RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTI/M/12
31 October 2000
(00-4560)
Working Group on the Relationship
between Trade and Investment
REPORT ON THE MEETING OF 11 OCTOBER 2000
Note by the Secretariat
1. The Working Group on the Relationship between Trade and Investment held its twelfth
meeting on 11 October 2000 under the Chairmanship of Ambassador Man Soon Chang (Korea).  The
Working Group adopted the agenda as proposed in WTO/AIR/1367.
A. IMPLICATIONS OF THE RELATIONSHIP BETWEEN TRADE AND INVESTMENT
FOR DEVELOPMENT AND ECONOMIC GROWTH (ITEM I OF THE CHECKLIST OFISSUES SUGGESTED FOR STUDY)
2. Statements were made on the relationship between foreign direct investment (FDI) and the
transfer of technology, and on a contribution pres ented by India at the meeting of 8 June 2000
(WT/WGTI/W/86).
(i) The relationship between FDI and the transfer of technology
3. A number of delegations made comments on a study prepared for the World Bank which
provided a survey of the literature on trade, FDI and the transfer of technology (WT/WGTI/W/88).  In
addition, comments were made on a contribution presented by Korea at the meeting of 8 June 2000 on
Korea's experience with the impact of FDI on the transfer of technology (WT/WGTI/W/82).
4. The representative of Korea stated that the study contained in WT/WGTI/W/88 was a very
useful survey of recent empirical and theoretical studies on the issue of trade, FDI and the transfer of
technology.  The observations made in this study regarding the potential channels of technologicalspillovers from FDI were relevant to the analysis of the costs and benefits of technology transfer
requirements.  The conclusions drawn in the study were consistent with Korea's own experience, as
described in WT/WGTI/W/82.  FDI was a prominent channel of technology transfer and, regardless
of the evidence on the extent of spillovers, FDI did result in a more effective use of resources in host
countries.  In addition, liberalization of trade and FDI policies might need to be complemented byappropriate policy changes in areas such as education, research and development and human capital
formation in order for developing countries to take full advantage of increased trade and FDI.
5. The representative of the European Communities highlighted the conclusion drawn in
WT/WGTI/W/88 that, when research and development and high technology production were carried
out in close geographical proximity to a country, in particular a developing country, spillovers weremore intense.  In any case, spillovers were neither exclusively national nor exclusively international
but were probably both to some extent.  Another important conclusion was that FDI was a prominent
channel of technology transfer and that FDI appeared to be more conducive to technological
spillovers in the host country than licensing and jo int ventures.  Regardless of whether technological
spillovers were more vertical than horizontal in nature, the clear message was that FDI resulted in a
better allocation of resources in host countries.  Moreover, the evidence from empirical studiesWT/WGTI/M/12
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indicated that compulsory transfer of technology requirements did not give the best results.  Rather, it
was important to complement the FDI regime of a country with steps to increase the competitiveness
of the domestic market  and to enhance local technical skills.  Capacity building efforts, such as
policies in support of local technological capabilities, effective competition policy and adequate
protection of intellectual property rights appeared to  be the most appropriate policies that countries
could implement in order to enhance and encourage technology transfer and spillovers.
6. The representative of Hungary,  referring to  a study by Blomström and Sjoholm mentioned on
page 23 of WT/WGTI/W/88, stated that it was significant that this study had found that no substantial
difference existed between joint ventures and wholly-owned subsidiaries with regard to technology
spillover effects.  He shared the conclusion that  FDI was a prominent channel of technology transfer
and considered as particularly noteworthy the point  that there was empirical evidence did not support
the idea that mandatory technology transfer requirements would lead to more learning by local firmsthan FDI.  The key to ensure the transfer of technology was the creation of a stable and predictable
regulatory environment.  His delegation also agreed with the observation that FDI spillover effects
might be vertical rather than horizontal in nature.  This was why the creation of an FDI-friendly
environment was not enough and why it should be accompanied by government efforts to ensure the
diffusion of modern technologies to local industries, e.g. by fostering backward linkages.  Hisdelegation also agreed that the absorptive capacity in the host country was crucial for obtaining
significant benefits from FDI.
7. The representative of Mexico welcomed the study contained in WT/WGTI/W/88 as a
comprehensive review of the main empirical and theoretical studies on the complex issue of the
relationship between FDI and the transfer of technology.  Notwithstanding that there were sometimesdiscrepancies in the results of these studies,  it was possible to identify certain general conclusions.
The study indicated that, where foreign enterprises had the option to establish in developing countries,
FDI was the preferred route, and that FDI was thus a prominent channel for the transfer of technology.
In the case of other means of transfer of technology, such as licensing and joint ventures,  the study
pointed to the lack of empirical evidence that these alternative means resulted in a larger absorption oftechnology by domestic firms.  The study also noted that, while there was no firm evidence to confirm
the existence of horizontal positive externalities or spillovers, there was evidence that FDI could entail
a transfer of technology through vertical linkages.  This was the case, for example, of the transfer of
technology from multinational enterprises to host-country enterprises through arrangements with local
suppliers or buyers.  This was probably one of the channels of the transfer of technology that was
most beneficial to developing countries, because of its potential impact on the increase of productivity
of local firms as well as on the creation of aggregate national value added.  Another importantconclusion concerned the crucial role of the absorptive capacity of the host country.  In the absence of
the necessary human capital, the benefits of FDI were difficult to achieve.  Thus, in order to capitalize
on the advantages associated with FDI, including the transfer of technology, investment policies
needed to be part of a coherent regulatory framework and to be accompanied by policies designed to
promote the productivity of the domestic industry, including investment in research and development,education, and training of workers as well as the fostering and integration of productive chains.  As a
result of this study, the Group now had before it a general overview of the existing research on the
impact of FDI on the transfer of technology.  The results of this research did not yield definitive or
general conclusions as the impact of FDI depended to a large extent upon the national policies of the
host country and its particular circumstances.  This was not likely to change even with an exhaustivereview of the existing literature.  What was clear was that the great majority of countries considered
that FDI was beneficial for their economies, as witnessed by the proliferation in recent years of
policies designed to attract investment.  While her delegation was open to continue to analyze this and
other themes relating to the impact of FDI on development, in reflecting on how the Group should
proceed in its future work, it was necessary to bear in mind that it was probably not possible to arriveat definitive conclusions on this theme.WT/WGTI/M/12
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8. The representative of Switzerland stated that the study contained in WT/WGTI/W/88
illustrated that there existed an impressive body of research and analysis on the economics of FDI,
especially as regards its impact on the transfer of technology.  While the study only covered the most
recent literature, much work had been done on this subject in the 1970s and 1980s.  Thus, it was
important to realize that, even though further case studies and analyses of country experiences mightbe useful, the Working Group already had at its disposal a wealth of information.  Naturally the
results of specific studies varied in function of the time-period covered and the characteristics of the
countries and industries studied, but the synthesis of the existing literature in WT/WGTI/W/88
showed that it was possible to draw certain conclusions of a more general nature.  In this regard, he
underlined the point made in WT/WGTI/W/88 about the need for appropriate policies concerning
fundamental conditions such as education, research and development, infrastructure and human
capital formation.
9. In regard to the contribution by Korea on its experience with the role of FDI in the transfer of
technology (WT/WGTI/W/82), the representative of India stated that FDI was welcomed by
developing countries because it came as a bundle consisting of capital, technology, managerialcapabilities and also export potential.  Korea's views on this subject were keenly listened to by
developing countries because these countries had drawn many a lesson from Korea's experience withtechnology transfer in the 1960s and 1970s.  The views expressed by Korea that the transfer of
technology was better left to the market forces, and that mandatory technology transfers would only
result in the transfer of low-quality technology, ha d come as a surprise.  Conceptually, multinational
enterprises might not have any interest in transferring knowledge to and supporting innovation in
foreign affiliates beyond what was needed for the production process at hand.  A strategy withgovernment role kept to the minimum – that of ensuring macroeconomic environment and good
infrastructure – might lead to the exploitation of static comparative advantages, but might not push the
local technological frontier nor promote industrial upgrading and extensive local linkages.  To tap the
potential of FDI, host countries might have to play a proactive role in inducing multinational
enterprises to upgrade technologies and enter complex activities, because technologically competententerprises could exist even in low-income economies and might well be in a position to absorb or
even generate technology.  Korea itself had spearheaded its industrialization drive by building up an
impressive research and development capability, drawing extensively on foreign technology in forms
that promoted local control.  It had permitted FDI only when other means of accessing technology
were not available and foreign majority ownership had not been permitted unless it was a condition of
having access to closely held technologies.  As described in the UNCTAD World Investment Report
1999, some multinational enterprises had been induced to sell their equity to local partners once thetransfer of technology was complete.  All these previous experiences did not appear to tally with the
views expressed in WT/WGTI/W/82.  The recent experience of the liberalized open-economy regimes
in South-East Asia underlined the fact that, in spite of having a fairly free investment regime, the
technology that was transferred into these countries was of a low quality. Thus, while a mandatory
technology transfer clause might attract only inferior technology, in the 1990s even the free-marketregime in the South-East Asian countries had not achieved better results in terms of the quality of
technology attracted.  What mattered was the existence of linkages and spillover effects, and in this
respect the more important factor was the establishment of a stable investment environment.  The
recent spate of FDI flows into the South-East Asian developing countries had been due to
liberalization of government investment policies, but also to the prevailing trade restrictions of the
1990s which had given rise to tariff-jumping FDI.  Now that this was no longer necessary, because of
the progressive phasing out of the quantitative trade restrictions in recent years, the motivation of the
foreign investors was likely to change, leading to a change in the direction and nature of FDI inflows.
