WORLD TRADE
ORGANIZATIONG/C/W/307/Add.1
8 February 2002
(02-0600)
Council for Trade in Goods Original:  English
TRADE-RELATED INVESTMENT MEASURES AND OTHER PERFORMANCE
REQUIREMENTS
Joint Study by the WTO and UNCTAD Secretariats1
Addendum
PART II
Evidence on the Use, the Policy Objectives, and the Impact of
Trade-Related Investment Measures and Other Performance Requirements
                                                     
1 The terms of reference are as follows:  "To assist WTO Members to carry out the review called for in
Article 9 of the TRIMs Agreement, the WTO and UNCTAD Secretariats are requested to prepare a joint study
for the WTO Council for Trade in Goods.  The study should provide a factual and objective examination of theuse that governments have made of trade-related investment measures and other performance requirements as
policy tools for industrial development, their effects on international trade and investment flows and on
economic growth and development, and the treatment of them in other international agreements andinstruments.  The study should be based on a thorough review of the available literature, including the results ofanalysis carried out on this subject by other intergovernmental organisations." (G/C/W/266).G/C/W/307/Add.1
Page i
TABLE OF CONTENTS
I. INTRO DUCTION ................................................................................................................. ...1
II. EVIDENCE ON THE USE OF TRADE-RELATED INVESTMENT
MEASURES AND OTHER PERFOR MANCE REQUIR EMENTS...................................1
A. T RADE -RELATED INVESTMENT MEASURES AND OTHER PERFORMANCE
REQUIREMENTS APPLIED IN SPECIFIC SECTORS :  M OTOR VEHICLES ........................................2
B. T RADE -RELATED INVESTMENT MEASURES AND OTHER PERFORMANCE
REQUIREMENTS APPLIED IN THE CONTEXT OF THE REGULATION OF FDI .................................7
III. POLICY OBJECTIVES OF TRADE-RELATED INVESTMENT MEASURES
AND OTHER PERFORMANCE  REQUIREM ENTS ........................................................19
IV. THE IMPACT OF TRADE-RELATED INVESTMENT MEASURES AND
OTHER PERFORMANCE REQUIREM ENTS..................................................................21
A. I MPACT ON INTERNATIONAL TRADE FLOWS ............................................................................21
1. Local content requirements ................................................................................................... 21
2. Export performance requirements........................................................................................22
3. Trade balancing requirements...............................................................................................23
B. I MPACT ON INTERNATIONAL INVESTMENT FLOWS ...................................................................24
1. Local content requirements ................................................................................................... 24
2. Export performance requirements........................................................................................253. Trade balancing requirements...............................................................................................25
C. I
MPACT ON GROWTH AND DEVELOPMENT ...............................................................................26
1. Impact on resource allocation and growth ...........................................................................26
2. Impact on technology transfer...............................................................................................2 9
3. Impact on employment and wages ........................................................................................304. Impact on competit ion........................................................................................................ ....31
REFERE NCES ..................................................................................................................... .................32G/C/W/307/Add.1
Page 1
I. INTRODUCTION
1. This is Part II of the joint study which the WTO and UNCTAD Secretariats were asked to
prepare by the Council for Trade in Goods.  Part  I (G/C/W/307) covered the issue of scope and
definition, and provided an overview of relevant provisions of existing international agreements.
Part II reviews the use that governments have made of trade-related investment measures and otherperformance requirements, and their effects on trade and investment flows and on economic growth
and development.
2
II. EVIDENCE ON THE USE OF TRADE-RELATED INVESTMENT MEASURES AND
OTHER PERFORMANCE REQUIREMENTS
2. This section surveys the use that governments have made of trade-related investment
measures and other performance requirements, first as sector-specific industrial policies where in the
main the measures have been of general application, regardless of the ownership of the firms affectedby them, and second in the context of the regulation of FDI where the measures have been targeted
specifically at the activities of the subsidiaries of foreign-owned firms.
3. The survey is not comprehensive.  The information has been drawn from a variety of official
and non-official sources.  It is believed to be accurate, but since it has not been verified by the
Members concerned it should be regarded as illustrative of the range of policy settings in which themeasures have been applied, and not as an authoritative statement of laws or regulations.  In several
instances it has not been possible to verify whether the measures described are still in force.
4. A number of studies has addressed the overall incidence of trade-related investment measures
and other performance requirements.
3  There are limitations to the accuracy and comparability of
data4, but even so the following broad observations seem valid.
• Certain measures have been used relatively intensively by both developed and developing
countries, in particular in the motor vehicle industry.
• The OECD found a trend toward the removal of the measures in many OECD member
countries in the late-1980s5, and since then it would appear that there has also been a
significant decline in their use by developing countries.6
• The measures have been applied in different contexts, including generic laws and
regulations on the entry of FDI, in combina tion with investment incentive schemes, and
as general or sector-specific industrial development policies.
• Significant differences exist among specific industries regarding the incidence of trade-
related investment measures and other performance requirements, and the type ofmeasure used.
7
                                                     
2 It draws in particular from Caves (1996), Moran (1998, 2001), OECD (1998) UNCTC (1991), WTO
(1998), UNCTAD (2001), and Bora (2001), and from material in annual UNCTAD World Investment Reports .
3 See, for example OECD (1989) and UNCTC (1991b), and the summary of empirical studies
contained in a Note by the Secretariat prepared for the Working Group on the Relationship between Trade and
Investment (WT/WGTI/W/56) pp. 17-20.
4 Safarian (1993) p. 435.
5 OECD (1989) p. 40.
6 UNCTC (1983a) p. 81 and (1991b) p. 27;  OECD (1989) pp. 21-24.G/C/W/307/Add.1
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A. TRADE -RELATED INVESTMENT MEASURES AND OTHER PERFORMANCE REQUIREMENTS
APPLIED IN SPECIFIC SECTORS :  M OTOR VEHICLES
5. This sub-section illustrates the use that has been made by developed and developing countries
of trade-related investment measures and other performance requirements in the motor vehicle
industry.  Evidence suggests that this is the sector in which these measures have been applied mostextensively, by both developed and developing countries.  Other sectors where TRIMs have been
applied include oil, petrochemical, resource-based manufacturing and electronic manufacturing.
6. As part of a comprehensive  policy aimed at the development of a domestic automobile
industry, Argentina  adopted an Automotive Decree in 1959 that aimed at increasing levels of local
content by the end of 1965 to 80 per cent for commercial vehicles and 93 per cent for passenger
vehicles.  In the early 1970s, export performance requirements and export incentive schemes for
certain categories of vehicles were also introduced.
8  In 1991, Argentina adopted an Automotive
Regime which contained local content and trade-balancing requirements as conditions for the
importation, at reduced tariff rates, of finished vehicles and parts and components by automotive
assemblers and parts manufacturers.9  This regime was implemented in the context of
complementarity arrangements concluded by Arge ntina with its MERCOSUR partners, whereby parts
and components imported from other MERCOSUR coun tries have been treated as local content.
7. Australia  introduced policies in the mid-1930s to attract foreign investment to produce
automobiles with substantial local content.  From 1965 until the mid-1980s, Australia applied a series
of Motor Vehicle Manufacturing Plans which provided for the importation by local producers of
components at reduced tariff rates on condition that they meet specified levels of local content in the
production of cars.  Initially, the level of local content differed between low volume and high volumeproducers, but in 1985 a single local content requirement of 85 per cent was established.  This policy
was accompanied by increased tariffs on imports of finished vehicles, from 35 per cent to 45 per cent
in 1966, and to 57.5 per cent in 1978.  In addition, quantitative restrictions introduced in 1975 limited
imports of cars to a market share of 20 per cent.  In 1982, an export facilitation scheme was
introduced which allowed for exports of cars and components to be offset against the local contentrequirement.  Since the mid-1980s, tariff and non-tariff protection has been reduced.  The local
content requirement was eliminated in 1991.  The export facilitation scheme was replaced recently by
an Automotive Competitiveness and Investment Scheme.
10
8. Brazil  adopted a five-year plan in 1956 which prohibited the importation of finished cars and
provided tax benefits and privileged access to fo reign exchange to domestic and foreign-owned firms
which would attain by 1969 local content requirements of 90 per cent for trucks and vehicles and
95 per cent for jeeps and cars.11  Responding to balance-of-payments problems in the 1970s following
the first oil crisis, Brazil began to place greater emphasis on developing the export capacity of the
industry.  Under the BIEX (Special Benefits for Exports) programme, firms received exemptions from
payments of taxes on imports of capital goods, raw materials and parts and components if their
exports and foreign exchange earnings reached certain specified values.12  Tax incentives were also
available to firms that reached increasing levels of local content which, according to one source,ranged from 80 to 90 per cent.
13  The BIEX programme was terminated in 1990.14  In 1995, Brazil
                                                                                                                                                                    
7 For example, one study found that: "In automobiles and chemicals, local content TRIMs are generally
more prevalent than export minimums.  In computers and office equipment, export minimums are more
prevalent." UNCTC (1991b) p. 26.
8 UNCTC (1983c) pp. 105 and 116.
9 WTO (1999a) pp. 76-77, 87 and 126-130;  G/TRIMS/N/1/Arg/1/1 and Add.1.
10 Pursell (2001);  GATT (1994) pp. 68 and 161-163;  WTO (1998a) pp. 120-123.
11 Bergsman (1970) pp. 125-127;  Shapiro (1993) pp. 203-206.
12 OECD (1988) p. 10;  GATT (1992a) pp. 258-259;  Shapiro (1993) pp. 212-216.
13 OECD (1988) p. 10.G/C/W/307/Add.1
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raised the tariff on motor vehicles to 70 per cent and introduced domestic content and trade-balancing
requirements.  Firms assembling or manufacturing cars in Brazil were entitled to benefits in the form
of reductions of import duties on raw materials, parts and components, capital goods and certain
categories of finished vehicles if they reached a domestic content ratio of 60 per cent; maintained a
one-to-one ratio of purchases of domestic capital goods and raw materials to imported capital goodsand raw materials; and did not exceed a specified ratio of imports to exports.  In 1997, another
incentive programme, limited to certain regions of Brazil, provided tariff and tax concessions
conditional upon domestic content and export performance.  Both programmes expired in 1999.
15
9. The development of an automobile industry in Canada  began with high import tariffs that
were aimed inter alia  at encouraging US automobile manufacturers to locate in Canada.  During the
1920s, the Government responded to concern about the impact of the tariffs on domestic prices by
instituting a local content scheme involving a reduction of tariffs on imports of components on thecondition that manufacturers achieve a level of 50 per cent of Canadian content.  The required level of
local content was increased to 60 per cent in 1936.  In 1965, Canada and the United States concluded
a bilateral agreement on free trade in automotive products, which was implemented in Canada by
introducing an exemption from payment of customs duties on the importation of motor vehicles by
manufacturers who had produced motor vehicles in Canada in 1963 and who complied withrequirements to maintain a specified level of Canadian value added and to reach a certain ratio
between the sales value of cars produced in Canada and the sales value of vehicles sold in Canada.
16
Other foreign-based produces were also able to operate under similar preferential tariff conditions tothose applicable to North American producers.
17  Canada recently repealed the measure.18
10. Chile  adopted local content requirements for passenger cars in 1962 and for commercial
vehicles in 1966.  The local content levels were increased in the early 1970s to 70 per cent for
passenger cars and 60 per cent for commercial vehicles, but lowered again in 1975 along with a
significant reduction of tariff protection for imported finished vehicles.19  Under legislation adopted in
1985, assemblers of vehicles meeting specified local content levels were entitled to an exemption
from customs duties on imports of completely k nocked down units (CKD) and semi-knocked down
units (SKD), to the extent that such imports were offset by exports, and to a tax credit.20  T h e  t a x
credit expired in 1998 while the tariff exemption was to have been eliminated by the end of 2001.21
11. China  adopted an Industrial Policy for the Automotive Sector in 1994 which required
domestic content to increase from 40 per cent in the first year of production to 80 per cent by the third
year.22  Previously, a somewhat less stringent policy had been in force which required motor vehicle
assemblers to reach 40 per cent local content by the third year of production and 60 per cent local
content by the fourth year.  In its Accession Protocol, China committed itself to amend this policy.23
12. Chinese Taipei applied a local content requirement to motor vehicle assembly operations of
70 per cent until 1988, when the requirement was reduced to 50 per cent.24  Required levels of
                                                                                                                                                                    
