WORLD TRADE
ORGANIZATIONWT/WGTI/W/133
18 July 2002
(02-3985)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM SWITZERLAND
The following communication, dated 15 July 2002, has been received from the
Permanent Mission of Switzerland with the request that it be circulated to Members in advance of theWorking Group's meeting of 16-18 September.
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MULTILATERAL FRAMEWORK FOR INVESTMENT:  AN APPROACH TO
DEVELOPMENT PROVISIONS
I. INTRODUCTION
1. The Doha Ministerial Declaration recognizes the case for a multilateral framework on
investment to secure transparent, stable and predictable conditions for long term cross-border
investment particularly foreign direct investment (paragraph 20 of the Doha Ministerial Declaration).
In the period until the fifth Ministerial Meeting, the Working Group on the relationship between trade
and investment has been mandated to clarify several components of a multilateral framework on
investment. This communication aims at contri buting to the discussion of the Working Group
referring to development provisions (paragraph 22 of the Doha Ministerial Declaration).
II. THE RELATIONSHIP BETWEEN INVESTMENT, TRADE AND DEVELOPMENT
2. The relationship between investment, trade and development has been extensively
documented in the literature and also in the communications presented in the Working Group since
1997
1, as well as by UNCTAD and the OECD in particular.
                                                     
1The following communications were i.a. presented: Submission by Hong Kong, China
(WT/WGTI/W/10); Communication from Japan (WT/WGTI/W/11); Submission by the European Communityand its Member States (WT/WGTI/W/12); Communication from Colombia (WT/WGTI/W/15); Submission
from Korea (WT/WGTI/W/16); Communication from Bolivia (WT/WGTI/W/20); The relationship between
trade and foreign direct investment: FDI originating in developing countries, Note by the Secretariat,
(WT/WGTI/W/25); FDI and economic development, Communication from the OECD (WT/WGTI/W/26);Communication from Costa Rica (WT/WGTI/W731); Synthesis of the information made available to theworking group on the links between FDI and development, Note by the Secretariat, (WT/WGTI/W/38); The
effects of FDI on development: technology and other know-how transfers and spillovers, Note by the Secretariat
(WT/WGTI/W/65); Communications from India (WT/WGTI/W/72); (WT/WGTI/W/73); (WT/WGTI/W/74);International investment agreements: concepts allowing for a certain flexibility in the interest of promotinggrowth and development, Communications from UNCTAD (WT/WGTI/W/77); (WT/WGTI/W/78);Communication from the European Community and its Member States (WT/WGTI/W/84); Internationalinvestment and development: A report of UNCTAD's Work Programme in the area of investment after
UNCTAD X, Communications from UNCTAD (WT/WGTI/W/85), (WT/WGTI/W/94).WT/WGTI/W/133
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3. Over the past years, there has been a growing interest to analyse the relationship between
trade and investment as about one third of world trade is being undertaken within and another third
between multinational corporations. This clearly imp lies that policies affecting trade have an impact
on investment and conversely policies affecting inve stment have an impact on trade. It follows that
trade has become so closely intertwined with investment that further progress in the trade area cannotignore investment regimes.
4. Economic growth theory and empirical evidence demonstrate unambiguously that investment
is a key factor enabling societies to increase their living standards. Infrastructure, education and
professional training  represent the cornerstones  an economy on which production of goods and
services takes place. Investment is required to increase production and total factor productivity which
in many instances accounts for most of the growth. The main and most efficient form of technology
transfer takes place through FDI. Higher productivity leads to higher income, higher demand, higherconsumption and higher productive investment.
5. Investment plays a critical role in societies’ future for developed as well as developing
countries. The basic dynamics are identical. A major difference, however, is that in particular since
the 1980s debt crisis, developed countries have a far better access to international capital markets to
finance public as well as private investments. Developed countries have hard currencies and/orsavings rates enabling them to finance investment expenditures with international or national
borrowing.
