WORLD TRADE
ORGANIZATIONWT/WGTI/W/102
29 May 2001
(01-2684)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM THE EUROPEAN COMMUNITY
AND ITS MEMBER STATES
The following communication, dated 23 May 2001, has been received from the Permanent
Delegation of the European Commission.
_______________
TECHNICAL ASSISTANCE AND CAPACITY BUILDING
RELATED TO FOREIGN DIRECT INVESTMENT
I. INTRODUCTION
1. International Investment rules at bilateral, regional and multilateral level can play a key role
for the purpose of improving the legal environment for FDI world-wide, as a complement to domestic
reforms. It is widely acknowledged, however, that  investment rules alone are not enough to ensure
that all countries attract a greater proportion of the increasing flows of FDI. The main determinants of
international investment flows in a given country are market size and structure, macroeconomic and
political stability, level of infrastructure, labour skills, etc.
2. At the same time, it is also clear that the enabling environment for FDI is crucial to attract
foreign investors or at least to avoid discouragin g them. In our view, an improved legal framework
should be developed together with accompanying measures aimed at creating a supportive business
framework, which would maximise the potential that countries have for attracting FDI. This enabling
environment for FDI should include, beyond the lega l framework, good governance, effective justice
systems, respect for the rule of law, etc. The benefits of a sound enabling environment arewidespread. Not only does it make a country more attractive to FDI inflows, but also helps it to
absorb the flows in a more productive way, for exam ple through the efficiencies of better governance.
It can also help reduce capital flight and encourage greater domestic investment. In this context it will
be crucial to identify what appropriate assistance could be envisaged to ensure that developing
countries exploit their full potential by attracting more capital flows and consequently, increase theireconomic growth.
3. As a first step, developing countries could receive assistance on two fronts: on the one hand,
assistance should aim at identifying the key requirements for increasing their attractiveness as
investment locations and the key bottlenecks that frustrate domestic policies to this end. On this basis,
assistance could then be directed at building capacity  to:  (1) regulate the domestic markets in order to
attract investment;  (2) identify and deal with obstacles to ordinary market functioning, e.g.,
competition policy. On the other hand, developing countries should receive assistance to negotiate
effectively international investment rules and to transpose the results of negotiations into domestic
laws and regulations.WT/WGTI/W/102
Page 2
4. This paper attempts to identify possible fields for technical assistance in the context of the
possible future negotiations of international investme nt rules. The paper also refers to some of the
existing technical assistance instruments prov ided by the European Community as well as by
international organisations.
5. This submission does not propose to reach conclusions on these issues. Rather, its objective is
to open a debate among Members on:
(a) whether the existing instruments are adequate;
(b) whether they should be revised to take into account specific needs and objectives that
are not fully taken into account yet;
(c) whether notable gaps exist in the field of technical assistance and Capacity building
related to investment, and how they could be filled.
6. Thus, the paper is articulated into 2 main sections. The first section looks at the wider issue of
capacity building in the general context of sustainable development of Developing countries, and
gives some suggestions on how the WTO and its Members could contribute to improve the coherence
of the existing Technical assistance/Capacity buildin g initiatives related to trade and investment. The
second part deals with the immediate needs of a de veloping country wishing to negotiate international
investment rules, in terms of both identifying and defending its interests in such a negotiation and thentransposing the results of the negotiations into domestic laws and regulations.
7. This paper does not deal with the bigger issue of actually increasing and improving the
capacity building element of development assistance. This is an issue that goes well beyond the
mandate and the ability of the Working Group.
1. Building capacity to attract, absorb and benefit from FDI – Defining needs and
identifying gaps in current assistance programmes
8. As mentioned above, the main challenge relates to improving the overall capacity of many
developing countries to attract a higher share of FDI flows and to abso rb inflows in a manner
conducive to its smooth and sustainable economic development. This is a medium to long-term issue,
which needs co-ordinated and coherent support by international institutions and individual developedcountry donors also in order to maximise the benefits for those developing countries undertaking
efforts on their own in this regard. Clearly, all efforts in this area should be fully consistent and
developed within the context of the World Bank/UN global strategy on sustainable development and
poverty eradication.
9. The WTO and its Members, however, could kick-start a process of coherence in the area of
investment by providing developing WTO Members with resources to (a) identify the priorities for
action; (b) catalogue the technical assistance and capacity building initiatives already under way;(c) identify gaps in the overall assistance being provided; (d) ensure greater coherence of the action of
international institutions and individual donors; (e) identify the “capacity bottlenecks” that limit the
ability of developing countries to attract, absorb and benefit from FDI; (f) better target international
assistance to this end. WTO Members should consider to what extent existing instruments such as for
instance the Integrated Framework for LDCs or JITAP could be used for this purpose.