As Professor Jagdish Bhagwati and others had observed, the removal of import restrictions and the
strengthening of intellectual property rights protection by developing countries might very well leadto increased exports of high-technology products from the developed countries.  Thus, it was possible
that the transaction costs of exporting to distant ma rkets would remain as the sole determinant of the
choice of other production sites away from the home country of the multinational enterprise.WT/WGTI/M/12
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10. The representative of the European Communities, responding to the comments made by India,
stated that Korea's written contribution in WT/WGTI/W/82 was important as a detailed factual
account of Korea's experience with the impact of FDI on the transfer of technology.  As stated by his
delegation on many previous occasions, the Working Group would benefit from similar contributions
from other developing-country Members, especially those in South East Asia,  with respect to the roleof FDI in their economic development.  The quality of the technology transferred by multinational
enterprises depended upon the extent of competition in a given market.  Experience showed that, if a
country had an open investment regime accompanied by a protective trade regime, the lack of
competitive pressure made it unnecessary for multinational enterprises to exploit their most advanced
technology.  By contrast, if forced to compete in  an open trade environment, it was in the commercial
self-interest of such enterprises to use the most advanced technology.
11. The representative of Switzerland disagreed with India's observation that the sole determinant
of investment decisions was the transaction cost of exporting.  This was only one and not the most
important determinant of investment decisions.  FDI occurred in various forms, including the
acquisition of existing foreign facilities with a view to integrating them into a world-wide production
network in which such facilities could benefit from the technological capacity of the parent firm.
12. The representative of Korea, responding to India's comments, stated that his country's
experience with respect to FDI and the transfer of technology had already been described and
discussed in detail at the last meeting.  As discussed in a recent OECD study entitled Foreign Direct
Investment and Development:   A Reassessment of the Evidence and Policy Implications , FDI was
most likely to be harmful to the growth and welfare of the developing countries when the investor was
sheltered from competition in the domestic market and burdened with high domestic content,mandatory joint venture and technology-sharing requirements.  Korea's analysis in WT/WGTI/W/82
was also supported by the literature mentioned in the study in WT/WGTI/W/88.
13. In response to Switzerland's comment on the issue of the transaction costs of exporting as
being a determinant of investment decisions, the representative of India stated that, as developing
countries moved through autonomous liberalization initiatives and bilateral arrangements to a stable
and transparent investment regime and adequate protection of intellectual property rights, it was the
transaction cost of exporting that would be the sole determinant of investment.
(ii) Comments on India's contribution in WT/WGTI/W/86
14. In regard to the contribution by India in WT/WGTI/86, the representative of Australia agreed
with India that the Working Group needed to have before it more evidence of the benefits of possible
multilateral rules, as opposed to bilateral agreements, on investment, before it was possible to commit
to discussing the need for a multilateral framework.
15. The representative of the European Communitie s stated that a recent contribution submitted
by his delegation in relation to Item IV (WT/WGTI/W/89) was intended to address certain doubts and
concerns that had been voiced in the debate in the Working Group, including the points made by India
in WT/WGTI/86.  His delegation agreed with India that the relationship between trade and foreign
investment was complex and not susceptible to defi nitive conclusions, but it considered that the
mandate of the Working Group was to examine this relationship, rather than to attempt to reach
agreed conclusions.  The Working Group's examination of this relationship was useful in that it could
assist Members in defining their domestic FDI policies and in formulating their views on the
appropriate scope and content of international investment rules.  His delegation also agreed with India
on the central importance of the developmental dimension to the Group's work.  The Working Grouphad done a considerable amount of work on how the relationship between trade and investment could
play a positive role in the development process.  However, the Working Group's mandate did not
require it to arrive at definitive conclusions on this matter, and the work carried out so far had helpedWT/WGTI/M/12
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Members shape their policies on FDI both in a domestic and in an international context.  Finally, on
India's view on the importance of flexibility to accommodate domestic policy objectives, he stated
that all countries needed such flexibility, and that this concept needed to be made more precise in a
manner that struck a balance between the necessary degree of flexibility, on the one hand, and
certainty for economic operators, on the other.  In this respect, he expressed concern that there was atendency to equate flexibility with discrimination on grounds of nationality.  While it was legitimate
for a government to treat economic operators differently on the basis of objective differences between
such operators that were relevant to a policy ob jective, such differential treatment was to be
distinguished from discrimination on grounds of nationality.  His delegation remained unconvinced of
the economic benefits of such nationality-based discrimination.
16. The representative of Chile stated that India's contribution in WT/WGTI/W/86 highlighted the
need for a more thorough analysis of certain themes.  First, it was important to be more precise on the
meaning of the concept of policy flexibility.  While international agreements necessarily entailed
some loss of policy flexibility, this was compensated by a gain in terms of greater predictability and
stability of rules, which was generally recognized to be a key element in investment decisions.
Second, it was true that a country's investment regime was not per se  the key factor in attracting FDI
and that, as mentioned by India, factors such as  market size, level of education and quality of
infrastructure were more important.  However, if the investment regime was unstable and lacking in
transparency, this could no doubt affect investment decisions.  Finally, it was not obvious, as argued
by India, that a multilateral investment agreement would necessarily provide less flexibility than a
bilateral agreement.  A multilateral agreement on investment in the WTO would have the scope and
flexibility desired by its Members.
17. The representative of Hungary agreed with many of the points made by the European
Communities and Chile on India's contribution in WT/WGTI/W/86.  His delegation did not oppose
further discussion of Item I of the Checklist, even though the Working Group had already done a
substantial amount of work on this subject.  The issues raised by India in paragraph 5 of its
contribution could usefully be the subject of further examination on the basis of an exchange of viewson Members' individual experiences.  In the latter regard, he recalled that Hungary had presented a
contribution on the role of FDI in Hungary's recent economic development (WT/WGTI/W/83), and he
encouraged other Members to present similar contributions, especially if their experiences were
different from that of Hungary.  He disagreed with  the view expressed by India in paragraph 5 of its
contribution that a multilateral agreement on investment by definition could not take into account the
specificities and peculiarities of individual countries.  The GATS, which was a multilateral agreement
on a particular kind of FDI, fully took into account the specific situation of each country and thedifferences in levels of development between Members.  The realistic approach to the design of
multilateral investment rules in the WTO that had been proposed by Japan, Korea and the European
Communities was similar to the GATS and would thus provide the same level of comfort in this
respect.  With regard to paragraph 8 of India's contribution, he did not share the view that products
produced by companies with foreign ownership should be treated as if they were foreign products andas if the firms producing them were not part of the domestic industry.  Hungary's legislation did not
distinguish between firms established in Hungary on the basis of the nationality of their ownership.
This non-discriminatory treatment had enhanced the confidence of foreign investors and had
contributed to a substantial inflow of FDI in Hungary in recent years.  On paragraph 9, he stated that
the adjustment costs for host countries mentioned by India were not dissimilar to the adjustment costsassociated with the implementation of the GATS.  He agreed with India that global welfare gains
would not necessarily translate into national welfare gains for the host country.  In respect of
paragraph 10 of India's contribution, he disagreed with the idea that priority should be given to
exploiting the potential offered by the GATS before considering the negotiation of general investment
rules.  It was difficult to understand the economic rationale of such an approach, which would entaildiscrimination against suppliers of goods in favour of suppliers of services.WT/WGTI/M/12
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18. The representative of Hong Kong, China stated that it was indeed unlikely that the Working
Group would arrive at conclusions in this area of its work, but that gaining insights into the differing
positions of Members and the economic studies that had been conducted in this field was useful in this
educational phase of the Group's work.  In his delegation's view all the "soft" evidence pointed to a
very positive relationship between FDI and development.  Naturally, there were many factorsaffecting the impact of FDI on development, and he agreed that it was necessary for host countries to
have the adequate infrastructure, education and competition.  In respect of the juxtaposition in
paragraph 6 of India's contribution of the attention given to investment and the lack of progress made
at the international level on issues of labour mobility,  the logical implication of this was that bilateral
investment treaties apparently had not been able to address issues of labour mobility.  By contrast, at
least in the area of services there existed a multilateral agreement that tried to address the movement
of labour.  This suggested that there were potential trade-offs at a multilateral level betweenagreements on investment and agreements on labour mobility.  On the suggestion made in
paragraph 10 of India's contribution that one should first exploit the potential of the GATS, he stated
that his delegation had always taken the view that one should try to go as far as possible in trying to
address investment issues under existing WTO provisions, such as the GATS, but that there should be
scope for tackling all areas of investment.