14 GATT (1992a) pp. 161-164.
15 WT/L/132, WTO (2000a) pp. 54, 90-92, and 233.
16 Winham (1984).
17 WTO (1997).
18 WT/DS139/R and WT/DS139/AB/R; WT/DS142/R and WT/DS142/AB/R; WT/DSB/M/101,
para. 116.
19 UNCTC (1983c) pp. 105 and 126.
20 G/TRIMS/N/1/CHL/1.
21 G/C/W/172 and G/C/M/49.
22 Yuan (2001) p. 211.
23 WT/ACC/CHN/49, para. 204.
24 Hsieh (1997) p. 144.G/C/W/307/Add.1
Page 4
domestic content have more recently ranged from 31 to 40 per cent for automobiles, and to
90 per cent for motor cycles.  Chinese Taipei has undertaken to eliminate these measures.25
13. During the 1970s and 1980s, the member States  of the Andean Pact implemented a common
policy of what has been termed "regional import su bstitution" in the motor vehicle sector, including
through the allocation of production of specific categories of vehicles to individual countries and theestablishment of local content requirements.
26  More recently, Colombia , Ecuador  and Venezuela
applied local content requirements pursuant to a Complementarity Agreement concluded in 1993,
which provided for minimum levels of regional content.27
14. Until the early 1990s in India , Phased Manufacturing Programmes, which were used in all
major industries subject to industrial licensing, identified specific components that firms were
required to produce in-house or to obtain from other domestic sources.28  In the case of the automobile
industry, indigenous content requirements were introduced in 1953, when automotive assemblerswere required to implement manufacturing programmes for the progressive production of components
in India and a target of 50 per cent of domestic content was established.  In the late 1960s, an export
obligation was imposed requiring automobile producers to export at least 5 per cent of the volume of
their annual output.
29  The Phased Manufacturing Programmes were abolished in 1991 for new
projects and in 1993 for existing projects.  In 1995, India introduced new domestic content and exportperformance requirements as conditions for the granting of import licences for CKD/SKD kits to joint
ventures with foreign participation.  In 1997, a public notice was issued which provided that import
licences would be granted only if such joint ventures accepted Memoranda of Understanding in which
they committed not to engage only in assembly operations, to contribute a minimum amount of capital
to the venture, and to meet certain domestic content and trade balancing conditions.
30
15. During the 1970s and the 1980s, Indonesia  applied local content measures to various
industries through the use of "deletion lists" which identified specific parts and components to be
sourced domestically or that could be imported;  these were combined with restrictive licensing
requirements to achieve a specified level of local content within a given timeframe.  The measures
were applied mainly with respect to tr ansport equipment, machinery and engines.31  In 1993, these
measures were replaced by a programme that provided for reductions of import duties on parts and
components and exemptions of payment of a luxury sales tax depending upon the degree of local
content attained in the production of passenger cars, light commercial vehicles and automotive parts
and components.32  Import duty reductions on parts and components and exemption from payment of
luxury sales tax conditional upon local content requirements were also granted under a programme
launched in 1996 aimed at the development of a capacity to produce "national" motor vehicles,
i.e. vehicles produced at Indonesian-owned facilities, with a unique brand name owned byIndonesians, and developed with technology, construction, design and engineering based on national
capability.
33  The "national programme" was subsequently eliminated.34
                                                     
25 WT/ACC/TPKM/18, paras. 138 and 140.
26 UNCTC (1983c) pp. 122-125.
27 G/TRIMS/N/1/Col/1;  G/TRIMS/N/1/VEN/1;  G/TRIMS/N/1/ECU/1.
28 GATT (1993a) p. 101.
29 Krueger (1975) pp. 38 and 42-43.
30 Pursell (2001) pp. 381-382.
31 GATT (1991a) p. 99; GATT(1995) pp. 65-67.
32 G/TRIMS/N/1/IDN/1;  GATT (1995) p. 68;  WTO (1998c) p. 113.
33 WTO (1998c) pp. 114-115.
34 WT/DS54/R, and WTO (1998c) pp. 115 and 208.G/C/W/307/Add.1
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16. In 1968 Ireland  introduced "local assembly requirements associated with car imports", which
were eliminated at the end of 1985.35
17. Korea  initiated a policy aimed at shifting from assembly operations to full scale
manufacturing of motor vehicles in 1974.  It was implemented through various measures, including
restrictions on imports of completely built-up vehicles, restrictions on FDI, government interventionto encourage industrial restructuring so as to limit the number of manufacturers, and the provision of
incentives to ensure the international competitiveness of the industry.
36  Local content requirements,
which have been a general feature of Korea's industrial policies in a wide range of sectors37, have also
been applied to the automobile industry.  Accord ing to one author, the Korean Government required
motor vehicle assemblers to reach a level of 75 per cent of domestic sourcing after seven years.38  An
OECD study reported local content requirements ranging from 20 to 95 per cent.39  Automobile
manufacturers were also subject to export performance requirements.40
18. Recent policies of Malaysia  aimed at encouraging a shift from assembly to full-scale
manufacturing of motor vehicles have involved the use local content requirements along with import
licensing, tariff protection and industrial linkage programmes.  In 1991, requirements were introduced
of 45 per cent local content for certain categories of passenger cars and 60 per cent local content for
commercial vehicles, to be attained by 1996.  Non-compliance with these targets for a given modelcould be sanctioned by a requirement to reduce the net selling price of the model. A local content
requirement for motor cycles was applied in 1981.
41
19. Mexico  introduced a local content requirement in the automobile industry in 1962, and export
performance and trade-balancing requirements in 1969 and 1972.42  In 1977, the local content
requirement was increased and a requirement introduced whereby each producer had to achieve abalanced foreign exchange budget.
43  A decree issued in 1983 made the foreign exchange balancing
requirement more restrictive and also limited the number of product lines and models that individual
firms were allowed to produce, while permitting additional product lines and models if they were
neutral in their foreign exchange impact and if more than 50 per cent of output was exported.  This
decree also raised the required level of local content for specified categories of vehicles, but allowedfor a lesser degree of local content to be offset by increased exports.
44  In 1989-90, a decree and
regulations were passed which allowed firms with production facilities in Mexico to import
automobiles of their own manufacture and brand name, subject to a limit expressed as a percentage of
vehicles sold in Mexico.  The foreign exchange balancing requirement was relaxed and the
restrictions on the number of product lines and models were abolished.  At the same time, the local
content requirements which hitherto had been applied on a cost-of-parts basis were replaced with a
domestic value added requirement.  Restrictions on foreign ownership in the auto parts sector were
                                                     
35 OECD (1989) p. 40.  Another OECD study mentions local content requirements applied in the
automobile sector by Austria and Greece, but does not specify the precise nature of such measures and the time-
period during which they were applied.  OECD (1987) para. 17.
36 Green (1992).
37 Westphal (1990) p. 48.
38 Auty (1994) p. 66.
39 OECD (1987) p. 24.
40 OECD (1989) p. 68.  Auty observes that exports of motor vehicles were heavily subsidized
especially by allowing manufacturers to assemble one imported car kit, usually a large luxury car commanding ahigh price in the domestic market, for every five vehicles exported.  Auty (1994) p. 68.
41 WTO (1997b) pp. 106-107;  G/TRIMS/N/1/MYS/1/Rev.1;  GATT (1993b) p. 91.
42 Peres Nunez (1990) pp. 109-111.
43 Pere Nunez (1990) pp. 111-113.
44 GATT (1993b) p. 155;  Peres Nunez (1990) pp. 115-116.G/C/W/307/Add.1
Page 6
relaxed.45  Amendments introduced in 1995 and 1997 provide for annual reductions of the value
added and trade-balancing requirements.46
20. New Zealand adopted  an import-substitution programme for the motor vehicle industry in
1950 through the use of import licensing, foreign exchange control, and domestic content
requirements.  A scheme introduced in 1961 allocated foreign exchange to motor vehiclemanufacturers according to the degree of domestic content they attained, and in 1967 the Minister of
Industry and Commerce called on the industry to achieve a domestic content level of 50 per cent.
47
21. In 1987 and 1988, the Philippines  introduced a Car Development Programme, a Commercial
Vehicle Development Programme, and a Motorcycle Development Programme.  Firms participating
in these programmes received benefits in the form of import duty reductions if they met certain
conditions, including with respect to loca l content and foreign exchange balancing.48
22. South Africa  introduced a domestic content scheme for the motor vehicle industry in 1962.
This expressed the required level of local cont ent in physical rather than in value terms.49  I t  w a s
replaced in 1989 by a value-based system that provided that motor vehicle manufacturers who
attained a local content level of at least 55 per cent were entitled to a rebate of excise duties at a rate
of 50 per cent of the level of their local content, whereby exports were considered as local content.50
23. Thailand  applied domestic content requirements to motor vehicles from the early 1970s
pursuant to the Investment Promotion Act and the Factory Licensing Act.  In addition to a local
content requirement applicable to passenger vehicles, which was increased from 24 to 54 per cent in
1988, such requirements have been applied to commercial vehicles, engines and motorcycles.51  These
requirements were eliminated in 1999.
24. In the United Kingdom , undertakings regarding the degree of local content have reportedly
sometimes been a factor in decisions to provide in centives to investors in the automotive sector.  It
has been reported, for example, that incentives granted in connection with the establishment in 1983
by the Japanese car maker producer Nissan of an automobile assembly plant in Sunderland were
conditioned on an undertaking by Nissan to achieve a local content level of 60 per cent.52
25. Uruguay  initiated a policy aimed at the development of a domestic motor vehicle assembly
industry in 1964 by raising tariffs on imports of completely built-up vehicles, and adopted legislation
in 1970 that stipulated local content and compensatory export requirements.53  These requirements
remained in force until 1992 when they were replaced by a decree that granted a tax incentive to the
export of vehicles or parts.54
                                                     
45 GATT (1993b) p. 156.
46 WTO (1998d) pp. 120-121.
47 Baranson (1969) pp. 61-62.
48 G/TRIMS/N/1/PHIL/1.
49 Bell (1989).
50 G/TRIMS/N/1/ZAF/1 and GATT (1993c) p. 163.
51 WTO (1999c) p. 62; WTO (1995) pp. 52-53 and 106; GATT (1991b) pp. 218-219. See also
G/TRIMS/N/1/THA/1.
52 Safarian (1993) p. 358;  OECD (1998) p. 11. When in the late 1980s Nissan began to export cars
produced in the United Kingdom to other EEC Member Stat es, controversy arose over whether the level of local
content was sufficient to treat such cars as having their origin in the United Kingdom.
53 GATT (1992b) pp. 202-204;  UNCTC (1983c) p. 105.
54 G/TRIMS/N/1/URY/1 and Add.1.G/C/W/307/Add.1
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B. TRADE -RELATED INVESTMENT MEASURES AND OTHER PERFORMANCE REQUIREMENTS
APPLIED IN THE CONTEXT OF THE REGULATION OF FDI
26. The regulation of FDI has been an important policy context in which trade-related investment
measures and other performance requirements have been applied by developed and developing
countries.55  In particular, where legislation has provided for a procedure for the authorization of FDI
on a case-by-case basis, its anticipated impact on factors such as export performance, use of domestic
products and services, and contribution to domestic technological development, have at times been
taken into account by host country authorities in deciding whether to approve FDI, to grant
investment incentives, or to relax limitations on foreign equity participation.  In some cases, host
country authorities have actively sought to secure commitments by foreign investors in these areas.
27. This section provides a brief description of FDI review mechanisms applied by a number of
developed and developing countries.  It is not a comprehensive survey.  Where specific provisions ofnational laws and regulations contain authority for the application of trade-related investment
measures and other performance requirements, it is often difficult to ascertain whether the actual
implementation of such provisions has been automatic, or discretionary and subject to negotiation.
56
28. Until the liberalization of Argentina's  FDI regime in the late 1980s, FDI was subject to a
prior authorization requirement pursuant to a foreign investment law and implementing regulationsthat had been adopted in 1976-77.  Approval of FDI was dependent on a determination by the
authorities that FDI contributed positively to nati onal economic development in terms of its impact on
factors such as the balance-of-payments, import substitution, increased exports, and technological
development.
57  To the extent that performance requirements were imposed as conditions for the
approval of investment proposals, evidence suggests that  they pertained in particular to the transfer of
technology.  According to a 1989 OECD study, Arge ntina applied transfer of technology requirements
in all sectors, but did not maintain local content or export performance requirements of general
application.58
29. In the early 1970s, Australia's policy on FDI changed from an "open door" approach59 to a
more qualified stance resulting in the establishm ent of a comprehensive mechanism for the case-by-
case review of FDI pursuant to the Foreign Takeovers Act of 1975 and the subsequent creation of a
Foreign Investment Review Board.60  Foreign investment proposals could be rejected if they were
found to be "contrary to the national interest", based on an analysis of whether they would produce
"net economic benefits" for Australia with regard to:  competition, price levels and efficiency;  the
introduction of technology or managerial or workforce skills new to Australia;  the improvement of
the industrial or commercial structure of the economy or of the quality and variety of goods and
services available in Australia;  and the development of, or access to, new export markets.61  In
practice, the review process was not used to im pose specific conditions on foreign investors with
respect to matters such as trade, employment, and the conduct of research and development;  the
Foreign Investment Review Board explicitly rejected the imposition of such performance
                                                     
