideration that the
products manufactured by companies vary, the use of a 4-figure or a 6-figure category is unrealistic
because they are divided in too much detail, so that a 2-figure category or the category above, i.e. 21Sections, would be the subject of consideration.
III. DEFINITION
A. B
ASIC APPROACH TO INVESTMENT CATEGORIES
14. International investment can be divided broadly into foreign direct investment (FDI) and
portfolio investment. Basically, the bulk of FDI comprises investment aimed at building long-term
economic relations in the host country, while, seemingly, most portfolio investment is considered to
be speculative in nature and conducted with the primary goal of investment profit. International
investment has, however, become more diversified in recent years, blurring the distinction between
these two types. We will return to this issue later.
15. The International Monetary Fund (IMF) defines direct investment as the category of
international investment that reflects the objective of a resident entity in one economy obtaining a
lasting interest in an enterprise resident in another economy4. The "lasting interest" implies the
existence of a long-term relationship between the direct investor and the enterprise and a significant
degree of influence by the investor on the management of the enterprise. Direct investment comprises
not only the initial transaction establishing the rela tionship between the investor and the enterprise but
also all subsequent transactions between them and am ong affiliated enterprises, both incorporated and
unincorporated. The direct investment capital actually transacted through direct investment activitiesis capital provided by a direct investor to a direct investment enterprise or received by a direct
investor from a direct investment enterprise. The components of direct investment capital transactions
are equity capital, reinvested earnings, and other capital associated with various intercompany debt
transactions.
16. Portfolio investment includes, in addition to equity securities and debt securities in the form
of bonds and notes, money market instruments and fi nancial derivatives such as options. Excluded are
any of the aforementioned instruments included in the categories of direct investment and reserve
                                                     
3 International classification standard for goods. Designed to embrace in principle all goods which can be traded,
including not only the goods and services produced through econo mic activities, but also tangible assets such as land, and
intangible assets such as real estate.
4 Communication from the IMF entitled "Definition of Foreign Investment" (WT/WGTI/W/61).WT/WGTI/W/111
Page 4
assets. To put it simply, cross-border investment in securities is investment with the intention of
profit-making rather than management control, and this is not categorized as direct investment.
17. Direct investment is typified by green-field investment, whereby a completely-financed
commercial presence is established in another country (typically plants in the case of manufacturing,
branches in the case of services), or cross-border mergers and acquisition. In this regard, the IMFdefinition stipulates that where the ratio of stockholdings by the foreign investor is 10% or over, it
shall be included in the category of direct investment (the same definition as applied under Japan’s
Foreign Exchange and Foreign Trade Law). When the investment ratio is less than 10%, the
investment is deemed to be portfolio investment. The relation between portfolio and direct investment
is presented in diagram form in Annex 3.
B. D
IRECT INVESTMENT AS DEFINED IN INVESTMENT AGREEMENTS
18. Existing investment agreements offer a range of definitions according to the purpose of the
agreement. As explained by Japan in an earlier paper5, these definitions can be divided into three
broad categories. The first category is "enterprise-based", which focuses on the enterprise, whereby
investment is defined only as direct investment in the context of the relationship with an enterprise.
The second category is "asset-based", which uses asset standards, and is a wide-ranging definition that
includes both portfolio and real estate investment6. There is room for variation in this category,
however, such as the treatment of short-term capital regulations or exclusion of the movement of
capital based on speculative financial transactions. The third type of definition allows for optional
investment criteria, with the particular criteria determined according to goals and provisions. The
definition may be called "selective asset based", which changes according to the respective specific
obligations incurred under investment rules. For example, one investment arrangement applies anarrow definition in the case of investment liberalization, and a broad definition for investment
protection.
19. Amidst this multitude of approaches to defining investment, Japan considers the use of the
enterprise-based approach limited to direct investment as the most appropriate starting point of the
discussion on the definition for investment in a mult ilateral investment framework. Japan’s reasoning
is as follows.
1. Significance of long-term economic relations
20. The investment covered by a multilateral framework should be restricted to investment
intended to build long-term economic relations with the host country. As is noted in Paragraph 20 of
the Doha Ministerial Declaration, the multilateral framework should address that investment which
contributes to the expansion of trade, and, ultimately, to the economic development of the host
country. It is clear that direct investment meets these conditions. It is equally clear that it would not beappropriate to create a legal framework within the WTO concerning short-term investment of a
speculative nature.
21. Disciplines on short-term capital movement are in any case outside the WTO’s mandate. This
particular issue is being discussed by financial experts in, for example, the Financial Stability Forum,
in the context of stabilizing and strengthening the international financial system
7.
                                                     
