WORLD TRADE  
ORGANIZATION  WT/WGTI/W/121 
27 June 2002 
 (02-3584) 
Working Group on the Relationship  
between Trade and Investment Original:   English 
 
 
 
COMMUNICATION FROM THE EUROPEAN COMMUNITY 
AND ITS MEMBER STATES 
 
 
 The following communication, dated 26 June 2002, has been received from the Permanent 
Delegation of the European Commission.  
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CONCEPT PAPER ON MODALITIES OF PRE-ESTABLISHMENT 
  
Note by the Secretariat
 
 
 
   
1. WTO Ministers have recognised at the Doha Ministerial Conference the case for a 
multilateral framework to secure transparent, stable  and predictable conditions for long-term cross-
border investment, particularly foreign direct inv estment, that will contribute to the expansion of 
trade. Paragraph 22 of the Doha Ministerial D eclaration mentions, inter alia, "modalities for pre-
establishment commitments based on a GATS-type, pos itive list approach" as one of the issues to be 
clarified in the Working Group on the Relationship between Trade and Investment, in the period until 
the Fifth Ministerial Conference. 
2. Among the issues listed in the Ministerial Decl aration, this is probably the one on which 
Ministers have given the clearest indications a bout the possible way forward. The issue of the 
admission of investment has already been addressed in papers presented in this Working Group since 
1997.
1 In this context, this submission aims at outlining the EC view on how the admission of 
investment could be addressed in  a multilateral framework on FDI. 
3. Since 1999 the EC and its Member States have made clear their position according to which, 
in the context of a multilateral framework on i nvestment, the question of admission should be 
addressed following a GATS-type approa ch based on positive commitments.  
4. We believe that this approach would allow enough flexibility for all WTO members. Each 
WTO member would be able to decide to open up (i .e. to commit) the sectors in which it wished to 
attract foreign investors in accordance to its need s and to its level of development. This would 
guarantee legal certainty and policy stability for potential investors. But no member would be forced 
                                                      
1 See, for instance WT/WGTI/W/22, W/23, W/28, W/29, W/30, W/33, W/42, W/47, W/51, W/54, 
W/71, W/79, W/84, W/96, and W/104. This concept paper is intended as a suggestion on the pre-
establishment provisions that c ould be included in a Multilateral 
Investment Framework. It should not be read as a text proposal. WT/WGTI/W/121 
Page 2  
 
 to take commitments in any given sector. This was the suggestion given by Ministers of WTO 
Members at Doha. 
I. CLEAR RULES ON THE ADMISSION  OF FOREIGN INVESTORS ARE 
IMPORTANT 
5. In order to analyse modalities of pre-establishment commitments based on a GATS-type 
positive list, the starting point for admission of inv estment has to be defined. Subject to admission 
rules in any international agreements, governments have the right to control entry and establishment 
of foreign companies within their territory. They can restrict the admission of investment in a two-
fold way: 
(i) They prohibit or restrict the entry of FDI, or discriminate among investors on 
the basis of their nationality or other elements. 
(ii) They impose entry conditions
2 to permitted FDI. 
6. Firstly, when such restrictions are in place fo reign investors either have no rights or only 
conditional rights to enter the market. Secondly, when  their possibilities to launch an undertaking are 
conditional, this by definition entails that forei gn direct investors are not treated under the same 
conditions as domestic investors, and in some cases as other third country investors. They might be 
excluded to invest in certain sectors which are only  open to domestic investors or other foreign 
investors, and/or they might be  subject to additional conditions. 
7. During the last decade several host countries have  unilaterally liberalised their investment 
climate and increased the opportunities for foreign comp anies to invest in their territory. However, a 
host of barriers world-wide still prevent foreign in vestors from entering markets in many countries. 
The rules that regulate the entry of foreign invest ors as provided for both in the domestic legislation 
and in the admission rules included in internationa l agreements concluded by a potential host country 
are important factors when investors consider  entering new markets. The admission rules may 
increase the legal certainty for compan ies that plan to set up an undertaking in a new host country by 
confining the wide area of discretion of host countries into a more predictable pattern. 
8. Generally speaking, open and transparent ad mission rules for foreign investment can 
significantly contribute to a better allocation of capital by creating a level playing field among potential host countries and among investors. At the same time, host-country governments usually 
keep a certain control on the entry of foreign i nvestors in order to preserve national development 
goals, security, public health, the protection of the environment, safety and public morals. These two 
objectives are not incompatible and can co-exist in  a multilateral investment framework, as they do 
already in most international investment agreements. 
II. DIFFERENT WAYS TO REGULATE THE ENTRY OF FOREIGN INVESTMENTS 
9. Host countries can regulate the admission and/or market access, of foreign investors in many 
different ways and for a number of reasons. Some sectors of the economy might be closed to any 
private investment either domestic or foreign. In  other cases host countries might wish to restrict 
specifically foreign investment in certain areas, to  screen the entry of foreign capital or to impose 
certain conditions on foreign enterprises who wish to establish their activities in the host-country's 
territory. 
                                                     