6. FDI does not play the same macro-economic role depending on the development level.
Developed countries have various sources of capita l, are home- and host-countries of FDI,  transfer
and receive technology and know-how in the same types of industries . Based on historical industrial
development, some developed countries are very large net foreign investors while others are very
large net FDI recipients. In countries at various development stages, however, the role of FDI has
somehow been different; at a macro-economic level,  FDI enables them to ease foreign exchange and
savings constraints at the time when FDI is made. It represents a direct contribution to domestic
investment which is at the heart of economic and total factor productivity growth thereby contributingsignificantly to local management, know how, tech nology, backward and forward linkages and other
externalities.
2
7. It has also been recognized that in the 1990s, large capital inflows in some developing
countries did not contribute to raise total investment as domestic savings were decreasing. This was in
particular linked with a growing interest of firms for mergers and acquisitions as compared to
greenfield investments. In mergers and acquisitions, additional investments are nevertheless generally
made to upgrade the technological level and, in privatisations, to make privatised firms profitable. AsFDI earns profits, repatriation of earnings or amortisation of capital may lead to capital outflows
larger  than inflows on a project basis. A comple te assessment of a FDI project must however take
into consideration all the effects  on the host co untry including employment, backward and forward
linkages, fiscal revenues, technology and management transfer.
8. Limitations to international debt and borrowing of sovereign states and private companies
imply that FDI will keep playing in the future an important role in economic development.
3 During
and after the Asian financial crisis, the global amounts of FDI to developing countries remained at a
level of US$170 to 200 billion while long-term borrowings became negative. FDI has proven to be the
most stable factor in external financing, being  very valuable in a volatile world.
                                                     
2 Such externalities may include stronger competition, regulation, institution-building and education.
3 Between 1995 and 1999, FDI inflows remained at US$20 billion for five Asian countries mostly
affected by the financial crisis – Indonesia, Malaysia, Philippines, Korea, Thailand – while bank loans and debt
securities became negative. Source: World Investment Report, UNCTAD, 2000, p. 23.WT/WGTI/W/133
Page 3
9. FDI in general seeks natural resources, markets or efficiency . Natural-resource-seeking FDI  is
the oldest form of FDI. Trade creation results fr om the export of the natural resources and from the
import of equipment and specialised intermediate inputs. Additional gains can be achieved from
processing in the exporting country. Market-seeking FDI, generally follows a position established
through trade. Domestic presence, however, is the preferred option in order to be closer to the market(consumer and intermediate goods). For the home country, market-seeking FDI generally replaces the
existing exports in some production lines (trade-reduction effect) but adds to trade with export of
equipment, intermediate goods , technology and know -how (trade-creation effect). Efficiency-seeking
FDI focuses on standardized products. These FDI are trade-creating as they stimulate exports from the
host country back to the home and other countries; imports of machinery and intermediate products
are also necessary.
III. THE POLICY DIMENSION
10. FDI looks for countries fulfilling first basic conditions such as stable macro-economic policy
framework including price and exchange rate stability, distortions-free labour and product markets as
well as a given level of human capital and infrastructure. Second, flanking policies and governance
conditions referring to rules and standards such as non-discrimination, national treatment, sector
regulatory framework, judiciary system, property ri ghts, competition policy, anti-corruption policies
and environmental standards belong to the overall policy framework. In these areas, developing
countries might take measures to maximise the development effects of FDI.
4 According to
Balasubramanyam and Sapsfor5, FDI is much more effective in promoting growth and technological
change in open economies. FDI can be an important catalyst but is generally not among the prime
movers of development.
11. A firm may begin the internationalisation process with exports, then with distributorship and
then either with licensing or franchising agreemen ts or FDI. FDI requires the strongest involvement
and bears the highest risk. The trade regime of the host country has a significant importance for a
foreign investor with for instance access to inte rmediate materials locally or abroad for export-
oriented facilities. In that respect, export-processing zones may offer very favourable conditions.Large free-trade zones and customs unions may also be conducive to attract FDI in order to benefit
from economies of scales.
12. For home countries the most fundamental interest lies in transparency and legal security for
their companies abroad, including treatment according to the principle of non-discrimination
particularly in the post-establishment phase. These basic conditions are generally granted among
industrialised countries. As a matter of fact, countries and regions within countries compete fiercely
for FDI while their firms may also invest heavily abro ad in the same or other sectors. Skilled labour,
upstream and downstream industries, research centres, universities, tax regimes, infrastructure, trade
regimes and fiscal incentives belong to the policy framework decisive for the choice of a FDI
location.