10. This would help developing countries to better target their request for assistance and greatly
improve the effectiveness of the assistance itself. It remains clear that there is no single model of
technical assistance  that all countries should follow. The technical assistance programmes have to be
targeted at the specific priorities and needs to be identified by individual or groups of developingWT/WGTI/W/102
Page 3
countries that would allow them to effectively implement as well as benefit from multilateral
investment rules.
11. Multilateral investment rules are designed to underpin domestic investment regimes and to
reassure foreign investors that, whatever the rules of a potential host country look like, they will
always comply with certain basic principles. The resulting greater legal certainty would producegreater propensity to invest abroad and greater FDI flows overall and would also minimise the risk of
capital flights. Moreover, a large number of potential host countries, especially among developing
countries, suffer from a “perception gap”, whereas th ey are perceived by foreign investors as posing a
much greater risk that the reality would justify. This multilateral underpinning of domestic investment
rules would go a long way towards bridging that gap.
12. Nevertheless, even once issues of (real or perceived) legal (un)certainty have been totally or
partially laid to rest, the fact remains that many developing countries have a limited capacity, becauseof their physical or geographical situation, or precisely because of their undeveloped economy, to
attract a growing share of FDI, absorb it into th eir economic fabric, and in the end fully benefit from
it. The fact that neither multilateral rules nor the WTO as an organisation can solve this problem does
not mean that they cannot play a positive role towards finding solutions.
13. The areas for improvement are many: for instance, better market opportunities (including
through regional integration); a functioning legal system; establishment and enforcement of fair
competition rules to curb abuses by foreign and domestic firms; development of better banking and
financial structures, including better lending facilities for local entrepreneurs; domestic laws and
regulations clarifying investors’ responsibilities; improved governance, etc. Efforts by developing
countries to achieve improvements in these areas could be supported through coherent and co-ordinated programmes by international institut ions (World Bank, IMF, UNDP, etc.), regional
institutions and individual donors. The need for co-ordination and participation of many donors in this
area is particularly acute.
14. By now the EU and its Member States have gained considerable experience with financial
and technical assistance in developing and transition countries. EU programmes are currently beingprovided to numerous partner countries, including those of Central and Eastern Europe, Russia and
the CIS, several countries in the Mediterranean, Latin America, ACP countries etc. Some of these
programmes cover technical assistance designed to strengthen public administration, harmonise
standards or reform legal systems.
15. In the context of foreign investment, such assistance – as will be provided for example by
PROINVEST
1 – is intended to focus on private sector development, on support of investment
promotion agencies as well as on legal and financial sector weaknesses in order to reduce non-commercial risk and to increase investors’ conf idence to engage in these markets. To foster
development it is thereby crucial to create a virtuous cycle of finance, investment and growth .
Adherence to the rule of law, nationally and internationally,  and local capacity building  in this
respect deserve special attention in (future) EU assistance programmes.
                                                     
1 The overall objective  of the programme is to increase investment (domestic, cross-border, and
foreign) in the ACP regions leading to economic growth, job creation and the strengthening of the private sector,
thus contributing to economic integration within these Regions and their incorporation in the world economy.
The programme serves to address a market failure where information on investment opportunities lacks
transparency and is difficult to obtain. ACP companies, specially SMEs, also have difficulty in identifyingpotential foreign partners. In addition, the market is not supplying sufficiently objective information on the risksinvolved in investment. Specifically, the programme se eks to promote investment and inter-enterprise co-
operation agreements (ICAs) in key sectors (e.g. agro-industry, tourism, mining, light engineering, buildingmaterials, ...), including strengthening the role of the Investment Promotion Agencies (IPAs) and intermediary
private organisations in the ACP Regions.WT/WGTI/W/102
Page 4
2. The negotiation of international investment rules and their transposition into domestic
laws and regulations
16. Besides the longer term issue relating to the capacity of a developing country to attract a
significant share of FDI flows and to absorb inflows in a manner conducive to its smooth and
sustainable economic development, the WTO and its Members could start considering what could bedone in the short to medium term.
17. In particular, should investment negotiations be launched, WTO Members would be faced
with the need to identify and analyse their domestic laws and regulations that would be relevant to the
operations of foreign investors and that could be affected by multilateral rules. This issue would be
relevant to both the negotiation and the implementation phase of investment rules.
18. This analysis assumes that, in an investment agreement, WTO Members would negotiate
obligations in three main areas:
(a) Transparency;
(b) Non-discrimination (both MFN and National Treatment);
(c) Market Access.
19. Technical assistance needs in these areas will be briefly examined in turn. In general,
however, an important element to improve developi ng WTO Members’ “negotiating capacity” would
be their ability to identify domestic laws and regulations that may need to be preserved, in order to
pursue developmental objectives, through, for instance, MFN exemptions, National Treatment
exceptions, no or limited commitments on access, etc.