55 See, for example, OECD (1987) pp. 8 and 10.
56 OECD (1989) p. 25;  UNCTC (1991b) p. 29.
57 UNCTC (1983b) pp. 254-258.
58 OECD (1989) p. 67.
59 Brash (1970).
60 Safarian (1993) pp. 81-87;  Flint (1985) pp. 3-4.
61 If it was determined on the basis of these criteria that a proposal was not contrary to the national
interest, additional criteria could be taken into account.  One was whether the business or project concernedcould be expected to be conducted in a manner consistent with Australia's best interest in matters such as localprocessing of materials and the utilisation of Australian components and services, involvement of Australians onpolicy-making boards of businesses, research and development, royalty, licensing and patent arrangements, and
industrial relations and employment opportunities.  Safarian (1993) p. 90;  Flint (1985) pp. 86-87.G/C/W/307/Add.1
Page 8
requirements.62  Australia's foreign investment review policies have been relaxed since the
mid-1980s63, but the basic requirement for notification and review has been retained.  The "net
economic benefits" test has been replaced by the principle that proposals are to be automatically
approved unless they are found to be contrary to the national interest, and thresholds for the
notification and review of  investment proposals have been increased.64
30. Canada's  Foreign Investment Review Act of 1973 ("FIRA") was designed to optimize the
performance of foreign affiliates.  Underlying the adoption of FIRA was a view that the activities of
such foreign affiliates did not contribute sufficiently to the trade and technological development of
Canada because of the subordination of the affiliates to the commercial interests of their parent
firms.65  FIRA subjected greenfield investments and foreign acquisitions to a requirement of prior
authorization based on a determination of whether proposed investments were likely to be of
"significant benefit" to Canada.  The criteria to be considered in this regard were the effect of the
investment on:  the level and nature of economic activity in Canada, including employment, resource
processing, the utilisation of parts, components and services produced in Canada, and exports;  the
degree and significance of Canadian participation in the business enterprise or new business and in
any industry or industries in Canada of which the business enterprise or new business formed or
would form a part;  productivity, industrial efficiency, technological development, innovation andproduct variety in Canada;  competition within any industry or industries in Canada;  and the
compatibility of the investment with national industrial and economic policies, taking into
consideration industrial and economic policy objectiv es enunciated by the government or legislature
of any province likely to be significantly affected by the investment.
31. Though in practice the vast majority of investments reviewed under FIRA were approved
66,
approval was often subject to specific undertakings made by foreign investors on matters such as the
export performance of foreign affiliates and their use of Canadian goods and services67;  the conduct
of research and development by foreign affiliates in Canada;  the access of foreign affiliates to foreign
technology;  the introduction of new products and machinery in Canada;  the ability of foreign
affiliates to develop, manufacture and market innovat ive products;  the assignment of responsibility to
foreign affiliates for the specialized production and marketing of a product on a global or
geographical basis; employment;  and the appointment of Canadian officers.68  Performance-related
undertakings were legally binding and enforceable and subject to monitoring by the Foreign
                                                     
62 Safarian (1993) pp. 101-103 and 107-109.
63 Safarian (1993) pp. 96-97; GATT (1994) p. 36.
64 Under current policy, notification and prior approval are required in respect of:  acquisitions of
substantial interests in existing Australian businesses with total assets over $50 million or where the proposalvalues the business at over $50 million;  proposals to establish new businesses involving a total investment of$10million or more;  portfolio investments in the media of 5 per cent or more and all non-portfolio investmentsirrespective of size;  takeovers of offshore companies whose Australian subsidiaries or assets are valued at
$50 million or more, or account for more than 50 per cent of the target company's global assets;  direct
investments by foreign governments or their agencies irrespective of size;  acquisitions of interests in urbanland; and proposals where any doubt exists as to whether they are notifiable.  FIRB (2000).
65 Conklin and Lecraw (1997) pp. 17-18;  Safarian (1993) p. 122.
66  Safarian (1993) p. 133.
67 One source reports that "in the first 2600 cases approved by FIRA, over 60 per cent involved
commitments to increase the processing or use of Canadian goods and services while a further 37 per cent wereaccompanied by undertakings to increase exports from Canada."  Leckow and Mallory (1991) p. 29.  InFebruary 1984, a GATT Panel Report in Canada-Administration of the Foreign Investment Review Act held that
undertakings regarding domestic content were incompatible with Article III of the GATT.  GATT, BISD30S/140.
68 Leckow and Mallory (1991) pp. 29-30;  Safarian (1993) pp. 520-531.G/C/W/307/Add.1
Page 9
Investment Review Agency, but there does not appear to have been any case in which firms were
prosecuted for alleged failure to adhere to the terms of an undertaking.69
32. In 1985, FIRA was replaced by the Investment  Canada Act (ICA).  While retaining the
mechanism for review of certain foreign investments, ICA places emphasis on the promotion of
investment by both Canadians and non-Canadians and accords secondary importance to the case-by-
case review of FDI.  The scope of the review procedure under the ICA is considerably narrower than
under FIRA, in that in principle it applies onl y to transactions involving the acquisition by
non-Canadians of control of large-scale Canadian business enterprises.70  With respect to investments
that are subject to review under ICA, a determinatio n must be made that the investment is of "net
benefit" to Canada based on an examination of much the same criteria that were applied under the
FIRA.71  No investment proposals have been formally disallowed since the passage of ICA.72  While
ICA provides for the possibility of legally binding undertakings by foreign investors as a condition forthe approval of reviewable investments, it appears that such undertakings have been demanded in
relatively few cases.  One study reported in 1994 that undertakings relating to performance
requirements had been negotiated in only one tenth of the acquisitions reviewed and approved since
the inception of ICA, mostly involving the oil and gas sector and technology-intensive Canadian
companies.
73
33. Trade-related investment measures and other performance requirements have been used by
China  in the context of legislation enacted in 1979 regarding the various forms in which foreign
investment is permitted.74  China's law on Foreign Equity Joint Ventures of 1979, as amended in
1990, provides inter alia  that an equity joint venture shall gi ve priority to Chinese sources in the
purchase of raw materials and equipment and that such a joint venture is encouraged to market itsproducts outside China.  In 1986, rules were adopted for the encouragement of foreign investment,
which contained a broad range of incentives for export-oriented or technologically advanced
                                                     
69 Conklin and Lecraw (1997) p. 104;  Safarian (1993) p. 128.
70 ICA currently requires a review of direct and indirect acquisitions of Canadian businesses by foreign
investors if the value of such businesses exceeds specified thresholds.  These thresholds are higher in case ofdirect acquisitions by investors of WTO Members who ar e also exempt from the requirements for a review of
indirect acquisitions.  However, in certain sectors (u ranium production, financial services, transportation
services and cultural businesses) direct and indirect acquisitions by investors of WTO Members are subject to
the generally applicable review thresholds.  As an excep tion to these rules, the ICA provides that in the case of
investment in certain business activity related to Canada's cultural heritage or national identity, both theestablishment of a new business and the acquisition of control, regardless of size,  may be subject to review if areview is considered to be in the public interest.  Transactions that are not subject to review (establishment of
new businesses and the acquisition of control below the review thresholds) are subject to a notification
requirement.  WTO (2000b) pp. 11-12;  WTO (1999a) pp. 15-16;  WTO (1997a) pp. 44-45;  Industry Canada(1994) pp. 245-248.
71 In the context of a recent WTO trade policy review , Canada stated that ICA "simply considers the
potential impact of the proposed acquisition on, among othe r factors, the utilisation of parts, components and
services produced in Canada, and on exports from Canada.  It does not require that an investor undertake
obligations in any of these areas as a condition of approval."  WT/TPRM/78 pp. 93 and 101.
72 WTO (1999b) p. 16.
73 Industry Canada (1994) p. 267.  In the case of  the oil and gas sector, undertakings have generally
called for increased levels of Canadian ownership and for commitments on investment spending by the foreignacquirer.   In respect of technology-intensive Canadian firms, undertakings typically pertain to "assurances that
the investor has, and is prepared to  commit, the resources required for the Canadian business to grow as an
internationally competitive enterprise, including financial, research, technological, production, marketing, andmanagement resources; a commitment to significant levels of R&D spending in Canada; a commitment, whereappropriate, to world product mandat es for specified products and services…; a commitment to provide quality
employment opportunities for Canadians; and assurances th at any transfer of technology between the Canadian
Business and the investor, or its affiliates will be on an arms-length basis."
74 Yuan (2001);  Huang (2000);  We nhua ( 2000);  Hickman (1997).G/C/W/307/Add.1
Page 10
investments, including tax exemptions, preferential land use fees, and privileged access to credit.  The
law on Wholly Foreign-Owned Enterprises of 1986 establishes that one of the conditions for the
approval of FDI through a wholly foreign-owned enterprise is that the enterprise must use advanced
technology or market all or most of its products outside China.  Implementing rules issued in 1990
stipulate that such an enterprise must export at least 50 per cent of its annual production. The law onForeign Contractual Joint Ventures of 1988 stipulates inter alia  that the state shall encourage the
establishment of productive joint ventures that are export-oriented or technologically advanced, and
that contractual joint ventures shall purchase insura nce within China.  China's FDI legislation has also
contained a general requirement that investors cover their own foreign exchange expenditure.  While
China's legislation is less explicit on local content requirements than on export performance
requirements, it has been suggested that in practice local content requirements have often been
imposed informally and are enforced more strictly than export performance requirements.
75
34. France's  policy on FDI changed in the mid-1960s to what was described as an approach
involving selective encouragement of inward FDI.76  Pursuant to a law adopted in 1966 on financial
relations between France and foreign countries, FDI was subject to a requirement of prior declaration
and authorization.  An investment proposal would be  allowed to proceed unless the Minister of the
Economy and Finance requested "postponement" of th e investment within two months from the date
of receipt of such a declaration.  Such a postponement could be temporary and lead to further
examination and discussions on possible modification of the application, or it could be indefinite.77
Several analyses of the operation of the French foreign investment review procedures since the 1960s
have suggested that performance-related conditions were an important aspect of the review process,
but there is little information on the precise nature of commitments that were made in this regard byforeign investors.  One author, reviewing the ope ration of policy in the early 1980s, commented that
"there was no formal list of criteria or standard criteria against which investments were evaluated,"
but that factors taken into account in practice included employment creation, regional development,
research and development, and development of export capacity.
78  Such factors have also been
identified in other studies.79  The emphasis on particular factors has varied over time.80  It would
appear that conditions attached to the approval  of investment proposals were often conveyed in
writing and were quite specific, but that there was no formal mechanism for monitoring or
enforcement of compliance with such conditions.81
35. In 1980, France abolished the prior declaration and authorization requirement with respect to
FDI from EEC Member countries and replaced it by a procedure for prior notification, but certain
categories of FDI from EEC Member countries remained  subject to prior authorization.  As regards
FDI from non-EEC Member countries, the prior authorization procedure remained in force, subject tocertain exceptions.
82  Since the mid-1980s, substantial relaxation of the prior declaration and
authorization requirements has occurred inter alia  through the raising of the minimum thresholds
above which investments by non-EEC investors were  subject to prior authorization, the exemption
                                                     
75 Rosen (1999) p. 69.
76 Safarian (1993) p. 211.
77 Bailey, Harte and Sugden (1994) p. 54;  Safarian (1993) p. 214.
78 Safarian (1993) pp. 214-215.
79 UNCTC (1978) p. 173:  noting that inward FDI is welcome in France "if it brings new technology,
increases exports or creates jobs in depressed areas";  OECD (1982) p. 22:  "…certain authorisations are, ineffect, conditional on the results which relate especially to the maintenance or the creation of jobs, regional
development or exports."  Industry Canada (1994) p. 14:  "Commitments on job creation, technology transfer,
and increased export activity are sought and receive cons iderable weight in the foreign investment review
process.  Companies that provide technology and employment through new or 'greenfield' investments inmanufacturing facilities or research laboratories are highly favoured."
80 Bailey et al. (1994) pp. 195-200;  Safarian (1993) p. 215.
81 Safarian (1993) p. 216.
82OECD (1982) p. 12.G/C/W/307/Add.1
Page 11
from these requirements of investments involving the creation of new enterprises as distinct from
acquisitions, and the reduction of the time periods within which the Minister must act on
declarations.83  Until the early 1990s, however, the di stinction between FDI from EEC Member
countries and FDI from other sources was retained.84  In 1996, the Government abolished the prior
authorization procedure for non-EEA investors.85
36. India's  Foreign Exchange Regulation Act of 1973 prohibited FDI in certain sectors and
established a general rule that, except with permission from the Federal Reserve Bank, foreign equity
participation in Indian companies should not exceed 40 per cent.  Export performance has been one of
the factors considered in the granting of exceptions to this rule.  Guidelines allowed for the possibility
of up to 51 or 74 per cent foreign equity ownership in case of investments in designated priority
sectrs, projects involving the use of sophisticated technology, and projects of which more than
60 per cent of the production was exported.86  In 1980, India adopted a "Hundred Per Cent Export-
Oriented Units Scheme" which permitted full foreig n ownership in projects that were wholly export
oriented.  In 1991, India substantially revised its foreign investment policy as part of a New Industrial
Policy.  The reforms included the removal of the re quirement that foreign investment be accompanied
by transfer of technology and the estalishment of a procedure for automatic approval by the Federal
Reserve Bank of foreign equity ownership up to 51 per cent in specified priority industries, oncondition that the foreign equity cover the exchange  required to import capital goods and that the
payment of know-how fees and royalties met certain conditions.
87  Subsequently, the scope of this
automatic approval procedure was expanded by the inclusion of additional priority sectors in which
51 per cent foreign equity was allowed and the designation of certain industries in which up to
74 per cent foreign equity was permitted.88  Foreign investments that are not eligible for automatic
approval are subject to approval on a case-by-case basis by the Foreign Investment Promotion Board.
Guidelines that were issued in 1997 stipulate inter alia  that 100 per cent foreign equity may be
permitted in cases of predominantly export-oriented investments.  In 22 industries, FDI has been
subject to a requirement that dividend remittances by foreign investors be balanced by export
earnings.89  
37. From the mid-1960s, Indonesia  adopted a more liberal approach towards FDI in its
economy.90  A foreign investment law passed in 1967 permitted 100 per cent foreign ownership in
most sectors of the economy, subject to a minimum capitalization requirement, and provided a
30-year guarantee against expropriation.  In 1974, a new policy was introduced which prohibited full
foreign ownership, limited foreign participation in joint ventures to 80 per cent, required that at least
51 per cent of share holdings be transferred to Indonesians within a period of ten years, and increased
the number of sectors closed to FDI.  In 1977, an annual Priority List of Investments was introduced
as a basis for the review and approval of individua l investment projects.  FDI in sectors not included
on this list could be approved depending upon the location and export-orientation of the investment
and the employment created.  The early-1980s saw a reinforcement of restrictions on FDI with a
renewed emphasis on divestiture requirements, the reduction of the number of sectors in which FDI
was permitted, and the revocation of tax holidays.
                                                     