19. The representative of Switzerland, referring to Australia's comment on the need for the
Working Group to have more evidence of the benefits of multilateral rules on investment, stated that a
recent contribution by Hong Kong China on transparency (WT/WGTI/W/90) provided a good
illustration of the benefits of multilateral investment rules, as opposed to bilateral investment treaties.
With regard to India's contribution in WT/WGTI/W/86, he agreed with the conclusion in paragraph 13that most of the issues identified by India had no t received definitive answers, but he questioned the
need to have definitive answers on all those issues.  The extent to which it was necessary to further
examine such issues depended upon the content of possible multilateral rules that Members would be
ready to negotiate.  He agreed with India on the complexity of the relationship between trade and
investment and on the importance of the developmental dimension, but the question arose as to howlong the educational process should be pursued.  In his view, there was a critical mass of information
before the Group on this matter, and the considerable evolution in attitudes towards FDI also testified
to the recognition of the positive role of FDI.  With respect to India's views on policy flexibility,  he
shared the European Communities' view  that flexibility should not be equated with discrimination on
grounds of nationality.  Regarding India's observation on the inconclusive evidence on the benefits of
FDI, he considered that this issue had been the subject of a very rich literature, the general tenor of
which was that in the majority of cases FDI brought benefits to the host country.  In respect ofbilateral investment treaties, he noted that such treaties did not address the issue of channelling FDI
into priority areas, as suggested by India in paragraph 3. He agreed with the points made by India in
paragraph 3(viii) on the basic determinants of FDI decisions.  In conclusion, Switzerland was of the
view that a multilateral agreement on investment would entail benefits in that it would replace the
numerous bilateral investment treaties, provide a basic framework offering stability to foreigninvestors, and enhance the attractiveness of developing countries as destinations of FDI.
20. The representative of Argentina agreed with Indi a in regard to the educational nature of the
Group's work and the need to take into account th e complexity of the relationship between trade and
investment and to acknowledge the central importance of the developmental dimension.  By contrast
his delegation's views differed somewhat from those of India with regard to the need for further studyof the costs and benefits of FDI.  In his delega tion's view, the benefits of FDI for development were
quite evident, as illustrated by Argentina's experience.  Similarly, he differed with India in regard to
its characterization of bilateral investment treaties.  Argentina had concluded a large number of such
treaties, not with a view to channelling FDI into area s of priority but to provide guarantees to foreign
investors of national treatment and legal security.  A multilateral agreement on investment per se
would not resolve all problems faced by developing c ountries and in this respect he agreed with India
on the role of the factors described in paragraph 3(viii) of India's contribution as determinants of FDIWT/WGTI/M/12
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decisions.  However, a multilateral agreement on investment would add to the factors that made a
country attractive as a destination for FDI.  His delegation was unconvinced that there was merit to
exploring in this Working Group the relationship between capital and labour mobility.  Finally, he
sought clarification from India on its views on th e issue of investment incentives.  This was an
important theme to be pursued in the Working Group given that developing countries often foundthemselves in competition with other developing countries in their efforts to attract FDI.
21. The representative of Malaysia stated that the key issue in dispute was not whether FDI could
make a positive contribution to the development process,  but whether multilateral rules on investment
were preferable to bilateral investment treaties.  In this respect, his delegation fully shared the views
stated by India in WT/WGTI/86 regarding the lack of evidence on the benefits of multilateral
investment rules.  Since existing bilateral investment treaties adequately addressed the issue of legal
protection of foreign investment, multilateral rules on investment would be aimed essentially atproviding market access for foreign investors.  While reference had been made to the GATS approach
as a possible model for future investment rules, the GATS was a very different kind of instrument.  In
addition, in light of the views expressed by some delegations on the notion of flexibility, it was
doubtful whether an approach similar to the GATS could provide the degree of flexibility needed by
developing countries.  It was very unlikely that if, in the context of multilateral investment rules basedon the GATS approach, developing countries made national treatment commitments in particular
sectors and subsequently found that such commitments were not compatible with their development
needs, there would be scope to adjust such co mmitments.  An example in this regard was the
difficulties currently encountered by developing countries in respect of reasonable and legitimate
requests for an extension of the transition period under the TRIMs Agreement.  Consequently, hisdelegation remained unconvinced that multilateral rules on investment could accommodate the
development needs of developing countries and that such rules would have any added value as
compared to bilateral investment treaties.  For de veloping countries wishing to attract FDI, the main
priority was to provide a transparent regulatory environment, a stable socio-political system and
sound macro-economic policies.
22. The representative of the European Communities stated that, contrary to what had been
argued by Malaysia, market access was only one of many aspects of multilateral investment rules.
His delegation had very clearly stated that it was not envisaging rules that would entail an unfettered
right of market access for foreign investors, and that it was in favour of rules allowing for flexibility
through negotiated commitments, with the GATS as a possible model.  In response to Malaysia's
comments on the issue of flexibility to accommodate the needs of developing countries, he reiterated
the view that it was necessary for governments to be able to treat investors differently based ondifferences between investors, but that there was no policy rationale for discrimination purely on
grounds of the nationality of investors.
23. The representative of India stated that, in light of the general recognition of the importance of
FDI in development, it was unclear why some delegations took the view that it was not necessary to
reach conclusions on the relationship between tr ade, development and investment.  Developing
countries like India were liberalizing their investment policies autonomously.  This included enhanced
transparency in investment policies and in procedures for entry and establishment and operation.
While the European Communities had explained that multilateral rules on investment would also
serve objectives other than market access, the experience of developing countries showed that such
other objectives were best served by autonomous liberalization efforts side-by-side with bilateralinvestment treaties.  Such treaties made the invest ment rules and procedures transparent, provided for
adequate protection of foreign investment and left enough room for host countries to pursue policies
to achieve their development goals.  Therefore, India was not convinced that any additional benefits
would accrue from any multilateral framework of rule s on investment.  Rather, India believed that any
set of rules that would bind developing countries, set stipulated minimum standards and restrain theuse of performance requirements of any kind might restrict global investment flows generally andWT/WGTI/M/12
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especially to developing countries.  There were numerous bilateral investment treaties but only few
regional arrangements on investment, which were limited in coverage.  At the multilateral level, the
experience with the OECD's Multilateral Agreement on Investment (MAI) was well-known.  In
India's view, therefore, it was premature to start discussions on the elements of a multilateral
framework for investment and the Working Group needed  to devote more time to the analysis of the
implications for development of different kinds of investment.  For India, the question was not
whether there were lacunae in the existing bilateral and regional arrangements, but rather how a
multilateral agreement could help countries better achieve their developmental objectives.  India was
not persuaded that this was the case.  On the issue of the efficacy of the GATS in regard to the
movement of labour, she stated that her delegation's position was well known.  India had not
suggested in its contribution that bilateral investment treaties could usefully address this issue.
Rather, it had made the basic point that there was a two-way relationship between capital and labour,and that any discussion of the mobility of capital would remain incomplete unless the scope for labour
mobility was appropriately investigated.