20. Thus, enabling developing WTO Members to recruit and train staff for this work and/or
(perhaps on a transitional basis) to use external specialised human resources (e.g. teams of lawyersand economists) could go a long way towards improving their ability to negotiate investment rules
compatible with their level of development, as well as  to enable them to transpose these rules in their
domestic legal order.
(a) Transparency (and dissemination of information)
21. The transparency of the domestic investment regime is crucial to attract foreign investors in
any given country. The question of identifying the domestic laws and regulations that are of most
immediate interest to prospective investors and es pecially the dissemination of this information,
should be an important element of investment promotion.
22. It is objectively difficult for any country to identify and list all the domestic laws and
regulations that may be relevant to the operation of foreign investors (or of domestic investors too, for
that matter). These laws and regulations are usually scattered in different legislative and regulatory
texts (even where some of them are collected in an “investment code”) and are the responsibility ofdifferent branches of government or, in many countries, of independent agencies or sub-national
governments. A developing country will need help in financing and training the human resources to
comb through such domestic laws and regulations, and to devise suitable, effective and non-
cumbersome procedures to comply with any multilateral transparency and notification requirements.WT/WGTI/W/102
Page 5
23. The World Bank (MIGA2, FIAS3), for instance, has instruments aimed at improving
dissemination of information and investment promotion. In the Asia-Europe Meeting (ASEM)
context, partners have also created a website (the Virtual Information Exchange) which provides
information on the investment regime in each of the ASEM partners and on the implementation of the
ASEM Investment Promotion Action Plan (IPAP), in cluding a list of most effective measures to
attract FDI4. WTO Members should try to make the most of these instruments and share information
in order to identify best practices for investment promotion and dissemination of information.
24. Technical assistance for the specific goal of improving transparency could build on existing
projects and offer officials and investment promoti on agencies from Developing Countries support in
terms of know-how as regards (i) identification of  national legislation concerning investment, (ii)
dissemination of information, and (iii) strengthen ing the capacity to upgrade regulatory frameworks
and to maintain this upgrading. In this context,  the existing activities of the World Association of
Investment Promotion Ag encies (WAIPA) could also be very useful.5
(b) Non-discrimination
25. Non-discrimination provisions are likely to take the form of both MFN and National
Treatment obligations. Whatever negotiating format is chosen, neither of these obligations is likely to
be an absolute one, realistically speaking. There will be exceptions or exemptions from theseobligations in one form or another. A WTO Member, therefore, will have to identify the areas and
analyse the reasons for which it needs to preserve flexibility when deciding whether or not to grant
MFN or NT treatment to foreign investors. For instance, GATS today contains a list of MFN
exemptions. If a similar mechanism were to be used in an investment agreement, a WTO Member
would need to decide which exemptions it wishes to maintain.
26. Again, the problem developing WTO Members face here is one of having sufficient resources
to carry out this identification exercise. This identification would also be the obvious basis for the
implementation of MFN and National Treatment provisions in the domestic legal system after
conclusion of the negotiations.
27. Technical assistance for policymakers and their officials could concentrate on (i) the
identification and analysis of host countries’ relevant legislation, and (ii) the analysis of the cost and
benefits of excluding certain areas from MFN/NT provisions.
                                                     
2The MIGA Agency, part of the World Bank group, aims at encouraging foreign investment by
providing viable alternatives in investment insurance against non-commercial risk s in developing countries
thereby creating investment opportunities in those countries. MIGA is also involved in programs, disseminationof information on investment opportunities, and technical assistance that enhances national investmentpromotion capabilities.
3The Foreign Investment Advisory Service (FIAS) helps developing and transition country
governments design initiatives to attract foreign direct investment. FIAS advises on laws, policies, incentives,
institutions, and strategies. It helps countries increase the amount of investment they receive--and the benefitsthis investment produces.
4See more information on http://europa.eu.int/comm/external_relations/asem_ipap_vie/intro/
prog_report_en.htm.
5http://www.waipa.org.WT/WGTI/W/102
Page 6
(c) Market Access
28. This assumes that the preferred option to deal with access of foreign investors is that of
voluntary commitment, sector by sector, by each WTO Member. In this case too, a WTO Member
needs to make a cost-benefit analysis as part of the negotiation process. Some WTO Members may
need to identify the sectors where opening to foreign investors would be problematic for theirdevelopmental objectives and where they wish, therefore, to maintain restrictions to access. The same
analysis would then be the basis for dismantling, in the implementation phase, those restrictions that
the Member has chosen not to maintain.
29. Technical assistance for policymakers in this area could focus on: (i) the economic analysis of
removing or maintaining restrictions to entry in a given sector; (ii) programmes aimed at facilitating
the transposition of international rules into domestic legislation.
30. Good examples in the area of technical assistance for the negotiation of investment rules
already exist. UNCTAD is running a multi-donor project aimed at assisting developing country
governments in the negotiation of international investment agreements.
__________