83 Baily et al. (1994)  pp. 65-67;  Safarian (1993) pp. 218-221.
84OECD (1992) p. 80.
85 OECD (1996a) pp. 26-27
86 UNCTC (1983b) p. 62.
87 OECD (1996b) pp. 30-31;  GATT (1993a) p. 48.  The requirement that foreign equity cover the
foreign exchange required for the import of capital goods was subsequently abolished.  WTO (1998b) p. 231.
88 WTO (1998b) pp. 37-39.
89 GATT (1993a) p. 47;  WTO (1998b) p. 39 and 190;  G/TRIMS/N/1/IND/Add.1.
90 See Lecraw (1996) and FIAS (1997) pp. 53-56, as well as information on Indonesia's investment
regime contained in reports prepared for GATT and WTO trade policy reviews in 1991, 1995 and 1998.G/C/W/307/Add.1
Page 12
38. In the mid-1980s, measures were taken to relax the FDI policy regime as part of an effort to
promote non-oil exports.  These included a gradual relaxation of equity ownership restrictions and
divestiture requirements, conditional upon factors such as the degree of export orientation of a project.
A reform package introduced in 1986 allowed for 95 per cent ownership in investments in high risk
ventures, investments in remote areas, investments requiring a large amount of capital, andinvestments that were 85 per cent export-oriented.  In addition, the number of sectors in which FDI
was permitted was increased.  In 1987, measures were introduced allowing for 95 per cent foreign
ownership in projects of which 100 per cent of the production was exported without a divestiture
requirement.  The measures also allowed for 95 per cent foreign ownership of companies with a
minimum capital of $10 million, companies located in Eastern Indonesia, and companies exporting at
least 65 per cent of their production.  In 1989, the annual Priority List of Investments was replaced by
a negative list and the number of sectors open to FDI was increased.  100 per cent foreign ownershipin projects was permitted in the Batam Economic Zone.  In 1992, Indonesia allowed 100 per cent
foreign ownership for investments of over $50 million, investments located in Eastern Indonesia, and
investments located in bonded zones if all production was exported, subject to a requirement to reduce
the level of foreign ownership over time to a ma ximum of 80 per cent.  95 per cent foreign ownership
was allowed for labour intensive operations, projects exporting at least 65 per cent, and industriesproducing raw materials or intermediate goods, subject to a requirement to divest 51 per cent to
Indonesians over a period of twenty years.  In 1994, foreign ownership of 100 per cent was permitted
in a large number of sectors without conditions as regards minimum capital requirements or the
market orientation of the project, divestiture requirements were substantially relaxed, and nine public
interest industries previously closed to FDI were opened to joint ventures.  The negative list wasreduced to very few sectors.
39. Until the early 1980s, FDI in Japan was subject to review and approval under the Foreign
Exchange and Foreign Trade Control Law of 1949 and the Foreign Investment Law of 1950.  Inward
investment was approved only if it could be demonstrated that the investment:  made a clear
contribution to technological development of Japanese industry;  made a contribution to exports or tosaving imports;  involved no significant competition with Japanese industry and involved a foreign
equity share of less than 50 per cent.
91  From 1967, a series of liberalization measures permitted
specified maximum levels of foreign equity participation in various categories of industries92, and the
Government issued a set of guidelines for foreign firms operating in Japan.93  In 1971, the positive list
principle was replaced by a negative list of industries that remained subject to individual approval.  In
1973, the Japanese Government permitted 100 per cent foreign ownership in newly established firms
in all industries, with the exception of several sectors in which individual screening continued.94  In
                                                     
91 Safarian (1993) p. 243.
92 Bailey et al. (1994) pp. 16-24; Safarian (1993) pp. 245-248.
93 These guidelines, often referred to as the "ten commandments" of foreign investment in Japan,
provided that foreign firms should:  seek coexistence and prosperity with Japanese enterprises through joint
ventures on an equal partnership basis;  avoid concentration of investment in specific industries;  avoid
suppressing small enterprises when entering into industries characterized by small firms;  cooperate voluntarilywith the Japanese effort to maintain proper industrial order;  avoid entering into unduly restrictive arrangementswith parent companies abroad and not resort to unreason able restrictions concerning transactions or to unfair
competition;  take positive steps toward developing Japanese technology and not hamper the efforts of Japanese
industries to develop their own technology;  contribute to the improvement of Japan's balance-of-payments
through exports and other means;  appoint Japanese to the board of directors and top management positions and
make share of company stock available to the public; avoid closures of plants or mass dismissal, andunnecessary confusion in employment and wage practices by paying due regard to the prevailing Japanesepractices;  conform to the government's economic policy. Yoshino (1975) p. 361.
94 Agriculture, forestry, fishing;  petroleum refining and sale;  leather goods;  mining;  and retail chains.
The last sector was removed from the list in 1975.  Safarian (1993) p. 245.G/C/W/307/Add.1
Page 13
1973-76, steps were also taken to remove restrictions on foreign acquisitions, but this was confined to
cases where the target firms consented to the acquisition.95
40. In 1980, a new Foreign Exchange and Foreign Trade Law provided that, instead of foreign
investment being prohibited in principle except when authorized on individual application, it was now
free in principle subject to certain exceptions and prior notification requirement.  These exceptionspertained to four specified industries
96 and to cases in which indi vidual investments were found
undesirable on grounds of certain criteria defined in the law.97  While it appears that outside the four
restricted sectors there were no cases of applications that were formally rejected under the legislation
enacted in 1980, it has been suggested that in practice it remained possible for the Japanese authorities
to screen and discourage investments by more informal means, for example in the context of
discussions with potential investors prior to the submission of a notification.98  The Law was amended
in 1992, and eliminated the prior notification requir ement in respect of most inward FDI and instead
provided for the submission of an ex post facto  report within fifteen days after an investment had been
made.  Prior notification was henceforth mandatory only in regard to a limited number of cases
involving investments which were liable to imperil national security, disturb the maintenance of
public order or hamper the protection of the general public, investments in restricted industries
covered by Japan's reservations to the OECD Code, investments from home countries not offeringreciprocal treatment to Japanese investors, and investments involving capital transactions which were
subject to authorization requirements.
99
41. Japan's FDI policy has been described as forming part of an industrial policy that sought to
protect domestic firms from competition by foreign affiliates and to secure access of domestic firms to
foreign technology through licensing agreements, while minimizing the scope for foreign firms toexploit their technology in Japan through fully-owned subsidiaries.
100  Thus, approval of FDI was
often subject to conditions limiting the ability of foreign investors to expand in the Japanese market
and to conditions regarding the terms of technolo gy transfer agreements between foreign investors
and Japanese firms.  Several cases were reported in which authorization of majority foreign-owned
investments was conditioned upon the licensing of technology to Japanese competitors.  Japan'sapproach to the screening of FDI thus served somewhat different purposes than the investment review
mechanisms used by several other developed countries.  In this respect, one author has observed that
Canada's FIRA "…did not seek to block further FD I but rather to improve the terms of its entry,
especially by stressing export targets for the new subsidiary, technology transfer, employment, and
local content…", whereas in the case of Japan, "…FDI did not provide a major source of capital
…rather, FDI was used as part of the larger industrial policy of promoting selected high value-added
industries, and the principal goal was obtaining the best foreign technology through FDI approvals.
                                                     
95Safarian (1993) p. 246.
96 Agriculture;  mining, oil refining and leather products.  UNCTC (1988) p. 115.
97 In the latter regard, the law allowed the relevant minister to seek a suspension of a transaction for a
maximum period of four months from the date of a notification in order to examine whether the investmentshould be modified or rejected.  The criteria to be consid ered in such an examination pertained to:  (1) whether
the investment might imperil the national security, disturb the maintenance of public order, or hamper the safety
of the general public;  (2) whether the investment might adversely affect the activities of Japanese firmsengaging in a line of business similar to or related to the one in which the proposed investment was to be made;(3) whether there was reciprocity of treatment of the Japanese investors in the home country of the foreigninvestor;  and (4) whether the transaction involved capital transactions requiring approval because of their effect
on balance of payments.  UNCTC (1988) p. 115.  Limitations on foreign acquisitions were also removed, except
in the four restricted sectors, but until 1984 Japan designa ted a number of companies in which acquisition above
a certain threshold would trigger review.  Safarian (1993) p. 255.
98Bailey et al. (1994) p. 29;  Industry Canada (1994) p. 183;  Safarian (1993) p. 256.
99 Industry Canada (1994) pp. 160-161.
100Bailey et al. (1994);  Safarian (1993);  Encarnation and Mason (1990);  Averyt (1986);  Yoshino
(1973).G/C/W/307/Add.1
Page 14
Employment, management, local content, and supply of capital rarely entered into Japanese screening
priorities, in contrast to the Canadian case."101
42. Until the 1970s, Korea's  development strategy reflected a preference for foreign loan capital
and the acquisition of foreign technology through licensing arrangements, rather than through FDI.102
The regulation of the entry of FDI was closely coordinated with industrial development plans.  The
Foreign Capital Inducement Act of 1961 required prior authorization of FDI according to a positive
list of priority industries and sector-specific restrictions on foreign equity participation.  The
requirement to conclude agreements with the Kor ean authorities, setting forth the conditions under
which foreign investment was allowed, appears to have provided considerable scope for the
application of a variety of performance requirements.  Aside from joint venture requirements, such
agreements imposed conditions regarding the amount of capital invested, export performance, the
level and type of technology used, the supply of raw materials, the provision of access to foreignmarkets, and the divestiture of foreign equity within a specified period.
103  It has been suggested that
"… in 1986, 38 per cent of agreements with foreign investors stated specific export-level
requirements, 80 per cent stated specific technological transfer requirements, 36 stated specific
requirements for raw material supply, and 28 per cent of the investors agreed to help their Korean
partners gain access export markets.  At least one of the above requirements was specified in theinvestment agreements of over 92 per cent of all foreign firms; at least two or more were  specified in
over 68 per cent."
104  In 1984, the positive list was replaced by a negative list approach and a
procedure was introduced for automatic approval of certain categories of FDI.  The application of
performance requirements as conditions for investment approval reportedly was abolished in 1989.105
During the 1990s, Korea's FDI policies have been further liberalized, notably through the replacement
of prior authorization by a prior notification procedure and the relaxation or elimination of
sector-specific restrictions on foreign equity participation.
43. Since the late 1960s, Malaysia  has pursued an FDI policy that draws a clear distinction
between FDI oriented toward exports and FDI or iented toward the domestic market.  Guidelines
issued pursuant to the Industrial Co-Ordination Act of 1975 have conditioned the level of foreignequity ownership permitted in a greenfield investment project on its degree of export orientation.
Where less than 20 per cent of production was destined for export, foreign equity ownership was
allowed up to a maximum of 30 per cent;  where more than 80 per cent of production was destined for
export, foreign equity ownership was allowed up to 100 per cent.  As an exception to these rules,
foreign equity ownership of 100 per cent could be permitted on a discretionary basis in case of
production of high technology or priority products.  Where foreign equity ownership was less than
100 per cent as a result of the application of these guidelines, specific requirements applied regardingminimum percentages of the balance of the equity that were reserved for Bumiputras.
106  Since 1998,
the equity restrictions based on export orientation have been relaxed on a temporary basis for FDI in
manufacturing.107  Performance requirements have also been used in the context of various investment
incentive programmes, including local content requirements as a condition for eligibility for tax
                                                     
