WORLD TRADE
ORGANIZATIONWT/WGTI/2
8 December 1998
(98-4920)
REPORT (1998) OF THE WORKING GR OUP ON THE RELATIONSHIP BETWEEN
TRADE AND INVESTMENT TO THE GENERAL COUNCIL
TABLE OF CONTENTS
Paragraph
A. INTRODUCTION ……………………………………………………………………….. 1-4
B. PROCEDURAL INFORMATION ON TH E ACTIVITIES OF THE WORKING
GROUP …………………………………………………………………………………… 5-16
(a) Sources and materials used in the work of the Working Group ……………………………… 5
(b) Cooperation with other inter governmental organizations ……………………………………. 6-7
(c) Meetings held to date   …………………………………………………………………………….. 8-15
(d) Cooperation with the Working Group on the Interaction Between Trade and
Competition Policy ………………………………………………………………………………… 16
C. SUBSTANTIVE WORK DONE IN THE GROUP …………………………………… 17-225
I. IMPLICATIONS OF THE RELATIONSHIP BETWEEN TRADE AND
INVESTMENT FOR DEVELOPMENT AND ECONOMIC GROWTH ……………….. 18-44
II. THE ECONOMIC RELATIONSHIP BETWEEN TRADE AND INVESTMENT ……… 45-119
(a) The degree of correlation between trade and investment flows;  (b) the determinations
of the relationship between trade and investment;  (c) the impact of business strategies,practices and decision-making on trade and investment, including through casestudies ………………………………………………………………………………………………... 47-56
(d) The relationship between the mobility of capital and the mobility of labour ………………. 57-58
(e) The impact of trade policies and measures on investment flows, including the effect of
the growing number of bilateral an d regional arrangements ………………………………... 59-62
(f) The impact of investment policies and measures on trade ……………………………………. 63-68(g) Country experiences regarding national investment policies, including investment
incentives and disincentives ………………………………………………………………………. 69-100
(h) The relationship between foreign investment and competition policy ………………………. 101-119
III. EXISTING INTERNATIONAL INSTRUMENTS AND ACTIVITIES REGARDING
TRADE AND INVESTMENT ……………………………………………………………. 120-161
(a) Existing WTO provisions ………………………………………………………………………….. 122-132(b) Bilateral, regional, plurilateral an d multilateral agreements and initiatives;
(c) implications for trade and investment flows of existing international instruments
 instruments …………………………………………………………………………………………. 133-161WT/WGTI/2
Page 2
Paragraph
IV. ITEM IV OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY …………. 162-225
(a) Identification of common features and d ifferences, including overlaps and possible
conflicts, as well as possible gaps in exi sting international instruments ………………… 164-185
(b) Advantages and disadvantages of entering into bilatera l, regional and multilateral
rules on investment, including from a devel opment perspective;  (c) the rights and
obligations of home and host countries and of investors and host countries;  (d) the
relationship between existing and possible future international cooperation on
investment policy and existing and possible future international cooperation oncompetition policy ……………………………………………………………………………… 186-225
D. RECOMMENDATION ……………………………………………………………… 226-227
ANNEX 1 CHECKLIST OF ISSUES SUGGESTED FOR STUDY
ANNEX 2 Summary of contributions received in the Working Group on
the Relationship between Trade and Investment
A. INTRODUCTION
1. The Working Group on the Relationship between Trade and Investment ("the Working
Group") was established by a decision taken at the WTO Ministerial Conference held Singapore in
December 1996.  The relevant paragraph (paragraph 20) of the Singapore Ministerial Declaration
(WT/MIN(96)DEC)  reads as follows:
"20. Having regard to the existing WTO provisions on matters related to
investment and competition policy and the built-in agenda in these areas, includingunder the TRIMs Agreement, and on the understanding that the work undertaken
shall not prejudge whether negotiations will be initiated in the future, we also agree
to:
/g109 establish a working group to examine the relationship between trade and
investment;  and
/g109 establish a working group to study issues raised by Members relating to the
interaction between trade and competition policy, including anti-competitive
practices, in order to identify any areas that may merit further consideration
in the WTO framework.