24. The Working Group took note of the statements.
B. THE ECONOMIC RELATIONSHIP BETWEEN TRADE AND INVESTMENT (ITEM II
OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY)
25. The representative of Hong Kong, China recalled that issues relating to the use of investment
incentives had attracted sustained interest and deliberation among Members at past meetings of the
Working Group.  To pave the way for a more systematic and in-depth consideration of whether and
how best to address investment incentives in the WTO context, several Members had expressed
support in June for her delegation's suggestion for a Secretariat study on the applicability of theAgreement on Subsidies and Countervailing Measures  (ASCM) to investment incentives.  In the
event, it had been suggested to revisit the matter at the present meeting.  As a staunch supporter of
world-wide trade and investment liberalization, Hong Kong, China remained concerned about the
possible adverse impact on trade and investment flows caused by the prevalent use of investment
incentives.  Since unhealthy competition among Members in granting investment incentives couldeasily lead to economic distortions, Hong Kong China saw a need to examine whether and, if so, how
best the WTO should contribute to lessening such distortions.  This examination could usefully start
with an appraisal of the extent to which investment incentives were being disciplined under existing
WTO instruments.  It was logical to examine the AS CM first as it was widely regarded as the WTO
Agreement most relevant to the realm of investment incentives.  A factual study on the relevance of
the ASCM to investment incentives could help further work by the Working Group in several
respects.  First, the study could shed light on the scope and nature of investment incentives whichwere already being caught by the various disciplines under the ASCM.  Second, it was worthwhile to
explore whether it was desirable and feasible to identify commonly accepted criteria to distinguish
between desirable and undesirable investment incentives.  The proposed Secretariat study could
contribute to this by reviewing the negotiating history leading to the distinctions made in the ASCM
between prohibited, actionable, non-actionable and non-specific subsidies.  Third, a number ofyardsticks had been built into the ASCM to facilitate Members in gauging the trade-distortive effects
of a subsidy.  The Secretariat study could provide useful clues as to whether and how these concepts
could be transplanted to the field of investment incentives by reviewing relevant dispute cases and
literature involving these concepts.  Finally, this  body of information would help the Working Group
in addressing the problem of the lack of a universally agreed definition of investment incentives.  Thedifferent meanings which Members attached to this term could pose a hindrance to progress at some
point in time.  Given the likeness between investment incentives and subsidies, it was worth exploring
the extent to which the various elements (e.g. benefit, financial contribution, subsidy granting
authorities and recipients) of the definition of subsidy under the ASCM could be adapted for
investment incentives in the WTO context.  H ong Kong, China had no set views on what the WTO
could or should do with regard to investment in centives in a globalizing economy.  The immediateWT/WGTI/M/12
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challenge was to embark on more research and exploratory talks.  The proposed Secretariat study was
a logical means to initiate this challenge.
26. The representative of Malaysia recalled that at the last meeting his delegation had objected to
the proposal to request the Secretariat to prepare a study on the applicability of the ASCM to
investment incentives, and had taken the view that discussions on this matter should proceed on thebasis of inputs from Members.  His delegation's views on this matter had not changed.  The Working
Group could consider this proposal at its next meeting.
27. The representative of the European Commun ities stated that it was clear that the ASCM
applied to investment incentives that were "subsidies" as defined in the ASCM.  In that respect, a
Secretariat note could only provide a factual description of the existing legal situation.  The
applicability of the ASCM to investment incentives that were subsidies within the meaning of that
Agreement was subject to certain limitations arising from the fact that the ASCM only applied totrade in goods and that the remedies provided for in the ASCM were effective only once there were
trade flows.  The proposed study by Hong Kong China seemed to go beyond this simple question of
the applicability of the ASCM to investment incentives in that it raised the issue of whether the
concepts used in the ASCM were useful for investment incentives generally.  This was a very
important question on which his delegation was continuing to reflect.  He was not sure that all theseconcepts would necessarily be relevant to investment incentives.  The question of whether the
distinction between prohibited, actionable and non-actionable subsidies could be applied to
investment incentives that were not subsidies wi thin the meaning of the ASCM merited further
reflection in the Working Group.
28. The representative of New Zealand stated that her delegation continued to see merit in the
Working Group discussing the issue of investment incentives, and fully supported the proposal by
Hong Kong China for a factual study by the Secretariat which would help provide some focus and
momentum to the Group's discussions.  In response to Malaysia's objections, she stated that
investment incentives might be necessary in the context of development policies or for other
justifiable policy reasons and that her delegation was not suggesting that all investment incentivesshould be abolished. A Secretariat study would in no way prejudge the outcome of the discussions in
the Working Group.  The first challenge was to embark on more research on the matter so that the
Working Group could improve its understanding of the situation.
29. The representative of Canada stated that over the past two decades international investment
flows had grown dramatically and both developed and developing countries had become more
conscious of the importance of foreign investment to their economies.  Governments had come to
value the role of foreign investment as an engine for growth and job creation and a source ofcompetitiveness.  At the same time, more and mo re governments appeared to compete to attract
foreign investment.  Such competition could have beneficial effects in that it induced governments to
strengthen economic fundamentals, adopt sound macroeconomic policies and fiscal responsibility and
reduce discrimination.  However, global competition to attract foreign investment could also have
unforeseen and negative effects.  For this reason, Canada considered that there were a number ofquestions that could usefully be explored with regard to investment incentives and believed that a
Secretariat note which explored the questions and identified relevant issues would be a useful
undertaking.
30. The representative of Japan, Argentina
 and Hungary  expressed support for Hong Kong
China's proposal for a factual study by the Secretariat.
31. In regard to Hong Kong, China's proposal, the representative of the United States stated that
her delegation preferred that, as a first step, Members interested in this topic submit documents for
review by the Working Group.  Given the reactions at  the last meeting and at the present meeting, itWT/WGTI/M/12
Page 10
might even make sense for several Members that wished to explore this subject in greater detail to
draft a joint submission.  Once such papers had been  received the next step would be for the Working
Group to discuss these submissions to gauge the positi ons of various Members.  The United States did
not rule out calling on the assistance of the Secretariat at a future date, but considered that a
Secretariat report would be more likely to address issues of concern if it was done in reaction tostatements and decisions taken by Members in the Working Group.  Additionally, her delegation
questioned whether this topic was a good use of the Group's efforts.  Traditionally, investment
agreements had not focused on investment incentives beyond those related to performance
requirements.  Her delegation preferred that the Working Group focus on more traditional investment
issues, such as transparency, and MFN and national tr eatment.  For this reason, she requested that the
Secretariat delay work on this topic until Members had been given an opportunity to express their
views.
32. The representative of Hong Kong, China noted that the majority of the delegations which had
spoken on this subject had supported his delegation's proposal for a Secretariat study.  His delegation
had indicated on past occasions that there might well be a need for investment incentives in certain
circumstances and that it was therefore not seeking a total prohibition of all incentives.  It had also
made the point that, while incentives might be particularly important in the context of developmentpolicies, more advanced countries naturally had more resources in this area.  He emphasized that his
delegation's proposal was consistent with the view  expressed by Malaysia regarding the need for
debate on this issue to proceed on a Member-driven basis.  It had only proposed that the Secretariat
provide some factual information which would be helpful for Members in their analysis.  He
expressed disappointment about the suggestion made by the United States, and considered that itwould be far more efficient for the Secretariat with its depth of knowledge in this area to prepare a
factual analysis of the points made by his delegation which could then serve as a basis for deliberation
by Members.  As Members had had four months to reflect on this proposal, he hoped very much that
the Working Group could agree on it.
33. The representative of Mexico stated that the recent widespread liberalization of FDI regimes
had been accompanied by a significant increase in the use of investment incentives, especially fiscal
and financial incentives, both by developed and developing countries.  Mexico considered that in
view of the possible distorting effects of such in centives on international trade and investment flows,
this theme warranted special attention in the Working Group and should be addressed in the
negotiation of possible investment disciplines.  She recalled that Mexico had expressed its views on
this subject in WT/WGTI/W/64.  The use of fiscal, financial and other types of incentives in order to
attract FDI was not justified on grounds of economic efficiency as it entailed an inefficient allocationof resources and could, in the best of circumstances, only provide a second best solution.  Proponents
of the use of investment considered that incentives could correct market failures and/or absorb
positive externalities associated with FDI.  Howeve r, from the economic literature before the Working
Group, including the study in WT/WGTI/W/88, it appeared that there was no empirical evidence to
confirm that these objectives were achieved in reality.  In any case, the use of incentives was not anoptimal policy as it was preferable to correct, rather than to compensate, structural or economic policy
failures.  Even assuming that incentives could help absorb positive externalities associated with FDI,
their costs could exceed their supposed benefits.  Fiscal and financial incentives could entail
significant costs especially if granted in a context of harmful competition between various countries to
attract FDI.  These costs included the attraction of less productive investment, discrimination againstsmall or domestic investors, erosion of the fiscal base, lobbying by investors to receive favourable
treatment in the granting of incentives, and inefficient allocation of capital and consequently a failure
to take advantage of comparative advantages.  In light of these considerations, Mexico considered that
the Working Group could explore options as to how  to limit the harmful effects of the use of
investment incentives.  In this respect,  one could build on the experience with the ASCM and analyzeto what extent the ASCM could apply to incentives.  Her delegation therefore supported the proposal
by Hong Kong China to request the Secretariat to prepare a factual study.  She noted that this studyWT/WGTI/M/12
Page 11
could be based on a note prepared by the Secretariat in 1997.  The concerns raised by a few
delegations with respect to the proposed study were difficult to understand.  What was being
requested was simply a factual study on the applicability of the ASCM in relation to investment
incentives which could help Members in their study of issues such as definition, the nature and scope
of incentives, criteria to distinguish between different kinds of incentives, and other relevant issuesidentified by Hong Kong China.