101 Averyt (1986) p. 52.
102 Conklin and Lecraw (1997) pp. 24-25;  Mardon (1990).
103 As a result of a policy of systematically requiring foreign investors to form joint ventures with
Korean firms, except in case of exclusively export- oriented projects and projects involving technology
considered necessary in the context of development plans, by 1985 only 13.3 per cent of FDI in Korea wasaccounted for by wholly-foreign owned firms.  Mardon (1990) pp. 127 and 129.
104 Mardon (1990) p. 134.
105 Kim (1993) p. 127.
106 OECD (1999) p. 121;  WTO (1997b) pp. 64-65;  GATT (1993b) p. 50.
107 OECD (1999) p. 124.G/C/W/307/Add.1
Page 15
incentives under the Pioneer Status and Investment Tax Allowance schemes, which were eliminated
on 1 January 2000.108
44. From the 1920s until the early 1980s, Mexico  pursued a foreign investment policy that has
been characterised as increasingly restrictive.109  Until the adoption of a generic foreign investment
law in 1973, no formal mechanism existed for the screen ing of FDI, but it has been suggested that the
Mexican authorities secured commitments by foreig n investors regarding performance and ownership
by making the granting of import licences conditional upon undertakings by foreign investors with
respect to domestic content, limitation of payments abroad and reduction of foreign equity holdings to
less than 50 per cent over a specified period of time.110  A foreign investment law adopted in 1973
provided for a more formal, centralized approach to the regulation of FDI.  It specified activities that
were reserved for the Mexican State, activities that were reserved for Mexicans or Mexican
companies with an "exclusion of foreigners" clause , and activities in which foreign participation was
not to exceed certain limits.  It also stipulated as a general rule that FDI in activities not specifically
regulated by the law should not exceed 49 per cent of equity.  A Foreign Investment Commission had
authority to permit foreign participation in excess of 49 per cent of equity where it found that this was
in the national interest.  In practice, derogations from the 49 per cent threshold appear to have been
rare and to have been subject to a requirement of eventual "Mexicanization".  Among the factors thatwere taken into consideration in granting such derogations were the expected impact of an investment
on Mexican exports, use of domestic products, and technological development.
111  The application of
the general rule against more than 49 per cent fo reign equity ownership was significantly relaxed in
1984 when Guidelines were issued indicating that foreign equity participation of up to 100 per cent
would be possible in designated priority industries, without a requirement of "Mexicanization".112
The adoption of these Guidelines was accompanied by a more explicit policy of requiring foreign
investors to make commitments regarding export performance, the assimilation of foreign technology,
and the conduct of research and development.113
45. Further liberalization of Mexico's FDI regime resulted from regulations adopted in 1989
which were codified in a new foreign investment law enacted in 1993.114  The law allowed for inward
investment without the need for prior authorization, except for investment in certain sectors that are
reserved for the Mexican State or for Mexicans, sectors where foreign ownership may not exceed
specified percentages of equity, and sectors in which prior authorization is necessary for the
acquisition of more than 49 per cent of equity.  Prior authorization is also required for the acquisition
by foreign investors of more than 49 per cent of the capital stock of any Mexican firm where the
investment exceeds an amount to be specified by the Foreign Investment Commission.  Where
investment is subject to approval by the Foreig n Investment Commission, Article 29 of the foreign
investment law provides that the Commission must consider the impact of a proposed investment on
employment and the training of workers, its technological contribution, compliance with
environmental regulations, and its contribution to  enhancing Mexico's competitiveness.  The law
provides that when deciding on an application, the Commission "may only impose requirements
which will not distort international trade".
46. Until the mid-1960s, no laws specifically regulating FDI existed in New Zealand .  According
to one author "successive governments in the post-war era had adopted an essentially passive attitude
                                                     
108 G/TRIMS/N/1/MYS/1/Rev.1;  G/C/W/210.
109 GATT (1993c) p. 59.
110 Maviglia (1986) p. 288.
111 Maviglia (1986) p. 293;  UNCTC (1983b) p. 320.
112 Peres Nunez (1990) pp. 42-43;  Maviglia (1986) p. 296.
113 Peres Nunez (1990) pp. 44-45 and 66-68.
114 GATT(1993c) pp. 61-65;  WTO (1998) pp. 34-36.G/C/W/307/Add.1
Page 16
towards inward FDI".115  The Aliens Act of 1948 provided for national treatment of foreign investors
with respect to the acquisition and disposition of any kind of property in New Zealand.  Pursuant to
the Reserve Bank of New Zealand Act of 1964, several regulations were adopted which effectively
amounted to the introduction of a review mechanism for inward FDI.116  The Overseas Investment Act
of 1973 established an Overseas Investment Commission whose task was inter alia  to provide advice
to the Minister of Finance on whether specific investment proposals were in the national interest.
Criteria for the assessment of the benefits of investment proposals in specific cases were set out in a
policy statement issued in 1973.117  These criteria were revised in 1979.118  Notwithstanding the broad
range of factors covered by these criteria, it has been stated that in practice the examination of
investment proposals in light of these factors did no t amount to a systematic cost-benefit analysis and
that there was no attempt to extract undertakings from foreign investors with respect to performance
requirements.119
47. While consideration was given in the 1980s to the possibility of replacing the general review
procedure with a notification procedure, it was decided to retain the review mechanism.120
Regulations currently in force distinguish between non-land transactions and land transactions.  With
respect to both, the regulations require consideration of whether the investor has business experience
relevant to the proposed investment and has demonstrated a financial commitment to the investment,
                                                     
115 Akoorie (1996) p. 179.
116 Safarian (1993) pp. 154-155; Paterson (1975) pp. 182, 186-187.
117 These criteria were:  The extent to which New Zealand resources of raw material and human skills
would be combined and developed to the most advanced stage which is economically feasible or desirable and
having regard to the impact on employment opportunitie s;  the compatibility of the proposal with Government
policies on the protection of the environment and regional development;  the degree to which the proposal
would extend New Zealand's access to technological deve lopments and scientific research conducted overseas
and the extent to which research and development would be stimulated in New Zealand;  the extent to which theproposal would promote New Zealand's industrial grow th and efficiency by increasing the degree of export
orientation and helping to provide acce ss to new or expanded export markets;  the impact of the proposal on
productivity, with particular reference to the effects on costs and prices in New Zealand;  the impact of theproposal on the structure and competitiveness of the industry or industries of which it would form part, and on
linkages with other New Zealand industries;  the contri bution to product innovation, marketing expertise and
consumer choice in New Zealand;  where the interests concerned with the proposal were operating on amultinational basis, the role of the New Zealand proposal in their total operations, with particular regard to thefirm's export and pricing policies, its other international strategies and New Zealand participation;  the taxationyield to New Zealand in relation to the benefits which the overseas company derived from its New Zealandactivities, with particular reference to the taxation aspect s of its pricing policies and the ratio of equity to loan
capital;  the balance of payments implications of an inve stment, including the cost of servicing the investment,
the amount of capital inflow and the extent to which this supplemented or added to the overseas capital availablethrough other channels, either to the Government or to  the private sector in New Zealand;  the degree and
significance of participation by New Zealand shareholders in relation to the nature of the individual overseasenterprise and the competing needs of New Zealand-owned enterprises for local equity capital.  Paterson (1975)pp. 206-207.
118 The revised list of criteria provided that the Overseas Investment Commission would consider:
(1)  added competition to local industry, lower prices and greater efficiency;  (2) the introduction of new exportmarkets or increased market access;  (3) the extent to which the proposal is likely to make a net positive
contribution to the balance-of-payments;  (4) the creation of new job opportunities;  and (5) the promotion ofNew Zealand's economic growth.  The following factors were also taken into account:  (1) the degree of equity
participation by local shareholders in relation to proposals which involve the ownership and control of
New Zealand's natural resources;  (2) the potential impact of the proposal on the environment and on regionaldevelopment.  (3) the implications of the proposal for the Government's other economic and industrial policiesand other national policies which might be affected by the proposal;  and (4) the relative opportunities ofshareholders in small private companies to dispose of their shares to the best advantage.  Safarian (1993) p. 159.
119 Safarian (1993) pp. 157 and 169.
120 Safarian (1993) p. 170.G/C/W/307/Add.1
Page 17
and of the character and immigration status of the investor.121  In the case of land transactions, a
determination must be made that the investment is in the national interest.122
48. Until January 1995, the main legislation regulating inward direct investment in Norway  was
the Concession Act of 1917.  This Act provided the legal basis for the review of FDI not only in
natural resources but also in other industries by requiring foreigners and foreign-controlledNorwegian companies to secure a concession to acquire waterfalls, mines and other real properties,
including where such properties were used for industrial purposes.
123  The Act stipulated certain basic
conditions for the granting of concessions, including requirements that imports and exports take place
at world market prices, that payments to parent firms for financial, technical and commercial
assistance be approved by the Government, and that Norwegian labour and materials be used.  It
would appear that the last of these three conditions received special attention in the petroleum
sector.124  In 1963, in a policy statement the Department of Industry further specified the criteria to be
considered in examining applications for concessions.125  The review process did not involve active
bargaining by the Norwegian Government in order to maximize the benefits of foreign investment
proposals, and with the exception of the petroleum sector the performance of foreign-owned firms
would not appear to have been a major objective of the review process.126  In 1995, as a consequence
of Norway's accession to the EEA, the review process based upon the Concession Act of 1917 wasreplaced with legislation that provided for uniform rules applicable to acquisitions by domestic and
foreign investors.  It subjects acquisitions by domestic and foreign investors above a certain threshold
to a reporting requirement, with the possibility of a review by the Ministry of Industry and Energy.
127
49. Portugal's  Foreign Investment Code, adopted in 1977, provided for prior authorization of
foreign investment proposals on the basis of an assessment of economic benefits in light of specifiedcriteria.
128  It is unclear whether the authorities also actively negotiated commitments from foreign
investors with respect to their performance.  In cer tain cases, including cases involving investment in
designated priority sectors, approval was granted automatically.  In the context of Portugal's accession
to the EEC, this regime was liberalized in 1986 with the substitution of a prior declaration procedure
for the prior approval requirement and the elimination of the assessment of economic benefits withrespect to EEC investments.  In relation to no n-EEC investments, however, the possibility of an
analysis of such benefits was retained in a procedure that provided for evaluation and possible
                                                     
121 WTO (1996) p. 12.
122 The factors to be taken into account in making such a determination are:  whether the investment
will result in the creation of new job opportunities or th e retention of existing jobs;  the introduction of new
technology or business skills;  the development of new export markets;  added market competition, greaterefficiency or productivity, or enhanced domestic services;  additional investment for development purposes;
increased processing in New Zealand of  New Zealand's primary products.  Where land is currently being used
for agricultural purposes, the intended use of the land is taken into account.  OIC (2001) p. 5.
123 Safarian (1993) pp. 173-175;  UNCTC (1989) p. 252;  OECD (1982) p. 23.
124 Safarian (1993) pp. 174 and 177;  UNCTC (1989) p. 252.
125 These criteria were:  the effects on income, production and employment;  location of the project;
the extent of foreign financing;  the development of new types of production;  the possibility of receiving new
knowledge;  the possibility of cooperating with international concerns to secure better or more stable prices and
guaranteed access to raw materials or exports;  the extent  to which the domestic sector was already developed;
and the extent of competition on the home market with established Norwegian firms and the danger ofmonopoly practices.  Safarian (1993) p. 175.
126 Safarian (1993) pp. 177, 181-182 and 430.
127 OECD (1995).
128 UNCTC (1986) p. 71;  The criteria taken into acc ount in the evaluation of individual investment
proposals were: job creation;  effective contribution to the balance-of-payments;  increased value of natural
resources;  utilisation of domestic goods and services;  contribution to industrial reconversion; regionaldevelopment;  production of new goods or services; improvement of existing goods;  introduction of advancedtechnology;  high degree of value added; low dependence on domestic capital;  training of Portuguese workers;
and low industrial pollution.  UNCTC (1986) p. 72.G/C/W/307/Add.1
Page 18
negotiations with foreign investors.  Criteria specifi ed in this regard were identical to the criteria
contained in the 1977 legislation.  It would appear that in practice this possibility of evaluation and
negotiation in respect of investments from non-EEC sources was never used and that such
investments were allowed to be made upon a simple declaration.129  In 1995, the requirement for prior
declaration was abolished and replaced with an ex post  notification procedure.  It should be noted that
Portugal has also applied a special, "contractual" regime, applied to large foreign investments, which
provides for tax, financial and other benefits depending upon compliance with specific commitments
negotiated by the Portuguese authorities with foreign investors.130
50. Under the Concession Act of 1916, foreign investment in real property and mining in Sweden
was subject to prior authorization.131  The Act also applied to certain Swedish companies, except
when their articles of association contained a clause limiting the acquisition of shares by foreign
investors.  Removal of such a clause required government approval.  In 1982, laws were enactedwhich required approval of foreign investment resulting in the acquisition of more than 10 per cent of
a Swedish firm's shares.
132  The application of this legislation involved discussions with foreign
investors on conditions attached to the approval of an acquisition, but it appears that there was no
attempt to extract detailed and specific comm itments with respect to long-term performance.133
51. Apart from certain restrictions on foreign ownership contained in the Alien Business Act
1972,134 the main policy instrument used to regulate FDI in Thailand has been the screening of FDI
proposals in the context of applications for investment incentives.  The Investment Promotion Act of
1977, amended in 1991, vests in the Thai Board of Inve stments authority to grant a wide range of tax
incentives and non-tax benefits to domestic and foreign investors.135  In determining whether to
accord promotional status to a project, the Board has considered general criteria, including theproject's contribution to:  the strengthening of the balance-of-payments;  regional development;
conservation of natural resources;  development of public utilities and basic infrastructure;
conservation of energy;  the establishment of basic industries which form the basis for further stages
of industrial development;  and technological development.
136  Additionally, the Board has applied
specific criteria to projects involving foreign participation which have limited the eligibility for
                                                     
