RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTI/W/74
13 April 1999
(99-1469)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM INDIA
The following communication, dated 22 March 1999, has been received from the Permanent
Mission of India with the request that it be circulated to Members.
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I. INTRODUCTION
1. In the meeting of the Working Group in June 1998, discussion on Item-IV of the Checklist of
issues included discussions on the criteria for evaluating international investment agreement from a
development perspective.  India has benefited from the various approaches to evaluate the
development dimension of international investment agreement referred to by UNCTAD. These may
not, however, address the fundamental concern that a multilateral agreement would inherently remove
the flexibility for developing countries to pursue development policies tailored to their specific needs.The more elaborate submission proposed by UNCTAD on this issue may help in further
understanding of the issue.  In the meantime, the discussions held on the first-three items of the
Checklist provide a certain direction for understanding of the issue.  This paper is an attempt to
identify this direction.
II. THE RELATIONSHIP BETWEEN FDI AND TRADE
2. Conventional analysis of the relationship betwee n foreign direct investment (FDI) and trade
in terms of whether FDI and trade were complements or substitute is becoming less relevant in aglobalizing economy, in which trade and investment were determined simultaneously by decisions of
multinational corporations regarding the location of their production facilities.  The determinants of
the investment decisions of the MNCs have been discussed and it has been found that an investment
agreement may not be one of the important determinants.  The three main reasons for multinational
corporations to invest in developing countries are natural resource availability, a large domesticmarket and a suitable platform for manufacturing exports.  The choice of a particular country, in
addition, may depend upon the strength of local institutions, the quality of local infrastructure and
work force, and the degree of macro-economic stability. For the latter set of reasons, a favourable and
attractive domestic investment régime along with strong fundamentals, strong domestic regulatory
and adjudicatory institutions and a predictable régime of investment protection may influence FDIinflows.  On the other hand, requirements of capita l in developing countries may be more for the
former set of reasons.  This is a significant development dimension in the FDI-trade relationship.
3. FDI is neither a panacea, nor the most important factor in development.  National policies, on
the other hand, may significantly influence developmen t oriented FDI flows.  From this point of view,
national policies have a three-fold rôle, firstly, to attract FDI through a liberal regime, secondly, toencourage FDI in priority areas and thirdly, by reducing possible negative effects of FDI.  In fact, FDI
might, in certain circumstances, need to be phased in  at a slower rate than the rate determined solelyWT/WGTI/W/74
Page 2
by market forces. Also, the importance of a sound and sustainable macro economic and financial
environment cannot be over emphasised.
4. At the beginning of the work in this Working Group, India had identified a list of themes to
be pursued.1   Consideration on some of these has advanced while more analysis is needed in many
others, such as factors in investment policies that help in raising standards of living, role of domesticsavings and fiscal balance, implications of FDI for effective technology transfers and domestic
capacity building and the role of the freedom enjo yed by national governments in pursuing their own
national industrialization policies.
5. It has been stressed by many delegations, particularly ASEAN, Egypt and India, that the
negative effects of FDI needs to be explored further.  It has also been emphasised that sectoral
targeting may be more effective in addressing not only national but also regional or locational sector
specific objectives.
6. While discussing the Secretariat document WT/WGTI/W/38, many issues have been
discussed in the previous meetings, particularly relating to identification of negative effects of FDI.
Seen in the context of the predominance of FDI flows through multinational corporations, the issue
needs further debate.  While non-market capital flows are more amenable to addressing development
priorities due to the inevitable involvement of national governments, free market flows may needstricter disciplines at the national as well international levels. Can these disciplines be
multilateralized, particularly in view of the unique circumstances of each FDI recipient? Selective and
judicious intervention of the government may often be required to support domestic industry and
technology creation, sometimes even to ensure a level playing field for domestic enterprises,
particularly the small- and medium-sized enterprises.  The recent financial crises in Asia and the rôleof prudential regulation for managing portfolio equity investment and bank lending need to be
especially considered in this regard.
7. As mentioned in the Secretariat document, while FDI has positive effects as a whole, it is
essential to consider the possible negative effects, such as restrictions on transfer of technology, the
impact on balance of payments and exchange rates and the possible crowding out of domesticentrepreneurial activities.  Further, correct policy environment is a prerequisite to full realisation of
benefits of FDI.  India’s contribution relating to transfer of technology may be of particular
significance.
2  While there may be an assumption that FDI promotes technology transfer, various
studies, beginning with WIR 1991, pointed out that countries at low levels of development are likely
to be able to induce FDI only into low technology activities.  This is confirmed by WT/WGTI/W/27,
in a way, by pointing out that US affiliates are increasing their technological capability with
technologies purchased from their foreign partners and sharing the technological advances.  On theother hand, for low-income economies, as indicated by Lan and Young (Transnational Corporations,
volume V, No.1, April 1996), the technology contribution of transnational corporations was deemed
to be from low to moderate, with technology flows dominated by hardware transplants and training in
basic operations.  A possible way out would be, as pointed out by Joseph M. Grieco (1984), where
positive national policy intervention in the computer industry in India played a positive rôle intransferring intangible assets.