34. The Working Group took note of the statements.
C. STOCKTAKING AND ANALYSIS OF EXISTING INTERNATIONAL INSTRUMENTS
AND ACTIVITIES REGARDING TRADE AND INVESTMENT (ITEM III OF THE
CHECKLIST OF ISSUES SUGGESTED FOR STUDY)
(i) WTO provisions on matters related to investment
35. No statements were made on this indent of Item III.
(ii) Bilateral, regional, plurilateral and multilateral agreements and initiatives; implications for
trade and investment flows of existing international instruments
36. The representative of India stated that his delegation recognized the important role that FDI
could play in the economic development of countries,  and that substantial changes effected since July
1991 in India's foreign investment regime had made India one of the most open economies in theworld for FDI.  India allowed FDI in all except a small number of sectors, and in a large number of
sectors a procedure for automatic approval applied to FDI projects which did not exceed specified
ownership limitations.  Even where specific approvals were required from the Foreign Investment
Promotion Board, objective criteria had been laid dow n for decision making.  As a result, FDI inflows
had increased from US$0.1 billion in 1991 to over US$4 billion in 1999, and the Government of India
had established a target of US$10 billion in annual inflows.  The liberalization of FDI regimes by
India and other developing countries was taking place on an autonomous basis and had been
accompanied by a proliferation of bilateral investment treaties since the early 1990s.  These treaties
were favoured by developing countries because they did not impose restrictions on developing
countries in following their own FD I policies.  Since the developing counties had the freedom to grant
national treatment only in the post-establishment phase of the investment, subject to such
qualifications as might be considered necessary, and conforming to the host country's laws, policies
and regulations, they could also afford to allow for a wider range of investments, based on the asset-
based definition to come under the purview of bilateral investment treaties.  The increasing number of
bilateral investment treaties was indeed a recognition of the positive role of FDI in a country's
economic development.  As described in her delegation's contribution contained in document
WT/WGTI/W/71, bilateral investment treaties signed by India provided for a broad definition ofinvestment, accorded national treatment and MFN treatment at the post-establishment phase,
prohibited expropriation of foreign investment unless it was done for a public purpose, and provided
for free repatriation of capital, profits and royalties.  Capital account convertibility was effectively
available to foreign investment through the specia l convertibility facilities granted to foreign
investment by India's exchange control regulations.  India's bilateral investment treaties also allowed
for the entry and sojourn of personnel.  Immigration and exchange control laws permitted foreigners
to take up employment in India, albeit with the appropriate permission.  While bilateral investment
treaties abounded, the experience with regional investment arrangements was still limited.  At the
international level, the OECD negotiations on the MAI had exposed the difficulties that even the
developed countries faced in arriving at an agreement on investment.  Countries like India that wereautonomously liberalizing their policies were actively pursuing a policy of entering into bilateral
investment treaties with both developed and developing countries.  India had concluded more than 40WT/WGTI/M/12
Page 12
such treaties during the 1990s.  Such autonomous liberalization was an ongoing process, and the
Government of India had announced its intention to continue with this process.
37. In regard to the reference made by India to the OECD negotiations on the MAI, the
representative of the European Communities stated that the experience with these negotiations was of
no relevance to the ongoing debate on trade and investment in the WTO as there were major
differences between these negotiations and the current discussions in the WTO in regard to the
institutional context, participation, aims and level of ambition.
38. The representative of UNCTAD made a statement on relevant recent activities undertaken by
UNCTAD, including the World Investment Report 2000.1
39. In regard to the analysis in the World Investment Report 2000 of cross-border mergers and
acquisitions, the representative of the European Communities stated that, while there was a perception
that Greenfield investment was more beneficial than mergers and acquisitions, the analysis in the
World Investment Report 2000 showed that any diff erences between the benefits of FDI in the form
of Greenfield investment and FDI in the form of  mergers and acquisitions tended to disappear over
time.  In addition, the kind of short-term positive effects of mergers and acquisitions that had been
identified in the World Investment Report occurred not only in times of economic crisis.  Rather, FDI
in the form of mergers and acquisitions played a continuous positive role in maintaining levels ofeconomic activity, technological capacity and employment.  While he agreed that the potential
negative effect of mergers and acquisitions on competition merited close attention, he stressed that
this applied to both international and domestic mergers and acquisitions. He concurred with the
observations in the World Investment Report regarding the need for international cooperation in the
field of competition law.
40. The representative of Canada also considered that it was important not to over-emphasize the
difference between Greenfield investment and mergers and acquisitions.  While clearly there were
differences between short- and longer-term impacts,  mergers and acquisitions were often followed by
sequential investments and transfer of newer and better technologies.  Employment could also be
generated over time in the case of sequential investment.  In addition, it was necessary to take intoaccount the beneficial effects of reinvestment of earnings from FDI.  Canada's  experience was that it
was the reinvested earnings portion that carried most of the positive effects of FDI.   She agreed that
competition policy had an important role to play in addressing some of the concerns that might arise
in connection with mergers and acquisitions.
41. The representative of the OECD made a statement on the revised OECD Guidelines for
Multinational Enterprises which had been adopted at the OECD Ministerial meeting in June 2000.2
42. The representative of the European Communities stated that the revised OECD Guidelines for
Multinational Enterprises were a very useful step towards enhanced investor responsibilities world-
wide.  They responded to civil society concerns in relation to the behaviour of international investors.
The Guidelines were a multilaterally-endorsed instrument which was not a substitute for but a
complement to domestic laws.  In this respect, he recalled the view expressed by his delegation in
WT/WGTI/W/81 that domestic legislation was the primary vehicle to regulate the behaviour ofinvestors, but that instruments such as the Guidelines were an important complement to domestic laws
and to initiatives of individual companies.  The Guidelines were useful because of their voluntary
nature, which meant that companies adhering to the Guidelines could make them an integral part of
their management practices.  This would facilitate compliance with relevant national laws and
regulations.
                                                     
1 Circulated in document WT/WGTI/W/94.
2 Circulated in document WT/WGTI/W/93.WT/WGTI/M/12
Page 13
43. The representative of Canada stated that multinational enterprises made a significant
contribution to the economic, social and environmental development of the countries in which they
operated.  The recent endorsement by OECD Members of the revised Guidelines for Multinational
Enterprises would enhance the climate for FDI activity and, more generally, should assist in
addressing some of the public unease with global economic integration.  Given the significantincrease in international flows of direct investment in recent years, and the rising importance of FDI
for national economies, non-binding instruments such as the Guidelines would help to maximize the
benefits to host countries of FDI.  Canada would welcome further opportunities to dialogue with non-
OECD countries on this important multilateral instrument.
44. The representative of Japan informed the Working Group of an APEC seminar on trade,
investment and competition which had taken place in Lima on 23 August, and of an ASEM
conference on the same subject which had been held on 30 September in Vienna.  The representativeof the European Communities stated that the European Commission was co-hosting with the
Government of Chile a seminar in Santiago de Chile on 28 November-1 December on trade andinvestment, trade and competition, trade and environment and trade facilitation.  A similar seminar,
organized by the European Commission and the Government of South Africa, was scheduled for
February 2001.
45. The Working Group took note of the statements.
D. ITEM IV OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY
46. The representative of the European Communities introduced a written contribution
(WT/WGTI/W/89) which addressed certain concerns  that had often been raised in the Working
Group.  He recalled that in the debate under Item A he had already referred to this contribution inresponding to the view that the Working Group had not yet reached definitive conclusions and in
commenting on the issue of the policy flexibility that countries needed in regard to foreign
investment.  One recurring theme in the debate in the Working Group concerned the alleged need to
distinguish between positive and negative effects of FDI.  His delegation considered that this kind of
distinction was somewhat misleading.  In many cases, the alleged negative effects of FDI on a host
economy were very hard to distinguish from negative effects of any kind of investment and were due
to structural problems in that economy.  Moreover, countries that believed that a distinction between
good and bad FDI was useful had the possibility to decide for themselves whether or not they wished
FDI.  In reality, however, almost all countries were  trying hard to attract FDI.  Another recurring
argument in the Working Group concerned the relationship between bilateral and multilateral
investment rules.  In this respect, his delegation was of the opinion that bilateral and multilateral rules
on investment could be complementary.  Certain issu es required a coherent and uniform treatment at a
multilateral level, while for other topics such coherence and uniformity was less important.  While
there was no guarantee that multilateral investment rules would lead to increased investment flows,
the same applied to bilateral investment treaties.  The fact was that investment flows increased when
investors felt confident that their investment abroad would be profitable.  European investors had
indicated that bilateral investment treaties were he lpful, but that multilateral rules were preferable.
International investment rules were not a substitute for domestic economic factors that determined a
country's attractiveness for foreign investors, but the stability provided by international investment
rules was an important factor in investment decisions.  On the question of the definition of
investment, his delegation found it hard to understand why it would be necessary to agree in the
abstract on a common definition of investment before the merits of multilateral investment rules couldbe considered.  The definition of investment was a matter for negotiations, and useful work had been
done in the Working Group to identify a range of possible approaches.  Finally, he disagreed with the
view that one should first exploit the potential offe red by the GATS in regard to foreign investment.
