WORLD TRADE
ORGANIZATIONWT/WGTI/W/79
2 June 1999
(99-2234)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
MULTILATERAL FRAMEWORK ON INVESTMENT:
A REALISTIC APPROACH
Communication from the Republic of Korea
The following communication, dated 2 June 1999, has been received from the Permanent
Mission of Korea with the request that it be circulated to Members.
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I. INTRODUCTION
1. There are basically two schools of thought on foreign direct investment (FDI):  the
globalization school and the internalization school.  The former emphasizes the benefits of economic
integration resulting from the liberalization of FDI regulations while the latter contends that activegovernment intervention is necessary to ensure sustainable economic development in the host country.
2. The globalization school sees the multilateral framework on investment (MFI) as an
institution promoting and accelerating free flows of in vestment at the global level.  The internalization
school believes in the minimization of external intervention in establishing national regulations
governing FDI while reserving maximum rights for governments to take appropriate actions whenever
necessary.
3. An MFI should reconcile the objectives of both schools.  An equilibrium must be reached
between enhancing global welfare through freer flows of investment and respecting sovereign
countries' right to formulate their own policies, in particular development policies in developing
countries.  This requires an optimal combination of flexibility and efficient resource allocation – not
an easy task as the fifty years of the multilateral trading system have illustrated.
4. The overall balance of interests among Members is at the heart of all negotiations in the
WTO.  For an agreement to be reached on an MFI in the WTO therefore, the rules adopted would
have to reflect the different realities faced by each Member so as to represent an overall balance of
concessions – the best way to secure a consensus.  This implies that an agreement on investment in
the WTO should be different from the MAI of the OECD.  The MAI's standards were unrealistically
high and thus failed to get broad based participation.
5. Bearing this in mind, this paper offers a possible WTO approach to an MFI in terms of
investment protection and liberalization.  The paper is presented solely to facilitate discussions in the
Working Group, and is without prejudice to Korea's views on the future work programme of the
WTO.WT/WGTI/W/79
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II. INVESTMENT PROTECTION
6. The purpose of concluding a bilateral investment treaty (BIT) is to protect investors from
non-commercial risks by agreeing on mutual guaran tees between the parties to the agreement.  At
present there are some 1,500 BITs world-wide, all of wh ich differ in content.  However, as most BITs
include a provision for MFN treatment, they are by and large similar in essence, thereby facilitatingtheir compatibility with an MFI.
7. Even if a country concludes a number of BITs, all with different terms, foreign investors will
be granted the most favourable terms possible among all the agreements, thanks to the MFN clause.
As such, the most important factor is not the uniqueness of terms within a specific BIT, but the
guarantee of MFN treatment.
8. If a host country is bound by numerous BITs, a foreign investor must examine the details of
all BITs signed by the host country to have a clea r understanding of the level of protection guaranteed
by the MFN treatment.  An MFI is an appropriate re medy to such a lack of transparency inherent in
the coexistence of multiple BITs.
9. If an MFI sets a standard higher than the on e in any individual BIT, it could guarantee the
highest level of protection and offer the most transparent standard of investment protection possible in
the host country.  Even if the standard set by an MFI is lower than those in some BITs, it may still be
higher than those in a significant number of other BITs.  Therefore, an MFI could enhance, to a great
extent, the overall level of protection and transparency in host countries.
10. The level of protection in an MFI could be set at the highest, lowest and medium levels.
Protection at the highest level would be the ideal one since the benefits of transparency would be
maximized and the free-rider problem would be eliminated.  Nevertheless, the most realistic approachwould be the third approach aiming at achieving a reasonably high standard of protection based on a
consensus of all participants.
11. The countries whose investment protection falls short of what is offered in an MFI could
subsequently raise their level of protection.  This would not only benefit investors but also the host
country, in terms of improving its investment environment.
III. INVESTMENT LIBERALIZATION
12. The GATS could serve as a model for multilateral rules on the liberalization of foreign
investment in sectors that it does not already cover, e.g. the manufacturing sector.
13. Complications arising from the application of the GATS model to sectors other than services
could be minimal.  For the manufacturing sector in particular, applying the GATS model would
hardly create complications as there are relativel y fewer restrictions on foreign investment in this
sector than in services in general.
14. In the case of primary industries such as agriculture, fisheries and mining, the application of
the GATS model could give rise to problems related to the unique nature of the industries, the
technicalities involved, and the particularities of a country's situation.  Nevertheless, a flexible
approach could offer solutions to these problems.
15. The modality of liberalization adopted by GATS is different from the one used in the
negotiations for the MAI at the OECD.  The OECD  MAI employed a top-down approach which had
aimed, in principle, at comprehensive liberalization in all areas.  In contrast, GATS adopts a bottom-
up approach (a "positive list") which allows each country to choose the level of liberalizationWT/WGTI/W/79
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depending on its domestic situation.  Thus, given its flexibility, the bottom-up approach should be
favoured during MFI negotiations.
IV. CONCLUSION
16. Briefly introduced in this paper are two basic concepts that should be factored in an MFI
within the WTO framework:  an optimal standard of protection and a bottom-up approach inliberalization.  These two concepts may raise a myriad of questions when scrutinized.  However, they
could offer ways to devise an MFI that reconciles the need for flexibility left to national governments
with the necessity to enhance transparency and predictability and ultimately global welfare.
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