129 OECD (1994) p. 34.
130 The following factors have been considered in such negotiations:  (1) the technical, economic and
financial feasibility of the projects;  (2) sectors where foreign investment is considered to be of most interest, byreason of its contribution to regional development and technological modernisation;  (3) forecasts of positive
foreign exchange balance, high value added and opening up of new jobs;  (4) significant financial coverage ofprojects from own resources;  and (5) suitable development of technologies and the quality of personnel trainingprogrammes.  OECD (1994) p. 37.
131 Safarian (1993) pp. 186-187
132 OECD (1987) pp. 25-26.
133 Safarian (1993) pp. 192-193.
134 WTO (1999c) pp. 31-32;  WTO (1995) pp. 127-128.  The Alien Business Act 1972 was replaced in
March 2000 by the Foreign Business Act.
135 The incentives available to "promoted" projects under the Investment Promotion Act fall into four
main categories:  (1) special permission to bring in foreign nationals to undertake investment feasibility studies,
to bring in foreign technicians and experts and to own land for carrying out a promoted project;  (2) guaranteesagainst nationalization, competition by new state enterprises, state monopolization of the sale of productssimilar to those produced by a promoted project, price controls on the products of a promoted project, exportprohibitions, imports by government agencies or state enterprises on a duty-free basis of products that compete
with the promoted project;  (3) trade protection through the imposition of a temporary surcharge on or a ban of
imports of competitive products;  (4) tax incentives  in the form of an exemption from or reduction of importduties or business taxes on imported machinery or imported raw materials and components, and an exemptionfrom corporate income tax.  Special tax incentives have  been applied to export-oriented projects and to projects
in Investment Promotion Zones.  Davidson and Ciambella (1995) pp. 260-265;  WTO (1995) pp. 129-133;GATT (1991b) pp. 252-254.
136 OECD (1999) p. 234;  Davidson and Ciambella (1995) p. 246.G/C/W/307/Add.1
Page 19
investment incentives by conditioning the level of foreign equity participation in a project on its
market orientation.  Thus, in case of manufacturing projects mainly oriented toward the domestic
market, Thai nationals were required to own at least 51 per cent of the registered capital.  Where more
than 50 per cent of the production was exported, foreign investors were allowed to hold a majority of
the shares, and where 100 per cent of the production was exported foreign investors were allowed tohold all the shares.  These links between equity owne rship and export orientation have been gradually
relaxed over time.  Thus, for example, in 1993 the requirement to export 100 per cent in case of
100 per cent fully foreign-owned investments was reduced to 80 per cent, and for manufacturing
projects for the domestic market majority foreign ownership was allowed on a case-by-case basis in
certain regions.
137  In August 2000, the export requirements for projects involving majority foreign
ownership were eliminated.  The only remaining restriction on the eligibility for incentives is that, in
certain sectors other than manufacturing, Thai nationals must own at least 51 per cent of the registeredcapital.
138  In addition to the exemption of export-oriented projects from these recently removed
foreign equity restrictions, another manner in which export performance has been a factor in
Thailand's investment promotion policies is the granting of certain kinds of tax incentives conditional
upon the degree of export orientation of a project.139
52. The United Kingdom's Exchange Control Act of 1947 regulated the financing of inward
direct investment with a view to ensuring that it had a favourable impact on foreign exchange
reserves.  The Act required that inward direct investment be financed by an inflow of capital rather
than borrowing on the UK market.  Thus, the inflow of  foreign currency had to be proportionate to the
degree of control acquired by the foreign firm.  A lthough the fact that under the Act all inward FDI
required authorization meant that it was theoretically  possible to review inward FDI in the light of a
broader range of criteria than just the financing conditions, evidence suggests that in practice the Act
was applied solely with reference to the financing criteria.  It has been noted that refusals were rare
and that no important case was declined by this review process as long as the financial conditions
were met.140  In a few cases, involving major take-overs, authorization of inward FDI was made
conditional on the foreign firm offering performance undertakings, but such undertakings were notsystematically monitored.  The financing restrictions were lifted in 1972 for EEC investors and in
1977 for all foreign investment in manufacturing.  The restrictions were eliminated in October 1979.
III. POLICY OBJECTIVES OF TRADE-RELATED INVESTMENT MEASURES AND
OTHER PERFORMANCE REQUIREMENTS
53. The preceding section shows that countries have sought a range of policy objectives through
trade-related investment measures and other performance requirements ("performance requirements").
This was confirmed in the documents circulated recently by several Members in the context of theirrequests for extensions of the TRIMs transition period.
141
54. Most prominent among them has been Industrial development , aimed at encouraging the
expansion of domestic manufacturing activities, including those that involve small and medium-scale
enterprises, and, as industrialisation progresses, raising manufacturing productivity and moving into
new technologies and into products with a higher skill component.  A typical structure of traderestrictions to encourage import-substituting industrial development involves a certain degree of tariff
escalation; i.e, high tariffs on finished products an d low(er) tariffs on intermediate inputs and capital
                                                     
137 WTO (1995) p. 31.
138 Board of Investment Announcement No. 1/2543.
139 WTO (1999c) pp. 59-60;  OECD (1999) pp. 235-236;  WTO (1995) pp. 129-133.
140Bailey et al. (1994) p. 159.
141 See the documents submitted by Argentina (G/C/W/295), Colombia (G/C/W/296), Malaysia
(G/C/W/291/Rev.2), Mexico (G/C/W/293), Pakistan  (G/C/W/294), Philippines (G/C/W/289), Romania
(G/C/W/290), Thailand (G/C/W/292).G/C/W/307/Add.1
Page 20
goods in order to protect the development of local, high-end manufacturing production.  However,
experience suggests that this may have the effect of leading to the development of only low
value-added, assembly operations based on imported inputs.  For many countries, the motor vehicle
industry has been a case in point.  It lends itself readily to the assembly of imported "knocked down
kits", which has been the starting-point for many countries in developing a domestic motor vehicleindustry.  At the same time, it is also an industry that uses a relatively large proportion of low
technology components, offering the possibility even at an early stage of industrial development of
extending the import substitution process backwards from finished products into various linkage
activities geared towards the supply of components.
55. One way of encouraging this would be to modify the tariff structure over time, raising tariffs
on those imported inputs that the authorities wish to see, and expect can be, produced competitively
by domestic industry.  Some countries have preferred to apply local content requirements,accompanied in many cases by higher tariffs on imports of finished products, and in some cases by
offering other forms of tax advantage aimed at maintaining the profitability of the producers of
finished products.  In contrast to the use of tariffs in this context, most local content requirements do
not specify what particular components are to be sourced locally.  Rather, the industrial policy
objective has been expressed in terms of a proportion of total content.  This can have the advantage ofallowing producers of finished products to select which components they will source locally, as
opposed to having the government make the selection for them when deciding which tariffs are to be
raised.  Typically, the proportion of local content required has been increased over time.  In some
cases, at a certain point the proportion has begun to be reduced;  a parallel can be drawn here with the
classic model of infant industry tariff protection, which proposes that tariffs should begin to bereduced once domestic producers have had time to become established so as to place pressure on them
to increase their productivity and competitiveness.
56. Some countries have subsequently introduced requirements to export finished products,
usually several years after the application of local content requirements.  The objective appears either
to have been to encourage a higher volume of production than would be warranted by sales on thedomestic market alone, in the expectation of achieving greater efficiency of production through
economies of scale, or more generally to try to inject greater export-orientation into the
industrialization process.  In some cases this objective has been pursued through export performance
requirements alone.  In others, a link has been created through trade-balancing requirements between
export performance and access to imports on advantageous terms -- typically, reduced tariff rates for
imported inputs -- in an attempt to encourage and assist producers of finished goods to compete on
export markets by removing one of their cost disadvantages (higher priced inputs).
57. Performance requirements have been used widely with the aim of influencing the activities of
foreign investors  in host countries in favour of contributing to key elements of economic growth and
development policy.  Based on data in the previous section, in addition to targeting the contribution
they make to industrial development, to import substitution, and to export promotion, performance
requirements have been applied to try to strengthen the contribution of foreign investment to a hostcountry's technological development, to the creation of employment, to its balance-of-payments
situation, and to conditions of competition in the host country and the ownership of resources.  In
some cases, performance requirements have explicitly targeted the policy objective;  in others, this
has been pursued more indirectly through, for example,  varying the level of equity that can be held by
a foreign investor in a local subsidiary according to  whether the investor agrees to meet targets in
areas such as export performance, trade or foreign exchange balancing, or technology transfer.
58. Many countries which have applied procedures for review and authorization of foreign
investment have taken the expected contribution to the transfer of technology  into account.  Some
have applied explicit conditions requiring either that certain technologies be used by the foreign
investor in the host country or that, once established, steps be taken by the foreign investor to ensureG/C/W/307/Add.1
Page 21
that technology and skills are shared with domestic firms.  In some instances this has been pursued
through explicit requirements that specific technologies be licensed to local firms;  in some it has been
pursued implicitly through local sourcing conditions that can only be fulfilled through technological
collaboration between the foreign investor and local firms.
59. Some countries have attached conditions to foreign investment relating to the  generation of
employment and the  accumulation of managerial and workforce skills .  These have been included
as policy objectives in procedures for reviewing and authorizing foreign investment projects, and
some have applied specific performance requirements targeted at these goals, particularly on a
sectoral basis.
60. Certain performance requirements have been applied to try to address balance-of-payments
concerns, by reducing demand for imports, increasing exports, and managing foreign capital flows
associated with the activities of foreign investors.  They were used by some developed countriesbefore the introduction of full currency convertibility and flexible exchange rates shifted the job of
balance-of-payments adjustment away from trade and capital account controls and onto
macroeconomic adjustment policy.  Some developing countries, particularly those that consider
themselves vulnerable to chronic balance-of-payments difficulties, continue to apply conditions to
foreign investors on inflows and outflows of foreign ex change relating to the initial investment or to
subsequent operations of the subsidiary firm.
61. Some countries have targeted the policy objectives of conditions of competition and
ownership of enterprises  through performance requirements.  The underlying concerns in these cases
appear to be the large commercial size and influence of foreign subsidiaries in a host country relative
to their domestic counterparts, the potential for foreign subsidiaries to out-compete domestic firmsand drive them out of key sectors or industries of the host economy, and on a broader level the
exercise of political control over the ownership of the means of production in an economy.  It has also
been suggested that these performance requirements aim to offset an asymmetry in bargaining power
between a foreign firm and the host country government over the distribution of the gains arising from
an investment (Newfarmer 1985, and Balusbramanyam 1991).
62. Finally, some countries have used performance requirements in the context of regional
development policies, within national borders, to encourage a more geographically diversified pattern
of industrialization.
IV. THE IMPACT OF TRADE-RELATED INVESTMENT MEASURES AND OTHER
PERFORMANCE REQUIREMENTS
A. I
MPACT ON INTERNATIONAL TRADE FLOWS
1. Local content requirements
63. Under conditions of perfect competition142, the world price of imported components must be
lower than the price of domestically produced substitutes in order for a local content requirement
(LCR) to be binding;143  otherwise, one would expect that cheaper, domestically produced
components of similar quality would be preferred automatically.  Overall demand for the components
will be a function of both the domestic price and the world price.  The higher is the proportion of
                                                     
142 See Vousden (1990).  For analysis that relaxes the assumption of perfect competition, see
Richardson (1993) on factor price effects, and Madan (1998, 2000) on transfer prices in intra-firm trade.
143 The trade effects of LCS will depend on the degree of differentiation between foreign and domestic
inputs, and on the production technology (Mussa, 1987).  The higher the degree of substitutability between the
two, the greater will be the impact on trade for a given LCS.G/C/W/307/Add.1
Page 22
components that is required to be sourced domestically, the closer their average per unit cost will be
to the prevailing domestic price.144  As a result, given the above assumptions:
• the LCR will reduce imports of components;
• the higher domestic price of components as a result of the LCR will mean that producers
of finished products will need to be compensated by a tariff on competing importedproducts if they are to remain competitive in the domestic market;  otherwise, imports of
finished products will increase and undermine the effectiveness of the LCR.  Hence,imports of finished products will fall;
• the effect on exports of finished products will be negative, or at best neutral, due to the
higher costs of incorporating domestically produced components.
64. The dynamic effects of an LCR on trade are more speculative.  If domestic producers of
components who are benefiting from the guaranteed market created by the LCR do mature over time
and eventually become competitive at world market prices, it will be possible to relax and eventuallyremove the LCR, to reduce the tariff on imported finished products, and possibly to develop an export
capacity in components.  If, on the other hand, the costs of local production of components remains
high behind the protection of the LCR, the risk is that the entire domestic industry, including the
production of finished goods, will remain uncompetitive and act as a drag on overall economic
growth.
2. Export performance requirements
65. If a firm is able to export competitively at world market prices, one would expect it to do so
in order to maximise its revenues and/or profits.  Requiring a firm to export a certain percentage of its
output beyond what is commercially viable will involve it in a loss-making activity.  Given constant
returns to scale, it will not change its output level (i.e. raise production to meet its export target, since
this will increase its losses), but rather reduce its sales on the domestic market (Herander and Thomas,
1986).   Given the above assumptions:
• the trade effects will be increased exports, but also increased imports that are needed to
make up the shortfall of production for the domestic market.
66. For a firm to continue producing profitably in  such circumstances, a compensating advantage
will be needed to offset the losses incurred on export sales (WTO, 1998).  Typical examples are
higher profits from domestic market sales deriving from tariff protection against imported goods that
compete for a share of the domestic market, duty rebates on imported inputs which reduce productioncosts, and various forms of fiscal or financial incentives.  These allow higher profits realised by the
firm on sales on the domestic market to be used to cross-subsidize losses incurred through exporting. ,
Given the above assumptions:
• a higher tariff on finished products will allow the firm to expand its production for the
domestic market, and result in lower imports.  Fiscal and financial incentives can have the
same effect;
• duty rebates will encourage higher imports of intermediate products.
                                                     