13. The policy dimension of FDI as such is mainly expressed through applied regimes on entry
and establishment, ownership and control, operational restrictions, authorizations and reporting. Sincethe mid-1980s, the liberalization of FDI regimes has become the dominant feature of FDI policy
world-wide . This trend accelerated in the 1990s with generally more than 60 countries introducing on
                                                     
4 For example, a government may invest massively in education, create science and technology
institutions, industrial incubators, promote internet connectivity and enforce intellectual property rules to attractadvanced/high tech investments; or, create linkages with the SME and micro-enterprise sector to contribute to
poverty reduction.
5 N. Balasubramanyam, D. Sapsford, "FDI and the WTO", Discussion Paper, Department of
Economics, The Management School, Lancaster University, August 2001.WT/WGTI/W/133
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a yearly basis more than 100 regulatory changes more favourable to FDI, changes less favourable to
FDI averaging less than 10.6
14. FDI is subject to various other policies . In some areas, government may protect local markets
from foreign investment for legitimate national interests such as cultural heritage or protection of
minorities. In other areas, governments may di stinguish between FDI and national investment.
Investment in some strategic fields might be kept for nationals or foreigners’ participation and may be
limited to minority holding; some sectors benefiting from high rents – high barriers to entry or high
protection at the border – might also be sheltered against FDI competition. In cross-border mergers
and acquisitions, competition authorities may also have to assess the impact of a new firm on
competition. Environmental standards leading to sustainable production and minimal costs for the
national resource base may be devised. Privatisation of important public enterprises may be
undertaken after a thorough analysis of the market and potential buyers. Governments may alsoexclude some sectors for some time from FDI and privatisation if conditions maximising development
effects cannot be met.
7
15. Being a critical factor for economic and welfare growth, investment is at the crossroads of
numerous policies addressing issues such as industrialisation, job creation, technical training,
economic diversification, backward and forward linkages, research and development, technologicalcapability, rationalisation, competition, total factor productivity, fiscal revenues, trade regime and
balance of payments.
16. Investment has widely been recognized as a very complex phenomenon because it interrelates
with many policy fields. The role of FDI for developing countries is significant with a contribution of
36.7% of gross capital formation in manufacturing and 11.1% in all industries in 1998.
8 Appropriate
treatment for development is therefore of paramount importance in a multilateral framework on
investment.
IV. FLEXIBILITY FOR DEVELOPMENT
17. Current  international investment and investment-related agreements, both bilateral and
multilateral, include flexibility for development in provisions referring to their objectives, their
overall structure and modes of participation,  their substantive provisions and  application.
18. The objectives of international investment and investment-related agreements are commonly
included in the preambles which, while not granting any right or obligation, are relevant for their
interpretation. Development is being affirmed as a central objective of numerous investment or
investment-related agreements. Among multilateral agreements, the preamble of GATS states:
"Recognizing the right of members to regulate, and to introduce new regulations, on the supply of
services within their territories in order to meet national policy objectives and, given asymmetriesexisting with respect to the degree of development of services regulations in different countries, the
particular need of developing countries to exercise this right; … ", whereas the preamble of TRIPS
contains the following : "Recognizing also the special needs of the least-developed country Members
in respect of maximum flexibility in the domestic implementation of laws and regulations in order to
enable them to create a sound and viable technological base;… ". The Treaty establishing the Latin-
American Integration Association includes for instance in article 3 : "Differential treatments, as
determined in each case, both in regional and partial scope mechanisms, on the basis of three
                                                     
6 Source: World Investment Report 2001, UNCTAD, p. 6.
7 One important such condition might be that there are no guarantees for a competitive environment. A
private monopolist might absorb many of th e welfare gains produced by the investment.