III. THE ECONOMIC RELATIONSHIP
8. Secretariat document WT/WGTI/W/7 has greatly benefited the discussions in this area.  Many
questions, however, need further exploration.  Some concluding remarks in this paper attempt to
simplify a very complex relationship, complicated further by the variety of economies which are FDI
                                                     
1 WT/WGTI/W/3.
2 WT/WGTI/W/73.WT/WGTI/W/74
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recipients as well as the variety of developmental reasons for which FDI could be desirable.  As
pointed out by Egypt and others, an examination of the relationship of investment liberalization and
economic development through historical analysis of  evolution of investment policies in individual
countries would be relevant, particularly in view of the fact that increased trade should not always be
assumed to be beneficial per se .  FDI, as an instrument of economic development, goes far beyond
that, and its welfare-enhancing aspects have to be factored in.
9. There is little doubt that developing countries are net importers of capital and technology and
that there is a huge competitive gap between their enterprises, particularly small- and medium -
sizedenterprises and the transnational corporations.  Developing countries recognise the importance
and value of FDI and foreign technology to th eir growth and development.  Their autonomous
liberalization of FDI and trade régimes and their increasing shift towards market and outward oriented
approach in economic policy-making bears ample testimony to it.  However, their experience showsthat the building up of domestic entrepreneurial industrial and technological capabilities is essential
not only to cope with, but also to realise the full benefits from FDI and foreign technology.  Without
sufficient domestic capabilities, FDI and foreign technology seldom permeate the productive system
of the national economy.  Selective and judicious interventions of the Government are therefore
considered necessary.  It also becomes desirable for developing countries to employ an appropriatemix of incentives and performance requirements for FDI to achieve specific developmental objectives
as well as certain political and social objectives.  The ASEAN
3 and UNCTAD4 interventions in the
previous meetings on investment incentives are relevant in this context.
10. Equally important is the Indian contribution on mobility of labour.5  As mentioned earlier,
FDI is an issue of wider economic concerns than just trade. Capital and labour are complementaryfactors of production and need to be studies together and, if desirable, liberalized together in order to
gain maximum developmental benefits.  The suggestions given in paragraph 12 of India’s paper could
be considered further.
11. Clearly the relationship between trade and FDI is complex and needs to be studied further,
particularly in view of the increasing role of transnational companies.  Factors such as mobility oflabour, investment incentives and performance requirements, and the development aspect of this
relationship would require further consideration before any conclusions on investment arrangements
could be drawn up.
IV. EXISTING ARRANGEMENTS
12. By far, the most explored of existing international instruments in the Working Group has been
the bilateral investment treaties.  These provide a predictable climate for foreign investments.  The
Secretariat document WT/WGTI/W/22 provides an excellent overview of the existing arrangements.UNCTAD's  work in this area is also enlightening.  Discussions have shown a number of common
strains in bilateral treaties, while pointing out certain divergences too.  The proliferation of bilateral
treaties itself is a measure of their success in providing a predictable climate.  On the other hand,
studies have also pointed out that transnational corporations may not even be aware of the existence
of such treaties – the determinants of their FDI decisions lie elsewhere.
13. India and many other developing countries firmly believe that investment should take into
account their developmental needs and concerns.  While it could be argued that an investment-
friendly agreement is ipso facto  development-friendly also, the experience of many developing
countries is that the development dimension cannot be taken care of merely by statements of
                                                     
3 WT/WGTI/W/41.
4 WT/WGTI/M/5, paragraph 20.
5 WT/WGTI/W/39.WT/WGTI/W/74
Page 4
principles or exhortations in a treaty.  In their view, the pursuit of the developmental objectives in the
light of each country's unique needs and circumstances requires sufficient freedom and flexibility to
pursue one’s own policies.  This would translate in to the freedom to regulate the entry of foreign
investment while at the same time providing predictable policies, laws and regulations once the
foreign investment has entered.  Most of the bilateral treaties provide an assurance for investmentprotection in accordance with the host countries laws, regulations and policies.
14. Discussions have not shown clearly the benefits emanating out of multilateralization of
bilateral treaties.  It may, therefore, be more advisable to continue with the existing trends and
arrangements, namely, autonomous liberalization of FDI policies and régimes together with bilateral,
regional and inter-regional treaties and to continue discussion on the crucial issues identified by the
Working Group.  This would enable existing trends and arrangements to evolve and gather further
strength and momentum in time for a review once the discussions on the issues before the Working
Group reaches a definitive stage.