Such a distinction between the treatment of investment in services and investment in other sectors was
without rationale and could lead to distortions.WT/WGTI/M/12
Page 14
47. He also drew attention to a paper which had been circulated informally which contained the
results of a survey of attitudes of European firms toward international invest ment rules.  The survey
was directly relevant to a number of questions that had been raised in the Working Group regarding
the benefits of multilateral investment rules in that it clearly identified the obstacles to foreign
investment experienced by European investors in many countries.
48. The representative of Hong Kong, China introduced a written contribution on the issue of
transparency of investment environment (WT/WGTI/W/90).  Following a description of the steps
taken by Hong Kong China to enhance the transpar ency of its investment regime, this contribution
analyzed existing obligations with respect to tran sparency contained in investment-related provisions
of the GATS and the TRIMs Agreement.  In the latter regard, the contribution pointed to five kinds of
provisions:  (i)  requirements to make publicly available information on measures which were likely
to be investment-related;  (ii) obligations to notif y measures introduced by Members;  (iii) obligations
to establish enquiry points and/or to respond to requests for information and, in the case of developed-
country Members, to establish contact points to facilitate the access of developing-country Members'
service suppliers to information related to their respective markets under GATS Article IV;  (iv)
obligations to ensure the transparency of administra tive procedures; and (v) obligations to expand the
transparency provisions of the GATS in a sector-specific context, as exemplified by the ReferencePaper on Basic Telecommunications and the Provisional Disciplines on Domestic Regulations in the
Accountancy Sector.  These existing provisions were subject to general exceptions and to specific
provisions designed to protect confidential information.  In addition to the WTO provisions,
transparency of investment rules was the subject of international instruments in the context of APEC
and the OECD and was also dealt with in bilateral and regional investment arrangements.  The thirdsection of the contribution identified several policy questions relevant to future work in the Working
Group on how best to achieve transparency with re gard to investment policies.  These questions
pertained to:  (i) the optimal scope of WTO transparency rules in terms of the kinds of investment
policies, measures, practices laws and regulations and the level of government that should be covered
by such rules;  (ii) whether transparency rules should apply not only after a measure had been adoptedformally but also to the process of adopting new or amended investment measures;  (iii) the
desirability and practicability of providing for rules on procedural transparency;  (iv) the possible
need created by the business realities of the new economy to develop innovative means to promote
transparency;  (v) the need for, and possible nature of, exceptions to new transparency obligations;
and (vi) the question of possible costs of new WT O provisions on transparency on investment-related
matters, especially the issue of how the objective of enhanced transparency could be pursued without
imposing burdensome obligations on developing-country Members.
49. In introducing a written contribution on expropriation and compensation (WT/WGTI/W/91),
the representative of Korea stated that recent de velopments in international investment disputes
suggested that provisions on expropriation and compensation, one of the core elements of investment
protection rules traditionally contained in international investment agreements, could be interpreted
more broadly than originally intended.  The ambiguity of these provisions had given rise to criticismof international investment agreements by non-gove rnmental organizations.  Against this background,
the aim of his delegation's contribution was to promote a mutual understanding among WTO
Members on the meaning of expropriation and compensation provisions.  As discussed in Section II
of the contribution, the main elements of expropriation clauses were the definition of expropriation,
the conditions under which expropriation was permitted, and the standard of compensation payable incase of expropriation.  The main current difficulty pertained to the definition of expropriation.  In
particular, while expropriation was generally defined as comprising both direct and indirect
expropriation, there was no generally accepted definition of the terms "indirect expropriation" and
"creeping expropriation".  During the MAI negotiations there had been a debate on whether
"regulatory takings" should be considered to amount to expropriation of foreign investment.  Thisissue had also arisen in several NAFTA investment disputes, which had contributed to the opposition
to the MAI.  The failure of the MAI negotiations had prevented in-depth discussion of this importantWT/WGTI/M/12
Page 15
question, notwithstanding the agreement among MAI negotiators on the need for a more precise
concept of expropriation.  In order to arrive at  a common understanding of the expropriation clauses
of international investment agreements, Korea considered that it was useful to focus discussions on
three questions:  (i) when governments concluded bilateral investment treaties, what was the usual
kind of expropriations they were willing to provide compensation for? (ii) how strongly did foreigninvestors feel their investment was being protected in the host country by the expropriation clause?
and (iii) for non-governmental organizations, what was the acceptable nature and range of
expropriations that should be compensated?  The development of a framework mutually agreed upon
by the host and home countries, foreign investors and non-governmental organizations was essential
to creating a transparent and predictable environmen t for international investments.  Korea believed
that this could not be constructively undertaken through multiple networks of bilateral investment
treaties which applied a plethora of different definitions, standards and conditions.
50. The representative of Japan introduced a written contribution on the issue of the definition of
the term investment (WT/WGTI/W/92).  He noted that the Working Group had discussed this
question on several occasions, and that a Secretariat Note (WT/WGTI/W/76) identified the issues
raised and the views expressed so far on this issue.  The aim of his delegation's contribution in
WT/WGTI/W/92 was to attempt to clarify the issues further based on the Group's past discussions.With regard to existing investment agreements, it was noted in the contribution that many recent
agreements  defined investment as every kind of asset that was concerned with corporate activities.
Under this broad definition, portfolio investment and acquisition of intellectual property was covered.
In certain other bilateral and regional agreements, such as NAFTA, a different approach had been
adopted, which defined investment broadly, but then carved out certain areas from the coverage ofthat broad definition. Japan considered that this a pproach illustrated how it might be possible to limit
the scope of investment rules in the WTO.  The GATS was another example of an agreement with
limited coverage in that it covered investment only to  the extent that a foreign service provider had a
commercial presence in the host country.  The IMF and the OECD defined the concept of FDI as
investment carried out with the objective of a lasting interest, which implied the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence
on the management of the enterprise.  Under these criteria, portfolio investment or real estate
investment were excluded from the definition.  Based on these existing agreements and practices,
three options could be distinguished with regard to the definition of investment in a multilateral
framework.  The first option would be to define investment along the lines of the IMF and OECD
definition of FDI, i.e. to adopt the enterprise-based criteria.  This definition would have the effect of
narrowing the scope of the investment rules.  The second option would be to have a broad definitionof investment at the outset and then to allow regulation of short-term capital movement, or to exclude
speculative short-term capital movement from the scope of the rules.  This would provide the
regulatory agencies with considerable room for manoeuvre.  The third option would be a combination
of the first two options.  This would mean that the scope of the definition would vary according to
each element of the agreement.  For example, in connection with the provisions concerning theprotection of investment, a broa d definition of investment could be used embracing portfolio
investment.  At the same time, certain provisions, such as national treatment obligations with respect
to the pre-establishment stage, could be tied to a narrow definition of FDI.  Each option had its own
advantages and disadvantages.  However, it seemed clear that, on the one hand, broad regulatory
discretion should be retained for the control of short-term capital movement and that, on the other,security and predictability for investors should not be compromised for that purpose.  Japan's
preliminary conclusion was that it might be necessary to define FDI from an enterprise-based
approach and, at the same time, to consider a way in which a wider scope of investment could be
covered by provisions on investment protection.
51. In regard to a contribution presented by Hungary at the meeting of 8 June 2000 on the need
for a multilateral framework for FDI (WT/WGTI/W/83), the representative of India noted that the
level, composition and direction of Hungary's trade had undergone substantial changes duringWT/WGTI/M/12
Page 16
Hungary's reform process, which had included significant liberalization of Hungary's foreign
investment policy.  India was not persuaded, however, that these developments justified the
conclusion that a multilateral framework for FDI would lead to increased FDI flows.  She noted, in
this respect, that Hungary's contribution had also  underlined that, left to itself, FDI might not
contribute to economic development to the desired extent, and that efforts were necessary to ensurethe diffusion of modern technology to local industries, to realize a better utilisation of human
resources in research and development and to attain the objective of balanced regional development.
These were precisely the reasons why developing countries insisted on retaining the freedom to screen
foreign investment and to direct it to desired economic activities, while at the same time
autonomously liberalizing their investment regimes.
52. In regard to the reference made by India to the policy challenges identified in paragraph 19 of
WT/WGTI/W/83, the representative of Hungary stated that, while there was role for governments in
meeting such challenges, they did not provide support for a policy of screening of FDI.  As described
in the second part of paragraph 19, Hungary had managed to achieve positive policy results without
resorting to the screening of FDI.
53. The representative of India commented on a contribution presented by Japan at the meeting of
8 June 2000 on the issue of transparency of foreign investment laws and regulations
(WT/WGTI/W/87).  The necessity and utility of enhanced transparency in promoting investor
confidence and thus creating a more favourable investment environment were generally recognized.