These groups shall draw upon each other's work if necessary and also draw upon and
be without prejudice to the work in UNCTAD and other appropriate
intergovernmental fora.  As regards UNCTAD, we welcome the work under way as
provided for in the Midrand Declaration and the contribution it can make to the
understanding of issues.  In the conduct of the work of the working groups, we
encourage cooperation with the above organizations to make the best use of available
resources and to ensure that the development dimension is taken fully into account.
The General Council will keep the work of each body under review, and willdetermine after two years how the work of each body should proceed.  It is clearly
understood that future negotiations, if any, regarding multilateral disciplines in these
areas, will take place only after an explicit consensus decision is taken among WTO
Members regarding such negotiations."WT/WGTI/2
Page 3
2. At its meeting of 24 April 1997, the General Council appointed Ambassador Krirk-Krai
Jirapaet (Thailand) as Chairman of the Working Group.1
3. The present report  provides an overview of the work done to date in the Working Group.  It
is submitted by the Working Group to the General Council in the light of the provision in
paragraph 20 of the Singapore Ministerial Declaration that the General Council will keep the work ofthis Working Group under review and will determin e after two years how its work should proceed.
4. The report is organized as follows:  Part B provides a procedural summary of the activities of
the Working Group to date.  Part C provides an over view of the substantive work done in the Working
Group to date.  Following the approach taken in the Working Group, the description in that part is
organized according to the elements of a Checklist of Issues Suggested for Study
2 which the Working
Group used to structure its substantive work.  Part D provides a recommendation to the General
Council.
B. PROCEDURAL INFORMATION ON THE ACTIVITIES OF THE WORKING
GROUP
(a) Sources and materials used in the work of the Working Group
5. The work of the Working Group has been based on written contributions (a total of 43 to
date), oral statements, and questions and answers by Members. This material has been supplementedby information received from observer intergovernmental organizations and by notes prepared by the
Secretariat.  An index of written contributions is attached as Annex 2.
(b) Cooperation with other intergovernmental organizations
6. The Singapore Ministerial Declaration (paragraph 20) encouraged the Working Group to
undertake its work in cooperation with UNCTAD and other appropriate intergovernmental fora inorder to make the best use of available resources and to ensure that the development dimension is
taken fully into account.  In this regard, the IMF and the World Bank attended the Working Group's
meetings in an observer capacity, pursuant to the cooperation agreements concluded between the
WTO and these organizations.  UNCTAD, the OECD and the UNIDO also attended the meetings as
observers, on the basis of an invitation from the Working Group.  At the request of the WorkingGroup, UNCTAD, the OECD and the World Bank made written and oral presentations on the work of
their respective Organizations at the first meeting of the Working Group.  At subsequent meetings,
they kept the Working Group updated on relevant activities of their respective Organizations and
contributed to the debate.  The Working Group was also kept informed of relevant work under way in
various regional contexts, such as the APEC.  The Working Group is highly appreciative of the
valuable contribution to its work made by the observers.
7. A number of regional organizations also reque sted observer status in the Working Group.  A
decision on requests for attendance by regional organizations was subsequently put on hold pending
the outcome of more general consultations on the issue of observer status in the context of the General
Council.
(c ) Meetings held to date
8. To date, the Working Group has held seven formal meetings.  The dates of these meetings
were:  2 and 3 June 1997; 6 and 7 October 1997; 8 December 1997; 30 and 31 March 1998, 16 and
                                                     
1 See document WT/L/215.
2 Reproduced in Annex 1 of this report.WT/WGTI/2
Page 4
17 June 1998;  1 and 2 October 1998;  and 25 and 26 November 1998.  The dates of these meetings
were determined in the light of the instruction in paragraph 22 of the Singapore Ministerial
Declaration that careful attention be given to co ordinating meetings with those of relevant UNCTAD
bodies.  Reports on the first six meetings have been circulated in documents WT/WGTI/M/1-6.  A
report on the seventh meeting will be circulated shortly as document WT/WGTI/M/7.