144 Local content schemes can also be prescribed in terms of the value.  Although analytically similar,
there are some differences in their impacts on consumer behaviour as shown by Färe et al. (1989).G/C/W/307/Add.1
Page 23
67. One justification that is sometimes advanced for applying export performance requirements is
that firms may be operating in imperfectly competitive market conditions.  For example, if a
subsidiary of a foreign company aims not to maximize its revenues or profits but rather to implement
the worldwide production and marketing strategy of its parent company, the subsidiary may not
export its production even if it is able to do so competitively at world market prices;  export marketsmay be reserved for subsidiaries of the same fo reign company operating in other host countries.  In
such a situation, exports from the host country will be less than is justified on competitiveness
grounds, and an export performance requirement may help to correct for this.
68. As was the case for the LCR, the dynamic effects of an export performance requirement are
more speculative.  If the firm concerned raises its total output and is able to reap additional economies
of scale, it may eventually be able to compete at world market prices without any offsetting
advantage.  Chao and Yu (1998a and b) analyse the situation where an export performancerequirement is imposed in the presence of a tariff in one time-period, and both policies are removed in
a second time-period.  This allows for consumption and substitution effects across time periods, and
for positive effects on the trade balance in one time-period to offset negative effects in another.  If the
non-traded sector absorbs resources from the sectors affected by the import restraint and the export
requirement, the result is higher overall national income and subsequent increases in both exports andimports.
3. Trade balancing requirements
69. Trade balancing requirements link the removal of restrictions on imports to the generation of
additional exports.  As such, if they are successful they can be expected to increase both imports and
exports;  if they are not, then existing trade flows may remain unchanged.  Analysis by Herander andThomas (1986) shows the ambiguity of the net effect on trade, and highlights the fact that it will
depend primarily on the use of imported inputs relative to domestically-produced inputs.
EMPIRICAL EVIDENCE
70. The principal methodology adopted has been case studies of particular countries or industries,
usually based on interviews with foreign investors.  This is useful, but in most instances the
conclusions drawn have not been supported through sy stematic cross-country analysis.  Also, it makes
it difficult to identify the specific effects of individual performance requirements, since the measures
are often applied in combination.
145  Nonetheless, certain insights can be derived.
71. The four most widely cited empirical studies on the trade effects of performance requirements
date from the 1980s.  They are the U.S. International Trade Commission (1982), Gray and Walter
(1984), Guisinger and associates (1985), and Moran and Pearson (1987).146
72. The USITC study found it difficult to draw general conclusions because of differences across
host countries and industries.  Nevertheless, it concluded that the measures had only a marginal effect
on trade and employment in the United States, as well as on the location of investment.  In the specific
case of the automotive industry, the study found that the net expansion of exports from the US that
could be expected from abolishing performance requirements in host countries where the subsidiariesof US motor vehicle producers were established would have amounted to less than 1 per cent.  Similar
estimates were made for the chemical industry (a net increase in exports of 1.7 per cent) and computer
and office equipment (0.5 per cent).  The relatively low numbers involved were attributed to the fact
                                                     
145 For example, on local content schemes UNIDO says  that "in practice, however, it (local content
schemes) has – at most – been seen as part of an overall policy of trade restriction, again supplementing existingtariffs and quotas, for a given sector".  (p. 6)
146 These studies have been reviewed extensively, notably by UNCTC (1991b) and WTO (1998).G/C/W/307/Add.1
Page 24
that most respondents indicated that the location effect of performance requirements was very low
(i.e., that the measures were only a minor factor in a foreign investor's decision about where to
produce, and in themselves did not prompt investors to consider moving their production elsewhere).
73. These results were broadly confirmed by Guisinger, who found statistically significant trade
effects only in the automotive industry.147  A weaker result still was obtained by Moran and Pearson,
with UNCTC (1991b) concluding that "TRIMs did not, per se, significantly affect the pattern of
trade".148
74. There are some grounds for believing that the methodology used in these studies may have
biased the trade effects of performance requirements, by failing to differentiate between the value,
volume and composition of trade flows.149  For example, aggregate trade changes predicted by the
USITC do not include the possibility of substitution effects between trade in final and intermediate
goods, yet some survey respondents indicated that in the absence of local content schemes, exports tothe country in which they were investing could shift from intermediate to final goods.  Some even
indicated a change in the volume and value of intra-firm trade.  Nonetheless, these studies suggest that
the aggregate trade impact of performance requirements has been relatively small.
B. I
MPACT ON INTERNATIONAL INVESTMENT FLOWS
75. The determinants of flows of foreign direct investment (FDI) are generally considered to
differ between two broad categories of FDI.  One category (market-seeking FDI) is attracted by the
potential for sales on the host country market, and has no expectation necessarily of exporting from it.
The second (efficiency-seeking FDI) is attracted by specific factor endowments in the host country,
notably an abundance of natural resources or of labour, and usually it does have a clear export
orientation.  In both cases, several determinants come into play at the same time, of which one may bethe existence of performance requirements.
1. Local content requirements
76. When an LCR is binding, the affected firm will be forced to purchase higher cost,
domestically-produced components instead of imported substitutes.  This raises the firm's costs of
production, and lowers its profitability, which can influence whether the firm decides that aninvestment in the host country will be commercially viable.
150  Prima facie , the existence of an LCR
is likely to deter FDI inflows to a host country, although this will depend upon how significant the
effect of the measure is on total costs of production.  The profitability of an investment in a particular
country is dependent on many factors, and cost advantages of the host country in other respects may
outweigh the negative effect of the LCR.  Also, other policy measures may be applied to compensate
for the cost disadvantages of an LCR, most obviously fiscal or financial advantages that are offered to
the foreign investor, and also in the case of market-seeking FDI the level of tariff protection which theinvestor enjoys in the host country.  As long as this effectively protects the investor from import
competition, the additional cost imposed by the LCR is relevant only inasmuch as it creates a cost
disadvantage vis-à-vis  other local producers, and they themselves may also be subject to the same
LCR.  In addition, the costs imposed by the LCR may be viewed as insignificant relative to other
advantages the investor derives from being able to supply the host country market from a localsubsidiary (e.g., specialized local knowledge of the market).  Given the above assumptions:
                                                     
147 Guisinger and associates (1985), pp. 154 and 319.
148 UNCTC (1991b), p. 50
149 UNCTC (1991b), p. 47.
150 See Färe et al. (1989) for a formal treatment of this.G/C/W/307/Add.1
Page 25
• An LCR will raise production costs and act as a deterrent to inflows of market-seeking
and efficiency-seeking FDI.
• However, compensating locational or policy advantages offered by the host country
government may outweigh the effect of the LCR and have a positive effect on FDI flows.
2. Export performance requirements
77. The impact of export performance requirements (EPR) on investment flows also depends on
the type of FDI that is involved.  As indicated ea rlier, in order for an EPR to be binding it must be
assumed that the firm is forced to some extent to cross-subsidize export sales.  EPRs are therefore less
likely to be relevant to efficiency-seeking FDI, which is attracted by locational advantages of the host
country and which is likely to have a natural export orientation.
78. If the foreign investor has to pay for the cross-subsidization of exports from its own revenues,
earned from selling on the host country market, the EPR would be likely to de ter FDI since it implies
lower overall profitability of the firm's activities in the host country.  However, the
cross-subsidization can be covered in other ways, for example by some form of compensating fiscalor financial advantage that the firm receives, in which case the costs imposed by the EPR may be
regarded by the foreign investor as being cancelled out.  This situation can be common in the context
of export processing zones, where foreign invest ment is encouraged on condition that output is
exported.  In return, a firm is generally able to take advantage of lower costs of production offered in
the export processing zone, for example lower factor costs and duty free importation of importedinputs and capital goods.
• An EPR is likely to act as a deterrent to inflows of market-seeking FDI.
• However, compensating advantages offered by the host country government may offset
the effect of the EPR and have a positive effect on FDI flows.
3. Trade balancing requirements
79. Since trade balancing requirements link the removal of restrictions on imports to the
generation of additional exports, market-seeking FDI is likely to be deterred since it will face apotential penalty on both the export and the import side.  Efficiency-seeking FDI, on the other hand,
which has a strong export-orientation in the first place, may be little affected.
EMPIRICAL EVIDENCE
80. The problem of isolating the specific impact of performance requirements is compounded in
the case of investment flows by the issue of whether the measures are imposed pre- or
post-establishment of the subsidiary.  If the existence of a performance requirement is known about
before the subsidiary is established, the foreign invest or may be able to design the investment so as to
minimize whatever adverse effects on costs of production it may have.  If, however, it is imposed on
an existing subsidiary, its costs are likely to weigh more heavily on the investor's operations.
81. The four studies cited above in paragraph 71 are the main ones that provide empirical
evidence of the impact of performance requirements on investment flows.
151  The USITC study found
that performance requirements had only a marginal effect on the location of investment;  most
respondents to the survey indicated that the existence of performance requirements was only a minor
factor in their decision about where to invest and produce, and the existence of performance
                                                     
151 Their results are summarized in UNCTC (1991b) and in WTO (1998).G/C/W/307/Add.1
Page 26
requirements did not in themselves prompt investors to consider moving their production elsewhere.
The results of these four studies have been summarized as follows:  "reported shifts in firm behaviour
due to TRIM regulations are surprisingly small".152
82. Hackett and Srinivasan (1998) examined in detail the costs of performance requirements
involved in switching from one set of suppliers of components to another.  The costs taken into
account were the loss of existing business relationships, the cost of finding satisfactory host country
suppliers, the costs of negotiating contract terms and safeguards, and the costs of adapting production
processes to the locally supplied component.  The findings were that these "supplier-switching costs"
were higher for Japanese firms than for US firms, and that for a sample of foreign subsidiaries over
the period 1982-1988 the imposition of LCRs had had a negative, but insignificant, effect on US
investments, and a positive and significant effect on Japanese effects, probably due to compensating
advantages of one kind or another that were offered in conjunction with the performancerequirements.  The study found also that the effect  on investment flows of EPRs was negative, but not
significant.
C. I
MPACT ON GROWTH AND DEVELOPMENT
83. Economic growth is generally viewed as a necessary, but not a sufficient, condition for
development (Caves 1996).  Development is the combination of a variety of factors:  UNCTAD(1999), for example, identifies key factors in  the relationship between FDI and development as
financial resources, technology transfer, export competitiveness, human resource development, and
the environment, and other studies have highlighted additional factors.  Typically, performance
requirements target one or more of these factors,  rather than the process of economic growth and
development at an aggregate level.
1. Impact on resource allocation and growth
84. Theory predicts that an economy which allocates its resources efficiently, which maintains a
high rate of capital accumulation (either from domestic savings or inflows of foreign capital), and
high total factor productivity (which depends in part on the technology that is used), should be able to
achieve and sustain a high rate of economic growth.  FDI can be of particular relevance, fordeveloping countries in particular, in each of these areas -- for example, to the extent that FDI is a
source of capital, or of technology, it can enhance the host economy's growth prospects -- and
performance requirements may be used by the host country to target one or other of these attributes of
FDI so as to try to increase their contribution to economic growth.
85. Recent research has explored how FDI contributes to the accumulation of physical inputs in
specific sectors and industries in a host country, which can then generate increasing returns to scale
that help raise the growth rate;  in other word s, a process whereby increases in output can in
themselves stimulate more sustained growth.
153  Encouraging a concentration of FDI in a particular
sector or industry in the host country may then also be a policy target for performance requirements.
However, the potential advantages gained from this particular strategy need to be gauged case-by-case
against the extent to which FDI may crowd out dom estic investment, and as a result lead to only a
small net increase, if any, in the total capital stock of an industry (Caves, 1996).154  More generally,
this strategy needs to be considered in the context of its potentially adverse effects on the efficiency of
resource allocation in the economy overall, and not just in the targeted industry.
                                                     