 
2 Provided they comply with existing international obligations such as for instance, the TRIMs 
provisions.  WT/WGTI/W/121 
 Page 3 
 
 
 10. UNCTAD3 has classified the different host-country measures affecting the entry of FDI in 
two groups: (a) measures relating to the admission and establishment, and (b) measures relating to 
ownership and control. Within th ese two broad categories, the different categories of measures can be 
classified under the following headings (see Annex) : (a) Controls over access to the host-country 
economy; Conditional entry into the host-country ec onomy; (b) Controls over ownership; Controls 
based on limitation of shareholder powers; Contro ls based on governmental intervention in the 
running of the investment; Other types of restrictions. 
III. HOW INTERNATIONAL AGREEMENTS DEAL WITH THE ENTRY OF FOREIGN 
 INVESTMENT 
11. While on the one hand most host countries wishing to attract FDI have liberalised unilaterally 
the entry conditions for foreign investors, on th e other hand, it is only through international 
investment agreements that host governments are bound to provide the entry conditions that give 
investors the predictability and security they seek. As already discussed in a number of meetings of 
this working group, there are two basic approach es to address the pre-establishment phase of FDI in 
international investment agreements: non-discr imination (NT and MFN) and market access. 
1. Non-discrimination: Most-Favoured-Nation (MFN) and National Treatment (NT) 
12. MFN treatment for the entry of  FDI ensures a level-playing field among foreign investors. 
This ensures that any more favourable treatment  on the entry of investors from one country are 
automatically extended to all other foreign investors.  This does not affect the internal economic policy 
of the host country, for instance, whether it liberalises or not certain economic sectors. 
13. NT at the pre-establishment stage prevents discrimination between foreign and domestic 
investors. However, this does not affect the right of the host country to completely exclude private 
investments in certain sectors of its economy.  
Both, the MFN and NT may be subject to exemptions, conditions and qualifications. 
 
2. Market access 
14. Unlike MFN and NT, which are relative standards of treatment, market access provisions 
address the host country’s regulations on the entry an d establishment of investment in absolute terms. 
In other words, in addition to the principles of non-discrimination, a host country may commit to refrain from applying certain specific restrictive measures to the entry of foreign investment, 
regardless of whether they are discriminatory or not. 
IV. THE GATS MODEL 
15. The GATS includes both the non-discrimination a nd the market access principles. It is the 
prime example of a multilateral agreement that provides for pre-establishment rules on FDI in the 
services sectors based on a positive-commitments (or positive list) approach. While the MFN principle applies across the board, the NT princi ple and market access rules apply only in those 
sectors in which WTO members have taken specific commitments in their schedule. 
                                                     
 
3 UNCTAD Series on issues in international inve stment agreements, "Admi ssion and Establishment", 
1999. WT/WGTI/W/121 
Page 4  
 