Transparency had thus been the hallmark of India's investment policy in recent years.  Liberalization
had proceeded at a fast pace, and there had been no instance in which such liberalization had been
reversed.  Automatic approval procedures as well as the procedures for approval by the ForeignInvestment Promotion Board ensured prompt, fa ir and transparent administration concerning
applications for licences.  In addition, a foreign investment implementation authority had been
established to facilitate contacts between investors and the authorities.  The domestic provisions and
procedures to ensure transparency were complemented by transparency provisions contained in the
more than 40 bilateral investment treaties conc luded by India.  Her delegation was concerned,
however, that Japan's contribution in WT/WGTI/W/87 went beyond the mandate of this Working
Group by suggesting the establishment of notification requirements.  The procedures for transparency
envisaged by Japan were certain to be burdensome for developing countries.  Any rules-based
approach to transparency could prove to be onerous for developing countries with limited human and
material resources.  It was therefore best left to individual countries to provide for transparency in
their procedures relating to foreign investment.  Countries were certain to make best efforts in this
regard because it was in their own interest to do so.
54. With respect to a contribution introduced at the last meeting by the European Communities on
the impact of international investment rules on domestic policy instruments (WT/WGTI/W/84), the
representative of India questioned the conclusion drawn that a multilateral framework on investment
could be consistent with the pursuit of domestic policy objectives.  The contribution was too positivein its assessment of the bottom-up approach to multi lateral investment rules, without examining the
implications of that approach for developing countries.  It recommended an approach which involved
the granting of non-discriminatory treatment to foreign investors while allowing countries to pursue
their own policies.  It was not clear, however, how these two elements could be reconciled in the case
of a country which set policy objectives regarding industrialization and the transfer of technology.
The mention made of the GATS as a possible m odel for multilateral rules on investment raised
questions since the GATS allowed for sector-specific national treatment exemptions, which might not
be possible for investment measures relating to goods, such as limitations relating to local content
which could contravene the GATT and the TRIMs Agreement.  In the case of trade in goods, the
domestic industry had a level of protection afforded by tariffs.  For trade in services, the domestic
industry had a level of protection mainly through limitations on access in the sector concerned,including restrictions on national treatment.  In the case of foreign investment in goods, however,WT/WGTI/M/12
Page 17
there was no protection to the domestic firms.  Performance requirements to be fulfilled by foreign
investors could fill this void.  It was therefore fundamental that developing countries retain the policy
option of using performance requirements for achieving their policy objectives.
55. The representative of Korea stated that his delegation shared the views expressed in the recent
contribution by the European Communities in WT/WGTI/W/89.  Regarding the issue of the
advantages and disadvantages of bilateral and multilateral rules on investment, he noted that most
existing bilateral investment treaties lacked an in tegrated approach to the post-establishment and pre-
establishment phases of investment.  He also pointed out that, as stated at a previous meeting by the
representative of UNCTAD, an analysis of investment flows between parties to bilateral investment
treaties revealed no evidence of a significant influence of such treaties on investment flows.  A recent
contribution by UNCTAD (WT/WGTI/W/85) also underlined the fact that, although FDI flows to
developing countries had increased significantly, they were heavily concentrated in a few countries.Since FDI represented a package that included not only capital, but also technology, organizational
and management practices and skills as well as access to international markets, it was reasonable to
conclude that countries that did not attract a sufficient amount of FDI were deprived of these other
important tangible and intangible resources that were central to the development process.
Competition among countries to attract more FDI flows was increasing.  The harmful effect orreduction of FDI benefits to host countries due to incentive competition had also been raised.  In this
respect, Korea was of the opinion that a multilateral framework would offer an integrated approach
which could remedy many of the shortcomings of bilateral investment treaties.  As had been pointed
out by some Members, it was difficult to predict whether investment flows would actually increase as
a result of the creation of a multilateral framework.  However, there was no doubt that potential long-term benefits existed as long as there was agreement on the validity of the enhanced transparency and
predictability for the stable flow of FDI, whic h in turn would contribute to the overall economic
growth and development.
56. The representative of Korea considered that Japan's contribution in WT/WGTI/W/92 was
very useful in presenting various possible approaches to the definition of investment and their merits
and demerits.  In WT/WGTI/W/49, Korea had described the definition of investment under its
domestic legislation, which combined an enterprise-based definition at the pre-establishment stage
with a broader, asset-based definition at the post-establishment stage.  This approach was similar to
the third option discussed in Japan's contribution.  While her delegation had in past discussions taken
the view that the work of this Working Group shou ld be limited to FDI, it was willing to be open-
minded about this matter and to explore the various options described in Japan's contribution.
57. The representative of the European Communities stated that Japan's contribution in
WT/WGTI/W/92 demonstrated that the definition of investment was complex and delicate, but that it
was perfectly possible to resolve it if there was acknowledgement of the close relationship between
the definition of investment and the substantive rules to which that definition was intended to apply.
58. Referring to the contributions by Japan and Hong Kong, China on transparency
(WT/WGTI/W/87 and 90), the representative of the European Communities stated that his delegation
shared the view that transparency was of central importance to foreign investors, especially in light of
rapid changes in domestic rules.  Transparency was necessary not only with respect to the substance
of rules but also with regard to the decision-making process.  The use of the internet could greatly
reduce the costs of the dissemination of information.  The contributions by Japan and Hong Kong,
China illustrated how various WTO rules had contributed to enhancing transparency.  Developingcountries would benefit greatly from WTO rules to promote transparency of the investment
environment, but they might need technical assistance to comply with information and notification
requirements.  In response to the questions raised in the contribution by Hong Kong, China, he stated
that transparency provisions should in principle apply to all measures, policies and practices that
might affect investment, and to all levels of government.  While transparency provisions applicable toWT/WGTI/M/12
Page 18
the adoption of rules might be useful,  the kind of public comment  procedure mentioned by Hong
Kong, China was perhaps not realistic.  Provisions to promote procedural transparency were desirable,
but their precise scope would need further clarification.  He agreed with Hong Kong, China that the
use of the internet in the context of WTO provisions to promote transparency in the field of
investment merited further consideration.  Special exceptions to WTO rules on transparency mightneed to be envisaged, but the reasons for such exceptions would need to be clearly explained.  Finally,
his delegation recognized that it was necessary to minimize the administrative burdens on developing
countries that could result from transparency provisions in the field of foreign investment and that
technical assistance would need to be provided by developed countries to developing countries.
59. Referring to the European Communities' contribution in WT/WGTI/W/84, the representative
of Switzerland provided an overview of the main el ements of bilateral investment treaties concluded
by Switzerland regarding definition scope, the different rules applicable to the pre- and post-
establishment phases of investment, expropriation and dispute settlement.  It was significant that such
bilateral investment treaties dealt with many issues that were now discussed in this Working Group in
relation to the contents of multilateral investment ru les.  As in the case of international trade, where
bilateral agreements had been supplanted by the GATT, the very large numbe r of existing bilateral
investment treaties suggested the need for a multilateral approach.
60. In reaction to a comment made by the representative of the European Communities on the
relationship between bilateral treaties and multilateral rules on investment, the representative of
Australia asked the European Communities to explain further its views on which specific subjects it
considered to be suitable for inclusion in a multilateral framework.  She also requested Korea toindicate whether its contribution on expropriation and compensation in WT/WGTI/91 meant thatKorea was of the view that this subject should be dealt with in a multilateral framework.  She
encouraged further discussion on the issue of transparency raised by Japan and Hong Kong, China.
61. The representative of the European Communities, responding to the question raised by
Australia, stated that he did not consider that there were any issues that were inherently not suitable
for multilateral rules and that it was for the coll ective Membership of the WTO to decide on the
appropriate scope of multilateral rules.  As stated on other occasions, his delegation considered that an
issue as important as foreign investment should be subject to the same basic principles of non-
discrimination, transparency and access through negotiated commitments that had been successfully
applied in the framework of the GATT and the WTO to other areas of economic activity.
62. The representative of Chile agreed that transparency was one of the most important issues
with regard to investment.  Japan's contribution in WT/WGTI/W/87 was useful in that it examined the
various ways in which countries enhanced the transparency of their investment environment andhighlighted the fact that the administrative costs of such transparency were outweighed by the positive
effects of transparency not only vis-à-vis  foreign investors but also vis-à-vis  the domestic industry.
Her delegation considered that the majority of countries already applied policies to promote
transparency in regard to foreign investment and that progress had been made on this subject in a
variety of regional and multilateral fora.  In the case of the WTO, this included not only the GATSand the TRIMs Agreement but also the Trade Policy Review Mechanism.  Her delegation therefore
considered that it was possible to address the issue of transparency of investment rules in the WTO
and that a possible first step would be to consider how work at the multilateral level could contribute
to greater uniformity of information provided by countries.