9. At its meeting of 2 and 3 June 1997, Members made general statements on the nature of the
work to be pursued under the mandate contained in the Singapore Ministerial Declaration and
identified specific issues for study in the Working Group.  Three written contributions were received
from Members.  Representatives of the UNCTAD, the OECD and the World Bank made statements
on their activities relevant to the Working Group.  The Working Group also discussed WTO
provisions on matters related to investment, using as a basis an informal Note prepared by the
Secretariat (Job No. 2988), and considered an informal Note by the Secretariat (Job No. 2843) onrelevant activities and initiatives in other international fora.  The Working Group took note of a
Checklist of Issues Suggested for Study, prepared by the Chairman, in the light of the suggestions
made by Members, as a basis for the organization of the future work of the Group
10. At its meeting of 6 and 7 October 1997, the Working Group started its substantive discussion
on the first three main areas identified in the Checklist of Issues Suggested for Study:  (I) implicationsof the relationship between trade and investment for development and economic growth;  (II)  the
economic relationship between trade and investment;  and (III)  stocktaking and analysis of existing
international instruments and activities regarding trade and investment.  Four written contributions
were received from Members.  On the first Item, the Working Group also had before it contributions
by five international intergovernmental orga nizations (OECD, UNCTAD, World Bank, IMF and
UNIDO) which had been requested at the meeting in June 1997 to provide a summary of work done
in these organizations on this matter.  Discussion of the second item was based on a Secretariat Note
on the relationship between trade and foreign direct  investment.  On the third Item, the Working
Group continued its examination of WTO provisions on matters related to investment and took note of
a supplementary Note by the Secretariat on developments regarding activities and initiatives in otherfora (Job No. 5279). The Working Group also received a written contribution from the APEC
Investment Experts Group on ongoing work on investment in the context of APEC.
11. At its meeting of 8 December 1997, the Working Group continued its work on Items I-III of
the Checklist of Issues Suggested for Study.  Six new written contributions were received from
Members.  The Working Group also decided on the organization of its work under Item IV of the
Checklist and agreed to hold meetings in March, June, October and November 1998.
12. At its meeting of 30 and 31 March 1998, the Working Group continued its consideration of
Items I-III of the Checklist of Issues Suggested for Study and started work on Item IV of the Checklist
by discussing the factual aspects of the first indent of that Item.  In addition to nine written
contributions received from Members, contributions were received from the UNCTAD and the
OECD.  The Working Group also had before it Notes by the Secretariat on bilateral, regional,
plurilateral and multilateral agreements, the availability of statistics on foreign direct investment andoutward foreign direct investme nt from developing countries.
13. At its meeting of 16 and 17 June 1998, the Working Group considered Items I-IV of the
Checklist of Issues Suggested for Study.  Seven written contributions were received from Members.
In addition, in relation to Item I of the Checklist the Working Group had before it a synthesis paper
prepared by the Secretariat on the information made available to the Working Group on therelationship between FDI and development.  In connection with Item IV, the Working Group also
received a contribution from the OECD on the OECD Guidelines for Multinational Enterprises and
heard a statement by the observer from UNCTAD on UNCTAD's work on criteria for evaluating
investment agreements from a development perspective.WT/WGTI/2
Page 5
14. At its meeting of 1 and 2 October 1998, the Working Group considered Items I-IV of the
Checklist of Issues Suggested for Study. Eight written contributions were received from Members.  In
addition, the Working Group had before it an informal Note by the Secretariat on the relationship
between FDI and development (Job No. 5229), a Note  by the Secretariat on the effects of investment
incentives and performance requirements, and several written contributions from UNCTAD.