 1. Most-Favoured-Nation 
16. According to GATS Article II, the MFN obliga tion applies across the board (pre- and post-
establishment) to all services sectors unless an ex ception is contained in the country list of MFN 
exemptions. 
2. National Treatment 
17. In addition to MFN, the GATS includes a mixe d approach for pre-establishment obligations: 
national treatment combined with market access. Th ere is no general obligati on to remove all barriers 
concerning the entry and establishment of foreign service providers. According to Art. XVII NT only applies in the sectors where commitments have been made. The NT obligation refers to treatment, in 
respect of measures affecting the supply of services, which should be "no less favourable" than that of 
like national services and service suppliers. This does not always mean formally identical treatment, 
as long as it is ensured that the treatment applicab le which covers both pr e- and post-establishment 
measures does not result in less competitive market  conditions for the foreign services or service 
suppliers. Any treatment will be considered to be  less favourable if it modifies the conditions of 
competition in favour of services or service suppliers of the member (host country) compared to like 
services or service suppliers of any other member. This means that the NT principle covers both de 
facto  and de jure discrimination. Thus, while the NT principle in the GATT only applies to the 
products in question, the GATS NT provision appl ies to the competitive conditions imposed on the 
service supplier. WTO members, through their schedule of commitments, set out any limitations to NT in each sector listed. 
3. Market Access 
18. Market access for services in the sectors in which a Member  has undertaken commitments 
provides that these service suppliers will be treat ed no less favourably than as specified in the 
Member’s schedule. Article XVI (2) gives a list of  market access barriers,  such as for instance, 
limitations on the participation of foreign capital,  limitations on the number of service suppliers or 
measures which restrict or require specific types of  legal entity or joint venture. Members shall not 
maintain or introduce those limitations listed in Ar ticle XVI (2) in sectors where they have undertaken 
market access commitments, unless if specified in th eir schedule of commitments. In any case these 
limitations cannot violate the MFN principle. 
19. The NT and market access provisions in the GATS cover "measures affecting the supply of 
services", which includes all measures affecting, di rectly or not, the c onditions under which the 
service provider operates. 
V. CONCLUSION 
20. The EC and its Member States believe that th e GATS approach provides a useful model for 
addressing pre-establishment rules in a multilatera l investment framework. On the one hand, 
governments can keep full control of the sectors in which they wish to commit market access and NT 
to foreign operators and of the sectors in which they  do not feel ready to do so. On the other hand, it 
provides a transparent and predictable picture of the rules affecting the admission and establishment 
of investors in each host country. This approach has the merit of incorporating enough flexibility to 
allow a gradual and progressive liberalisation of FDI,  fully compatible with any development strategy 
adopted by WTO members. 
21. As in the GATS, a multilateral investment framework  in the primary (i.e. agriculture, fisheries 
and mining) and secondary (i.e. manufacturing) sect ors could incorporate a general MFN obligation 
(including exceptions), as well as market access and NT obligations in accordance with a schedule of  WT/WGTI/W/121 
 Page 5 
 
 
 commitments, sector-by-sector. The schedule of  commitments would enumerate each member’s 
limitations to market access and NT. 
22. Since FDI in services sectors, accordi ng to UNCTAD calculations, accounts for 
approximately half of wo rld FDI stocks and flows4, the GATS approach for pre-establishment 
commitments already applies to a large chunk of FD I and could therefore serve as a useful model for 
multilateral pre-establishment commitments in the primary and secondary sectors. Moreover, since 
WTO members have far fewer market access and discriminatory restrictions in the manufacturing sector than in the services sectors, the adoption of the GATS model to the manufacturing sector with 
respect to the pre-establishment phase would not seem to represent a major difficulty for host 
countries. Even for the primary sectors such as agri culture, fisheries and mining, which are usually 
more regulated and politically sensitive, the "positi ve list" approach used in GATS would allow for 
sufficient flexibility to take into account and acco mmodate each specific domestic situation. It is 
understood, however, that the relationship betw een pre-establishment rules in a multilateral 
framework on investment in the WTO and the GATS mode 3 provisions as well as those in other international agreements c overing investment will need to be carefully assessed. 
 