152 UNCTC (1991b) p. 54.
153 The openness and growth literature can be found in Grossman and Helpman (1991) and Barro and
Sala-I-Martin (1995).
154 See also chapter 6 of UNCTAD (1999).G/C/W/307/Add.1
Page 27
86. As far as resource allocation is concerned, th e overwhelming evidence is that production and
consumption decisions at world prices reflect a more positive outcome for any country.  However,
Lipsey and Lancaster (1956) showed that in the presence of a distortion to a perfectly competitive
market (i.e., a second best situation), welfare could be improved in specific circumstances if the
government introduces a policy that creates a second distortion but which at the same time offsets thefirst.  This insight has been used repeatedly in the international trade literature, especially in the
context of policies used to protect industries from international competition (Bhagwati, 1971).  This is
a highly stylised line of argument.  It assumes policy-makers are in a position to evaluate accurately
distortions to market conditions, and to design corrective policy interventions with equal accuracy --
all in all, a combination that is difficult to realise in practice.  Nonetheless, the use of performance
requirements has been analysed in this context, and compared with the use of tariffs as an alternative
policy approach (Vousden, 1990).
87. Take as an example a host country government that wishes to expand production by
encouraging domestic manufacturing to supply a fore ign subsidiary with components.  It decides to
choose between applying a local content requiremen t (LCR) in combination with preferentially low
tariffs on imports of intermediate goods that are not sourced locally, or applying higher tariffs on all
imports of intermediate inputs to induce the foreign subsidiary to source as much as possible locally.
The effect on the host country economy in both cases is to misallocate resources into the protected
industries.  However, using static analysis, and assuming perfect competition in the intermediate
goods sector of the host economy, a tariff on intermediate products is inferior, in a welfare sense, to
an LCR as long as the LCR is not set at 100 percent (Vousden, 1987 and 1990).  The intuition behind
this is that the final domestic price of the interm ediate goods will be a weighted average of the
domestic and world price.  The LCR continues to provide access at, or near to, world prices for the
proportion of intermediate goods that continues to be imported, whereas the tariff raises the domestic
price for all intermediate goods, hence creating a larger consumer welfare loss.
88. This result is subject to many assumptions and constraints, including the market structure of
the intermediate goods sector and the degree of vertical integration.  If the intermediate goods sectoris dominated by a monopoly, for example, a tariff can become a superior instrument, since the
monopolist will find it profitable to take advantage of the higher inelasticity of the demand curve
arising from the quantity restriction imposed by the LCR, and to restrict the quantity and raise the
domestic price of intermediate goods.
89. Attempts have been made to derive results on  protection-induced capital flows in the context
of a general equilibrium model (Johnson, 1967;  Brecher and Diaz-Alejandro, 1977).  Richardson
(1993) develops a model of LCRs with capital flows and a market structure that allows foreign anddomestic firms to compete in the intermediate goods sector.  In this case, a result, which is consistent
with the empirical evidence, is that an LCR can  induce foreign capital inflows so that foreign
subsidiaries displace some of the domestic firms.  If these foreign subsidiaries source some of their
intermediate inputs from the world market, imports could actually increase.  As a result for low
proportion LCRs it is possible that the negative effect of higher domestic prices could be offsetthrough an increase in tariff revenues.
90. One contribution on the role of LCRs is a study by Kim (1997).  Using an inter-temporal
model that explicitly considers labour supply decisions, he finds that the long-run effects of an LCR
are to lower the level of the capital stock, improve the current account, and decrease employment.
91. In the case of export performance requirements (EPRs), to the extent that a protected host
country market, or some other fiscal or financial advantage, is necessary to induce foreign investment
in the first place, the imposition of an EPR has been shown under certain circumstances to lead to
potentially higher welfare (Rodrik, 1987).  Since an import tariff is in place to protect the domestic
market, production and consumption decisions in the host economy take place with respect to theG/C/W/307/Add.1
Page 28
tariff-distorted domestic price.  An EPR can reduce this distortion by ensuring that a proportion of
domestic production (the proportion that is exported) takes place at world prices, thereby increasing
welfare.  Once again, however, the underlying assumptions  are all important in reaching this result.  If
the host country could be made better off  in a tariff-distorted environment by forcing some output to
be produced at world prices, then welfare would be improved even more by ensuring that all output isproduced at that price, which implies removing the original tariff-distortion.
155
92. A potential source of resource misallocation in the host country can arise if there are
restrictive business practices of foreign subsidiaries.  This has been advanced as justifying the use of
certain performance requirements (Puri and Brusick, 1989, and Morrissey and Rai, 1995, and
Mashayekhi, 2000).  However, the case is weak in light of the general rule in economic policy that the
best policy is always the one that is targeted directly at the distortion (Bhagwati, 1971).  In the case of
restrictive business practices, the information required by policy-makers to gauge whether an LCR oran EPR is an appropriate remedy is very high.  As shown above, even in the context of a monopolistic
market structure, a quantity-based LCR is an inferior instrument to price-based tariff protection, since
the LCR more readily accommodates the exercise of monopoly power because of the price elasticity
of demand.
156
93. In summary, Moran (1998) concludes that "… under neoclassical assumptions of perfect
competition, the imposition of domestic content and/or export requirements on foreign firms damages
the prospects for economic development of the country that adopts them".157  In an imperfect market
context, it is possible in theory to construct exam ples of situations in which the imposition of a
performance requirement can be shown to improve resource allocation, and to improve it by more
than would be the case if a tariff were used instead.  However, the results of this type of analysis are
highly sensitive to the assumptions that are made about the existence of market distortions, and they
are not sufficient to support a general statement that performance requirements are likely to improve
resource allocation.  On the contrary, in most practical instances, performance requirements are likely
to produce a less efficient allocation of resources than a measure, such as a production subsidy, which
addresses the source of the distortion directly.
EMPIRICAL EVIDENCE
94. An early study of the effects of industrial and trade policies on resource allocation and growth
is a cross-country study done under the auspices of  the OECD (Little, et. al, 1970).  The general
conclusion drawn was that promoting industrialisation through import substitution policies created a
bias against exports and obscured comparative advantage.  Policies that encouraged industrial
expansion, but were export neutral, were vi ewed as being more conducive for development.
95. In the case of Brazil, Bergsman (1970) concluded that LCRs "forced foreign investors to use
and even to develop Brazilian sources of supply", and "drastically reduced the demand for imports of
manufactured products", but that they led to the establishment of manufacturing processes in Brazil
that were inefficient, usually because of their small scale of operation.
96. Munk (1969) arrived at a similar result from his study of local content protection in the car
and truck industries in Argentina, Brazil and Mexico -- the principal cause of resource misallocation
was the inability of these industries to exploit economies of scale, although he found that the Brazil
light truck industry at the time was producing at lower cost than the world price despite a local
                                                     
155 Bhagwati (1971).
156 Hollander (1987) showed that if an LCR were de vised to replicate rate-of-return regulation policies,
typically applied to natural monopolies, there is scope for welfare improvements.  However, the key assumptionof Hollander’s work is that the monopoly power is in the final, not the intermediate, goods market.
157 Moran (1998) p. 32.G/C/W/307/Add.1
Page 29
content level of 94 per cent.  Similar problems of insufficient economies of scale were also recorded
in the automotive industries in Chile (Johnson, 1965), Canada (Eastman and Stykolt, 1967),
Argentina, India, Mexico, New Zealand  and Yugo slavia (Baranson, 1969), and Australia (Gregory,
1987), although factors other than simply the use of LCRs were recognized also to be involved, for
example an overvalued exchange rate and a costly regional development strategy in the case of Chile.Munk's overall conclusion was that an LCR was a costly policy tool in terms of resource
misallocation unless there was a steady narrowing over time of the price differential between
domestic and imported components.  UNIDO (1986), in its assessment of local content schemes
across a number of developing countries, concluded that local content schemes "were also often very
costly, both in the sense of driving up local prices and of misallocating scarce resources".  (p. 75).
97. More recent research has tended to confirm the results of these studies.  Okamoto and
Sjoholm (2000), for example, studied the automotive industry in Indonesia and concluded that thepolicies being used there, including performance requirements, had created a highly protected
environment where low competition allowed establishments to operate inefficiently.  They concluded,
for the period 1990-95, that the industry failed to achieve international competitiveness, that
productivity growth (value-added per employee) declined, and the industry failed to develop any
export capability.  These results were confirmed by a cross-country study of the automotive industryin South-East Asia.
158  An analysis of the local content ratio of Japanese electronics affiliates in
24 countries found that local content regulations were modestly effective in raising local content, but
not in stimulating procurement from domestic suppliers (Belberdos et al., 2001).
98. A study by CEPAL (1998) of the global automotive industry also came to the general
conclusion that investment policies, including performance requirements, had been inefficient andcostly for several countries in Latin America:  "t he investment necessary to modernize the automotive
industrial base was not made, and production capacity remained stagnant and technologically
antiquated, which was an obstacle to accessing the foreign markets;  even more importantly,
production capacity sufficient to achieve efficient minimal economies of scale was not attained."
159
The ineffectiveness of the policies led to the decline of the industry in all countries except Argentina,
Brazil and Mexico, but even in Argentina and Brazil productivity remained low, at only about half the
level in Mexico where the industry was placed under strong competitive pressure for production
destined for the US market.
99. Moran (1998) concluded from an extensive review of the empirical literature on performance
requirements that:  "The imposition of domestic-content requirements in protected local markets leads
to less efficient production and provides less valuable backward linkages than does allowing foreign
firms to set up operations oriented toward global or regional markets".160  He also concluded,
however, that export performance requirements in the automotive, petrochemical and
electronics/computer sectors had played an important role in establishing backward linkages.161
2. Impact on technology transfer
100. Developed countries are the principal sources of technology, and transnational corporations
are an important conduit for the international transfer of technology (UNCTAD, 1999).  However, themechanisms for such transfers and the conditions for the generation of technology in host countries
are prone to a variety of market failures.  Some host country governments have therefore used
performance requirements to try to improve the conditions for technology generation and transfer,
                                                     
158 The countries studied were Indonesia (Aswicahyono et al., 2000), Malaysia (Tyndall, 2000), the
Philippines (Abrenica, 2000), and Thailand (Poapongsakorn, 2000).
159 CEPAL (1998), p. 242.
160 Moran (1998), p. 161.
161 Ibid, p. 6.G/C/W/307/Add.1
Page 30
targeting both the linkages between parent compan ies and their foreign subsidiaries, and between
foreign subsidiaries and domestic firms in the host country.  Local content requirements, for example,
may aim to encourage foreign companies to transfer  technology to local component suppliers in the
host country, or more explicit technology transfer requirements can be included in licensing
agreements.
101. In using these measures to try to address market failures, there is an ever present difficulty of
balancing the public benefit from the diffusion of technology with the private incentive to generate
technologies (Saggi, 2000).  Furthermore, the success of the measures is not automatic.  Kokko (1992)
suggests that the transfer of technology depends a great deal on the host country's technological
capability and the level of competition.
102. Empirical evidence of the use of performance requirements in this context is scant.  Kokko
and Blomstrom (1995) found that the imposition of requirements on the behaviour of foreignsubsidiaries was negatively associated with technology flows into the host country.  The performance
requirements studied included mandates to use the most advanced technology available, perform
research and development locally, have access to the parent company's patents, or transfer skills to
local personnel.
103. UNIDO (1986) concluded that, based on their empirical evidence, local content schemes
"have often failed to contribute to the indigenous technological development of the country and
represented only a pseudo-transfer of technology, not trained entrepreneur or managers in the
developing countries and therefore led to poorly managed enterprises, and not generated significant –
if any – foreign exchange savings" (p. vii).  Although they do qualify this conclusion by highlighting
that the overall impact does depend on a complementary comprehensive macroeconomic policy.
104. More generally, by measuring technology transfer in terms of spillover effects from one firm
to another, usually from a foreign subsidiary to a domestic firm, productivity levels of domestic firms
have been found to increase along with the foreig n subsidiary share of the industry in Canada
(Globerman, 1979) and Mexico (Blomstrom, 1986), but not in Morocco (Haddad and Harrison, 1993)
or Venezuela where in fact the opposite was found to have occurred (Aitken and Harrison, 1999).  Amore recent study of industrialized countries, on the other hand, did find a statistically significant and
positive relationship between the stock of FDI a nd domestic manufacturing efficiency (Barrell and
Pain, 1997).  However, none of the studies tested whether the magnitude and sign of the spillover
effects were functions of government policy, and more specifically of performance requirements.
3. Impact on employment and wages
105. The theoretical issue involved in whether performance requirements create employment and
skill upgrading, and raise wages, is how efficient they are as policy tools.  Policies designed toincrease production in a particular sector will most likely increase employment in that sector, but the
level of employment in the economy overall is determined by macroeconomic factors so that
increased employment in one particular sector ma y come only at the expense of reduced employment
elsewhere.  Furthermore, there will be a resource cost to the economy associated with each job created
and, as indicated earlier, performance requirements are not generally considered to allocate resourcesefficiently so the resource cost involved in usin g them for this purpose may be high.  As regards
wages, the wage rate is a function of value of the product for which labour is an input and its
productivity level.
106. As in the case of technology transfer, empirical evidence of the impact of performance
requirements on employment is very thin.  There is support for the proposition that local contentrequirements have raised employment in the sectors in which they are applied.  In the case of
Malaysia, for example, employment in the automotive sector, which is subject to a high local contentG/C/W/307/Add.1
Page 31
requirement, is 3.5 per cent of total manufacturing employment (Tyndall, 2000).  There would surely
be far fewer jobs in this industry in the absen ce of the government's import-substitution policies,
including performance requirements, but there is no evidence on whether the policies have reduced
unemployment overall or simply shifted jobs from elsewhere in the economy.
107. There is an extensive empirical literature on wa ges paid in foreign firms relative to domestic
firms, although none specifically relating the use of performance requirements to wage levels.
Markusen and Venables (1997 and 1999) find general support for the proposition that, on average,
foreign subsidiaries have higher productivity levels and pay higher wages than domestic firms, and
Caves (1996) also finds there is a wage premium to workers in foreign firms that is robust across a
variety of methodologies.  Aitken  et. al (1996) too found support for the hypothesis using data from
Mexico, Venezuela and Morocco.  Globerman et. al (1994) found that the premium was 20 per cent in
Canada, and Doms and Jensen (1998) derived the same result for the United States.  Feliciano andLipsey (1999) found a much lower premium when firm size and location were controlled for, and
Bora and Wooden (1998, 1999) quantified the premium at about 3 per cent in Australia.
4. Impact on competition
108. Performance requirements tend to be used most widely in industries that are imperfectly
competitive, where the opportunity exists to shif t rents from one firm to another.  Government
policies can play a role in this regard, either directly through rent shifting policies, or indirectly by
affecting the environment in which the firms compete (Krishna and Itoh, 1988; Richardson, 1991).
The standard hypothesis is that a host country government would wish either to shift rents from a
foreign subsidiary to a domestic firm, or simply extract rents from the foreign firm (Vousden, 1990).
However, Richardson (1991) shows how a perverse result could arise where a foreign subsidiary'sprofits increase at the expense of a domestic firm competing against it a final goods market.
109. The most comprehensive empirical work on the issue of power and transnational corporations
is in Newfarmer (1985)
162, which found that industries with high foreign investment (transnational
control) are characterised by less competition, measured using a concentration index.  The study
considers issues related to the use of performance requirements as a mechanism to counter the powerof large firms, but it does not empirically test whether or not such policies have been successful.
                                                     
162 See UNCTAD (1997) for a good survey of the issue of competition policy and FDI.G/C/W/307/Add.1
Page 32
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