15. At its meeting of 25 and 26 November 1998, the Working Group considered Items I-IV of the
Checklist of Issues Suggested for Study.  Four written contributions were received from Members.  In
addition, the Working Group had before it a Note by the Secretariat on the relationship between
foreign direct investment ("FDI") and development and a written contribution from the IMF.  The
Working Group adopted the descriptive part of its report to the General Council.  It also agreed ad
referendum  on the text of a recommendation to the General Council concerning the extension of the
Group's mandate.  This recommendation was formally adopted by the Working Group on7 December.
(d) Cooperation with the Working Group on the Interaction Between Trade and Competition
Policy
16. The Singapore Ministerial Declaration provides that the Working Group on the Interaction
between Trade and Competition Policy and the Working Group on the Relationship between Tradeand Investment shall draw upon each other's work, if necessary.  In this regard, the Chairmen of the
two Working Groups kept in close contact with a vi ew to coordinating the work of the two Groups on
relevant issues.  In order to benefit from the work of the Working Group on the Interaction between
Trade and Competition Policy, the Working Group agreed at the initial stage of its work that it would
take up the issue of the relationship between investme nt and competition policy, referred to in the last
indent of Item II of the Checklist,  after this subject had been discussed in the Working Group on the
Interaction between Trade and Competition Policy.  Accordingly, the Working Group started its
discussion of this matter at its meeting of 1 and 2 October 1998,  when it heard a presentation by the
Chairman of the Working Group on the Interaction between Trade and Competition Policy on the
discussion that had taken place on this subject in that Working Group.
C. SUBSTANTIVE WORK DONE IN THE GROUP
17. This part of the report provides an overview  of the substantive work done in the Working
Group, pursuant to the mandate given in paragraph 20 of the Singapore Ministerial Declaration.  By
its very nature, such an overview cannot reflect everything that was said and capture all nuances, such
as can be found in the detailed records of the individual meetings of the Working Group
(WT/WGTI/M/1-7) and in the written contributions of Members (see Annex 2).  The work undertaken
was structured on the basis of the Checklist of Issues Suggested for Study (Annex I) which the Grouptook note of at its meeting on 2 and 3 June 1997.  This summary uses the same structure.
I. IMPLICATIONS OF THE RELATIONSHIP BETWEEN TRADE AND INVESTMENT
FOR DEVELOPMENT AND ECONOMIC GROWTH
18. The matter of the implications of the relationship between trade and investment for
development and economic growth was considered at each meeting of the Working Group subsequentto its first meeting held in June 1997.  At that meeting, the Working Group decided to start its work
under this Item by inviting relevant international intergovernmental organizations to prepare
summaries of work done in their organizations on this matter.  In response to this invitation,
contributions were submitted by the OECD, UNCTAD, World Bank, IMF and UNIDO (W/8 andWT/WGTI/2
Page 6
Addenda 1-4).3  In addition, written contributions on this Item were provided and were introduced
orally by Japan (W/11 and 18), Poland (W/13), Korea (W/16), the United States (W/14 and 27), Hong
Kong, China (W/10) and Costa Rica (W/31).  A written contribution was also provided by Bolivia
(W/20).  Oral statements were also made  by Switzerland, Australia, India, Indonesia and the
Philippines on behalf of ASEAN WTO Members, Egyp t, Pakistan, Tanzania, Uganda, Canada, Brazil,
Mexico, Argentina and Norway.
19. The contributions by the international interg overnmental Organizations in documents W/8
addressed recent trends in the volume and geographical pattern of international investment,
particularly FDI;  the relationship between recent developments in FDI flows and the process of
increasing global economic integration;  the effe cts of FDI on development and economic growth in
regard to capital formation, technological and managerial know-how, access to export markets,
domestic entrepreneurship and forward and backward  linkages, competition, employment, balance-of-
payments and macroeconomic stability; and policies toward FDI.