63. The representative of the United States, referring to the contribution by the European
Communities in WT/WGTI/W/84, stated that the issue of the interrelationship between international
investment rules and national policies should be of interest to all delegations.  While investment flows
were extremely beneficial to host countries, her delegation recognized that there would always be
limited and negotiated exceptions that a country would find necessary to protect specific internalWT/WGTI/M/12
Page 19
interests.  In this respect, she referred to the appr oach adopted in bilateral investment treaties of the
United States and the NAFTA to extend protection to the pre-establishment phase, subject to a top-
down list of exceptions.  The experience of the United States was that this approach was realistic
given its success in negotiating bilateral investment treaties with many countries, most of which were
developing countries.  This experience showed that countries were willing to provide protection inthis regard.  In addition, the work underway in the FTAA negotiations was also likely to lead to the
adoption of a top-down approach.  These negoti ations included 34 countries in the Western
Hemisphere.  As Members continued their discussions in this Working Group, it was important to
remain open about the opportunities that existed in the WTO framework.  While the GATS offered
one approach for registering exceptions, Members should be willing to explore other mechanisms,
such as the top-down approach, which in the long  run would have a greater impact on investment
liberalization.  One reason why such a top-down approach might be achievable was that most
sensitive sectors were services and were already covered by the GATS.  The key point on this topic
should be that there were multiple ways to address the specific reservations that Members might have.
While the United States continued to believe that the time was not ripe for investment negotiations in
the WTO, it recognized that at some point in th e future such work might be warranted.  Given this
extended time line, her delegation preferred not to prejudge the make-up of a possible futureagreement.  The number of countries supporting a top-down approach might increase over time as
countries entered into additional international arrang ements.  Therefore, any future work in the WTO
should maintain flexibility to maximize investment protection while recognizing the diverse make-up
of the WTO.  With respect to paragraph 15 of WT/WGTI/W/84, she stressed that, when analyzing for
national treatment or MFN purposes the possible differential treatment of foreign and domesticinvestors, the investors compared needed to be in li ke circumstances.  For example, two firms with the
same manufacturing facilities and the same product but located in different regions might be held to
different air pollution control standards because of differences in levels of air pollution between these
regions.  These two investors would not be in like circumstances for purposes of the air pollution
controls.
64. With respect to the contribution by Japan in WT/WGTI/W/87, the representative of the
United States stated that US investors consistently mentioned lack of transparency as one of the main
impediments to foreign investment.  In view of the existing WTO provisions on transparency and thebroad support for the principle of transparency among WTO Members, it was appropriate to explore
this issue further.
65. In respect of the contributions by Japan and Hong Kong, China on transparency
(WT/WGTI/W/87 and 90), the representative of Hungary stated that his delegation shared the view
that the removal of explicit barriers to trade and investment needed to be accompanied by an adequate
degree of transparency.  Regulatory transparency was more conducive to more effective governance,
improved public confidence in government regulatory performance and brought economic efficiency.
In relation to paragraph 3 of WT/WGTI/W/87, he agreed with the view that transparency was
important in the context of risk assessment, the results of which had a considerable influence oninvestment decisions.  This was confirmed by Hungary's experience with foreign investors.  While
noting that transparency was only one of many factors affecting investment decisions, he agreed with
the observations in paragraphs 24 and 25 regarding the benefits of enhanced transparency for
developing countries.  He shared the views of Japan and Hong Kong China that the adoption of new
WTO rules on transparency in relation to investment necessitated a careful analysis of costs andbenefits in order to avoid too onerous transparency requirements.  In regard to Section 5 of
WT/WGTI/W/87, he stated that Article III of the GATS applied to all measures of general application
which pertain to or affect the operation of the GATS.  This included measures relating to the
establishment of a commercial presence under Mode 3 of the GATS.  This meant that the WTO
already contained transparency obligations in regard to FDI in the services sector.  The term"measures" as defined in Article XXVIII of the GATS included, but was not limited to, laws,
regulations, rules, procedures, decisions, and admini strative action.  It would seem logical, therefore,WT/WGTI/M/12
Page 20
that Article III of the GATS should serve as a source of inspiration when considering transparency
provisions on FDI.  He also noted that in its work on transparency the Working Group should take
into account the current discussions in the GATS Working Party on Domestic Regulations on the
possibility of elaborating further disciplines on transparency.  One important question debated in this
Working Party was whether new transparency disciplines should focus on obligations vis-à-vis
economic actors or vis-à-vis  other WTO Members.
66. In regard to the contribution by the European Communities in WT/WGTI/W/89, the
representative of Hungary stated that he shared the views expressed in this contribution, especially in
respect of the issues of flexibility, bilateral investment treaties, the usefulness of a multilateral
framework, the GATS as a precedent, and obligations of investors.
67. The representative of Mexico stated that the degree of transparency and predictability of an
investment regime could play an important role in attracting FDI.  For this reason, Mexico had
accepted obligations with respect to transparency in various bilateral and regional agreements and in
other international instruments, including the WTO.  Mexico had also made efforts at a domestic level
to promote transparency.  Thus, the law, regulation and procedures in respect of foreign investment
were published in the official gazette and were also accessible on the internet.  Also available on the
internet was a register of formalities with which domestic and foreign firms had to comply in order toundertake economic activities in Mexico, including procedures before the National Commission on
Foreign Investment.  In the multilateral context, Mexico considered that the principle of transparency
was one of the fundamental pillars of the WTO system, and agreed that this principle should be
included in any multilateral framework on foreign inve stment.  In this respect, she welcomed the
recent contributions by Japan and Hong Kong, China which identified the existing WTO provisionson transparency which were relevant to investment.  Regarding the questions raised in the
contribution by Hong Kong, China on the application and scope of possible new transparency
provisions with respect to foreign investment, she stated that in principle all measures affecting
investment should be covered by such rules, incl uding investment incentives.  However, the question
of the scope of such rules could not be addressed in isolation, but should be examined in the contextof the general question of the scope of a possible multilateral framework on investment.  She agreed
with Hong Kong, China on the need to explore how  the developments in the field of information
technology could be applied in the context of mu ltilateral rules on transparency.  Her delegation
would examine the other issues raised by Hong Kong, China in light of the need to promote
transparency of investment regimes while avoiding onerous obligations.
68. The representative of Malaysia recalled that at the last meeting his delegation had welcomed
Japan's contribution on transparency as a positive, new element in the work of the Working Group and
had indicated its interest in pursuing this issue.  While his delegation had on many occasions stressed
the importance of transparency of the investment environment, it failed to see the benefits of a WTO
agreement on transparency in the area of foreign investment.  Any government acting rationally
realized that it was in its self-interest to enhance tr ansparency if it wished to attract FDI.  In addition,
it was unclear how WTO dispute settlement procedures would operate in relation to a possibleagreement on transparency of investment measures.  Referring to the statement by Mexico, he
considered that it would be useful to exchange information on practices of individual Members with
regard to the promotion of the transparency of thei r investment regime.  He stressed that the Working
Group's mandate did not include work to define the scope and elements of a transparency agreement.
69. In response to the comments made by Malaysia, the representative of Switzerland stated that
multilateral provisions on transparency would be useful in facilitating access to information by small-
and medium-sized enterprises.  Notwithstanding na tional efforts to enhance transparency, such firms
often found it difficult to obtain relevant information.  The representative of the European
Communities stated that such multilateral provisions would enhance transparency between WTO
Members, which was distinct from transparency at a domestic level.WT/WGTI/M/12
Page 21
70. The representative of Hong Kong, China stated that, from earlier discussions on the question
of the definition of investment, his delegation had concluded that only a fairly limited definition might
be possible, but that it remained open to further discussions on this issue.  With respect to the
comment made by the European Communities that all measures affecting investment should be
subject to transparency rules, he stated that in pr inciple his delegation tended to agree with this view,
but that it was interesting that in the GATS Working Party on Domestic Regulation a suggestion had
been made that transparency should be limited to regulations.  Like Hungary, his delegation
considered that in its work on transparency the Working Group should take into account the
discussions in that Working Party.
71. The Working Group took note of the statements.
E. OBSERVER STATUS FOR INTERNATIONAL INTERGOVERNMENTAL
ORGANIZATIONS
72. In light of ongoing consultations in the framework of the General Council, the Working
Group agreed to maintain the status quo.
F. DATES OF NEXT MEETING
73. The Working Group agreed to hold its next meeting on 16 November 2000.  It also agreed
that the Secretariat would prepare a draft annual report to the General Council along the lines of the
reports submitted in 1998 and 1999.  The Chairman stated that at the meeting on 16 November the
Working Group would consider the draft annual repo rt to the General Council and decide on the date
of its first meeting in 2001.
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