                                                     
 
4 UNCTAD World Investment Report, 2001. WT/WGTI/W/121 
Page 6  
 
 Annex
 
 Examples of host-country measures affecting the entry of FDI (as identified by UNCTAD
5): 
 A. M
EASURES RELATING TO THE ADMISSION AND ESTABLISHMENT  
1. Controls over access to th e host-country economy 
− Absolute ban on all forms of FDI. 
− Closing certain sectors, industries or activities to  FDI for economic, strategic or other public 
policy reasons. 
− Quantitative restrictions on the number of fore ign companies admitted in specific sectors, 
industries or activities for economic, strategic or other public policy reasons. 
− Investment must take a certain legal form. 
− Compulsory joint ventures either with State participation or with local private investors. 
− General screening/authorisation of all inv estment proposals; screening of designated 
industries or activities; screening based on fore ign ownership and cont rol limits in local 
companies. 
− Restrictions on certain forms of en try (e.g. mergers and acquisitions). 
− Investment not allowed in certain zones or regions within a country. 
− Admission to privatisation bids restricted, or conditional on additiona l guarantees, for foreign 
investors. 
− Exchange control requirements. 
 
2. Conditional entry into the host-country economy 
General conditions:  
− Conditional entry upon investment meeting certa in development or other criteria based on 
outcome of screening evaluation procedures. 
− Investors required to comply with requirements related to national security, policy, customs, 
public morals as conditions of entry. 
 
Conditions based on capital requirements:  
− Minimum capital requirements. 
− Subsequent additional investment or reinvestment requirements. 
− Restrictions on import of capital goods needed to set up investment possibly combined with 
local souring requirements. 
− Investors required to deposit certain guarantees. 
 
Other conditions:  
− Special requirements for non-equity forms of  investment (e.g. build-operate-transfer 
agreements, licensing of foreign technology). 
− Investors to obtain licenses require d by activity or industry specific 
− regulations. 
− Admission fees (taxes) and incorporation fees (taxes). 
− Other performance requirements (e.g. local content rules, employment quotas, export 
requirements). 
 
                                                      
5 UNCTAD Series on issues in international inve stment agreements, "Admi ssion and Establishment", 
1999.  WT/WGTI/W/121 
 Page 7 
 
 
 B. MEASURES RELATING TO OWNERSHIP AND CONTROL  
1. Controls over ownership 
− Restrictions on foreign ownershi p (e.g. no more than 50 per cent 
− foreign-owned capital allowed). 
− Mandatory transfers of ownership to local fi rms usually over a period of time (fade-out 
requirements). 
− Nationality restrictions on the ownership of the company or shares thereof. 
 2. Controls based on limitation of shareholder powers 
− Restrictions on the type of shares or bonds held by foreign investors (e.g. shares with non-
voting rights). 
− Restrictions on the free transfer of shares or ot her proprietary rights over the company held by 
foreign investors (e.g. shares cannot be transferred without permission). 
− Restrictions on foreign shareholders rights (e .g. on payment of dividends, reimbursement of 
capital upon liquidation, on voting rights, denial of information disclosure on certain aspects 
of the running of the investment). 
 
3. Controls based on governmental interventi on in the running of the investment 
− Government reserves the right to  appoint one or more members of the board of directors. 
− Restrictions on the nationality of directors, or limitations on the number of expatriates in top 
Managerial positions. 
− Government reserves the right to veto certain  decisions, or requires that important board 
decisions be unanimous. 
− "Golden" shares to be held by the host Governme nt allowing it, for example, to intervene if 
the foreign investor captures more than a certain percentage of the investment. 
− Government must be consulted be fore adopting certain decisions. 
 
4. Other types of restriction 
− Management restrictions on foreign-controlle d monopolies or upon privatization of public 
companies. 
− Restrictions on land or immovable prope rty ownership and transfers thereof. 
− Restrictions on industrial or intellectual pr operty ownership or insufficient ownership 
protection. 
− Restrictions on the use of long-term (five years or more) foreign loans (e.g. bonds). 
 
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