5 Communication from Japan entitled "Definition of ‘Investment’ in the WTO Rules on Investment"
WT/WGTI/W/92.
6 For example, a WG paper from Costa Rica (WT/WGTI/W/60) suggests that both direct and portfolio investment
should be included in the investment definition, but that financial transactions for purely speculative purposes and capitalmovement in the form of loans with no relation to investment should be excluded.
7 Made up of a number of international institutions, the Financial Stability Forum contains a working group on
capital movement that has been conducting considerations from an expert standpoint, producing a report in April 2000WT/WGTI/W/111
Page 5
2. Statistical clarity
22. The IMF provides a clear definition of direct investment, and compiles statistics accordingly.
If the definition of investment used in the mult ilateral investment framework were focused on direct
investment, this would facilitate clarification of the scope of the investment to be covered by theframework. The inclusion of other international movements of capital is highly likely to create
problems in terms of gathering data and maintaining credibility of statistics, and it could be difficult to
ascertain the actual investment activities covered by the framework. To avoid creating unnecessary
confusion over the actual scope of the framework, it would be safer to exclude all but direct
investment.
C. F
UTURE ISSUES
23. The treatment of portfolio investment of a l ong-term nature presents problems in terms of
"long-term cross-border investment". More specifically, further consideration will probably be needed
as to whether owning of equity interest at a low rate (of no more than 10%, according to the definition
by IMF) but aimed at long-term economic relations in the host country should be excluded from the
coverage. As noted above, if the definition by IMF is adopted, such investment would not be
recognized as direct investment (see the "Foreign Portfolio Equity Investment" section of Annex 3).
However, much portfolio equity investment in  recent years involves active participation in
management from a long-term perspective, and is not necessarily only investment of a speculative
nature.
24. If the definition of a possible multilateral agreement on investment were to add long-term
portfolio investment to direct investment as defined by the IMF, the actual scope of the said portfolioinvestment would need to be clearly delineated. Detailed considerations will be needed on questions
such as the concrete definition of "long-term", and the possibility of dividing long-term portfolio
equity investment into speculative investment and investment for the purpose of lasting interest, as
well as dealing with the according statistical challenges.
                                                                                                                                                                    
(http://www.fsforum.org/Reports/RepCF.h tml). Finance Ministers also compiled a report entitled "Strengthening the
International Financial Architecture" at the Kyushu-Okinawa Summit in July 2000.WT/WGTI/W/111
Page 6
Annex 1
Four modes of trade in services
Mode and Description Example Diagram
1 Cross-border supply
consumer supplier
< Border-crossing of a service>
2 Consumption abroad
supplier
< Border-crossing of a consumer>
foreign consumer
3 Commercial presence
foreign supplier
consumer
4 Presence of natural persons
foreign supplier
(natural person)
< Border-crossing of suppliers>
consumer
< Symbols >
: supplier of a service
: consumer of a service: supply of a service
: border -crossing of suppliers/consumersSupply of a service by a service
supplier of one Member through
commercial presence in the territoryof another Member
< Border-crossing of commercial
presence>(commercial presence)Financial servicesprovided by a
local branchLegal advices by
telephone from a
lawyer living
abroad
Local
consumption by aforeign tourist or
businessperson,
such as rental ofelectronicSupply of a service from the
territory of one Member into the
territory of another Member
Supply of a service in the territory
of one Member to a serviceconsumer of another Member
Supply of a service by a service
supplier of one Member through the
presence of natural persons of that
Member in the territory of anotherMemberPerformances of a
foreign artistWT/WGTI/W/111
Page 7
Annex 2
FDI inflows by industry (1998)
(Values in millions of US dollars)
Primary* Manufacturing Services Unspecified All industries
World 10,364 52,776 46,653 10,044 119,837
Developed counties 8,577 34,974 39,999 9,620 93,170
Developing economies 1,787 17,802 6,654 424 26,668
Africa 65 183 254 137 639
South, East and South-
East Asia1,044 14,140 2,994 279 18,457
Latin America and the 
Caribbean678 3,479 3,407 9 7,572
* Agriculture, hunting, forestry and fishing, mining, quarrying and petroleum and unspecified primary
(UNCTAD "World Inve stment Report"1999)
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
World
Developed counties
Develping economies
  Africa
  South, East and South-
East Asia
  Latin America and the
Caribbean
Primary  * Manufacturing Services UnspecifiedWT/WGTI/W/111
Page 8
Annex 3
Relationship between Foreign Direct and Portfolio Investment
(based on the definition by the IMF)
Greenfield Investment
Foreign Direct Investment
Possession of 10% or more of
the ordinary shares or voting
power or the equivalent)
) Cross-border
Foreign Portfolio
Equity InvestmentPossession of less than10 % of
the ordinary shares or voting
power or the equivalent) M&A
)
Foreign Portfolio Investment Equity securities and debt
securities, including bonds and
notes, money market
instruments, and financial
derivatives
__________