V. FUTURE COURSE OF ACTION
15. Item IV of the Checklist has had much less time of the Working Group than the other items.
This is obvious, as the issues in this item emanate from the work done in the previous items. The work
in the previous items has generated a number of issues needing further discussion in this educativeprocess before any conclusions could be drawn for the work on Item IV. As mentioned above, the
common features as well as possible divergences in the existing arrangements have been identified.  It
is felt, therefore, that existing trends may be allowed to continue and evolve organically, particularly
for addressing the development perspective of a future course of action more fully, through a
deepening and widening of the debate.  In parallel, work may be progressed on some issues relating torights and obligations.  As mentioned in this context, a common definition of investment would have
to be explored further.  The issue of admission of foreign investment also needs further work as
indicated during the discussions in the last meeting.
16. On the question of obligations, discussions have identified the OECD Guidelines for
Multinational Enterprises, the draft UN Code on Transnational Corporations and the Guidelinesestablished therein, and the UN Set of Multilaterally Agreed Equitable Principles for the Control of
Restrictive Business Practices as some of the existing arrangements that could be explored further.
Work being undertaken in other fora on investor obligations could also be used to enlighten the
discussions.  The positive and negative effects of the existing investor obligations could also be
analysed.
17. UNCTAD work on the criteria to evaluate the development dimension of international
investment agreements is being reviewed after th e April 1998 Expert Meeting. Until now, the various
approaches being explored by them assumed that the development dimension can be integrated into
the existing tenets of investment arrangements.  The flexibility necessary for developing countries to
pursue development policies tailored to their specif ic needs would be missing in such approaches.
Hence, the freedom of governments to pursue development strategies suited to the needs of individual
countries need further exploration before the structure and the design of international policy isevolved.  As mentioned in the UNCTAD document on bilateral treaties in the mid-nineties, BITs are
in a constant state of evolution, while at the same time providing legal protection to foreign
investment and thus reducing non-commercial risks.  Some of the advantages of these treaties are that
they can be tailored to the specific circumstances of the two parties and are relatively easy to
conclude.  Some of these disadvantages pointed out are that they may favour one party’s interestsdisproportionately and their proliferation may lead to a complex web of inconsistent provisions.  As
regards the development dimension, UNCTAD points out that the main task of furthering a country’s
development objectives through FDI remains with in dividual governments.  Bilateral treaties allow
appropriate national policy instruments to be given effect to by subordinating the admission ofWT/WGTI/W/74
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investment to the host country’s domestic laws.  We welcome the UNCTAD initiative on developing
a set of development criteria by which to judge the quality of investments resulting from these
treaties.
18. Clearly, enough work has not yet been done by the Working Group to move forward on the
question of the relationship between existing and possible future international cooperation oninvestment policy.
VI. CONCLUSION
19. For India, the development dimension is at th e core of the discussions of the Working Group.
This dimension is being explored in its various facets and the variety of issues involved.  The
heterogeneity among developing countries themselves further complicates the discussion.  Each
country’s needs, endowments, perceptions and po litical and economic policies would influence the
discussions.  To pick up common threads is a difficult, but necessary task.  For the time being, wecould safely conclude three elements of the development dimension.
20. Firstly, investment arrangements need to be investor friendly as the flow of investments is one
of the pre-requisites of the realisation of developmental objectives.  A fair and equitable treatment and
a legal guarantee for treatment and protection of in vestment in the post – admission stage may provide
such investor-friendliness.  The bilateral treaties attempt to achieve precisely this.
21. Secondly, investment arrangements must provide sufficient freedom and flexibility to host
countries to pursue their own policies for admissi on and regulation of foreign investment in the light
of their own needs and circumstances.  The ability of host developing countries to build their
industrial and technological capabilities hinges upon the freedom and flexibility they have to regulate
capital flows.  This freedom is also critical as to how the political sensitivities associated with capital
flows are handled.  The regulatory policies adopted by some of the successful economies in the
previous decades, and the lessons learned from some of the financial crises experienced in this decade
are relevant for this element of the development dimension.
22. Thirdly, the obligations of the investors must not be ignored.  It is a matter of debate as to
which part of these obligations need to be addressed through national policies and which throughinternational arrangements, but the issue needs to be  addressed fully to move forward in the area of
investment protection. Performance requirements , restrictive business practices, transfer of
technology, transfer pricing, environmental protection, disclosure of information etc. are some of the
issues for discussion in this element.
23. In conclusion, to come back to the criteria for evaluating international investment agreements
from a development perspective, it needs to be reiterated that Members have greatly benefited from
the discussions in this Working Group.  Experiences have been shared with each other and manycommon threads have evolved that need to be pursued further.  Many issues have been identified
while others may remain to be identified in the fu ture.  The need of the time is to broaden and deepen
the analysis while allowing the existing arrangements to evolve.
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