8 For manufacturing, this contribution was only 11.7% in 1980 and 22.3% in 1990; for all industries, it
was respectively 1.2%, 4%.  Source: World Investment Report, UNCTAD, 2000, p. 5.WT/WGTI/W/133
Page 5
categories of countries, which will be set up taking into account their economic-structural
characteristics. Such treatments shall be applied in a determined scale to intermediate developed
countries, and in more favourable manner to countries at a relatively less advanced stage of
economic development ".
19. Special and differential treatment is a principle anchored in the overall structure and modes of
participation of GATT and WTO. According to special and differential treatment, some countries
benefit from particular rules (either permanently or temporarily) on a non-reciprocal basis.9
20. In GATS, Article XII:2 foresees that the liberalisation process will duly respect national
policy objectives and development levels of various members. Appropriate flexibility should be
provided to less developed countries to open fewer sectors , liberalize less types of transactions and
enlarge access to their markets progressively based on their development level (Article XIX:2 GATS).
Developing countries commitments in GATS are closely linked with the strengthening of theirdomestic services capacity, efficiency and competitiveness, improvement of their access to
distribution channels and information networks and liberalisation of market access in the sectors and
in modes of supplies of interest to their exporters (GATS, Article IV). GATS is all the more relevant
in this respect as mode 3 ("commercial presence") is directly linked with FDI.
21. Transitional arrangements aim at providing flexibility  by allowing more time before
implementing an agreement. For instance, Article 5 of the TRIMS, Article 65 of the TRIPS, Part VIII
of the Agreement on Subsidies and Countervailing Measures, all  provide for longer time frames for
compliance.
22. The use of positive lists is another important instrument allowing for flexibility for market
access. Under the GATS positive list approach, a Party lists in its schedule the services industriessubject to the rules of the Agreement. Furthermor e, according to Article XX of GATS, a Party may
introduce in its positive list terms, limitations and conditions on market access; conditions and
qualifications on national treatment; undertakings relating to additional commitments and where
appropriate the time frame for implementation of such commitments.
10
23. The limitations foreseen in Article XVI of GATS  illustrate the flexibility that a developing
country may exercise in that agreement. The measures foreseen may restrict or require specific types
of legal entities or joint ventures through which a service supplier may supply a service; limitations
may also refer to the participation of foreign capital in terms of maximum percentage limit on foreign
share holding of the total value of industrial or aggregate foreign investment.
IV. CONCLUSION
24. A transparent and predictable FDI regime is one of the key conditions to attract international
investment. A multilateral Agreement on such investment will provide a common basic framework inthis important policy area. Both host and home countries should benefit with the establishment of a
clear framework including all the main elements mentioned in paragraph 22 of the Doha Declaration.
                                                     
9 For example: Article XVIII of GATT, Part. IV of  GATT (adopted in 1964), the GSP – introduced at
the UNCTAD II Conference in New Delhi and covered by a waiver  -, the "enabling clause" (Tokyo RoundDecision on Differential and  More Favourable Treatment , Reciprocity and fuller  Participation of Developing
Countries)  and the Uruguay Round Agreements with time-limited derogations, greater  flexibility regarding
certain obligations and "best endeavours" clauses.
10 The issue of flexibility was also discussed in detail at the OECD Global Forum on Trade: Workshop
on the Development Dimensions of the Singapore Issues organized in co-operation with APEC and thegovernment of Hong Kong Special Administrative Region of China, Hong Kong, China 19 – 20 June 2002.Several important questions referring to flexibility were raised. See, Concluding Remarks on a personal basis by
Luzius Wasescha, Chairman of the OECD Trade Committee, p. 5, OECD, Paris, 26 June 2002.WT/WGTI/W/133
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However, as the liberalisation of FDI regimes durin g the past 20 years shows, other policies providing
for an enabling environment continue to play a key role in investors' decisions.
25. GATT, GATS, TRIPS and other WTO Agreements  include provisions referring to the
flexibility warranted by various stages of development. A multilateral Agreement on investment will
also  have to include development provisions allowing developing countries to take commitmentsaccording to their overall policy objectives and their level of development. It should strike a balance
between the adoption of common basic principles, recognition of today’s FDI regimes and the ability
of Members to pursue essential regulatory policies.
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