20. Several key themes emerging from these contributions were highlighted in introductory
remarks by the observers from these Organizations:
− It was stated that the past 15 years had witnessed a remarkable convergence of views among
OECD member countries in favour of FDI as a re sult of changes in economic policies to reduce the
rôle of governments and to rely more on the free play of market forces and of institutional factors,such as regional trade and investment agreements. Restrictions on FDI in manufacturing activities in
OECD member countries had almost disappeared and the previously widespread restriction of foreign
activity in the financial sector had been largely dismantled.  There was, however, residual sensitivity
to foreign ownership in certain sectors, such as the exploitation of natural resources, transport and
communications and cultural industries.  Moreover, several countries still maintained screeningsystems, but these now applied to only a limited range of investments and operated with minimum
bureaucratic support.  There was also reticence about sharing funding for research and development
with foreign-owned firms.  While OECD countries recognized that every individual FDI project
would not necessarily contribute positively to economic welfare in a directly measurable way, they
considered that it might not be possible to assess at the time of the investment whether the effectswould be positive or not, that there was a high  cost to government intervention in individual
investment decisions;  and that, to the extent that regulation was needed, for example in the field of
competition, the best approach was through non-discriminatory policies that applied equally to
domestic and foreign investors.
4
− In regard to the analysis in one of these contributions of the effects of FDI on development
that arose from the linkages of FDI with trade, the point was made that the conventional analysis ofthe relationship between FDI and trade in terms of whether FDI and trade were complements or
substitutes was becoming less relevant in a globalizing economy in which trade and investment were
determined simultaneously by decisions of multinat ional enterprises regarding the location of their
production facilities.
5  The point was also made that the impact of FDI on development was best
understood by viewing FDI as involving a package of tangible and intangible assets (technology,
innovation, organizational and managerial practices and skills, human resource development, accessto markets and forward and backward linkage with domestic enterprises) and that the relative
importance attached by host countries to the intangible assets associated with FDI had increased.
6
Similarly, in regard to the recent experience of OE CD member countries, it was stated that the shift
                                                     
3 In this part of the report, documents issued in the series WT/WGTI/W are referred to as "W/_".
Documents in the series WT/WGTI/M/_  are referred to as "M/_".
4 M/2, paragraph 4.
5 M/2, paragraph 5.
6 M/2, paragraph 5.WT/WGTI/2
Page 7
toward a more favourable attitude toward FDI in these countries over the last 15 years had been
accompanied by greater emphasis on the contribu tion of FDI to technology and innovation, its
stimulus to competition and increased efficiency, and in its rôle in promoting integration in the world
economy, as compared to the contribution of FDI to capital formation, tax revenue and the balance-of-
payments.7
− Reference was made to the conclusions drawn in one of the contributions that (i) the
expansion of cross-border production by multinational enterprises and closely associated firms
provided developing countries with opportunities to enhance the benefits they drew from greater
integration with the world economy, and that (ii) the maintenance of a high level of competition, a
stable political and macroeconomic climate, open trade and investment policies, adequate transport
and communications infrastructure and the maintenance of a predictable and effective institutional
environment were important conditions for attracting foreign investment and enhancing its benefits.8
− It was stated that there was growing concer n that globalization of the world economy posed
not only an opportunity but also a potential threat to developing countries because these countries
would have to face mounting international competition in both their export and domestic markets.
The risk was particularly serious for sub-Saharan African countries and the least-developed countries
elsewhere.  Furthermore, industrial competitiven ess was increasingly determined by technological
prowess or capability and the rate of technological change was accelerating in an unprecedented way.
The result of these developments was that an entirely new competitive environment had emerged for
industrial enterprises world-wide, leading to the establishment of global production networks and new
organizational structures of enterprises.  In order to respond effectively to these challenges,
developing countries needed to focus increasingly on the issue of competitiveness in formulating and
implementing their industrialization strategies.9
− It was stated that FDI was not a panacea and not the most important factor in development,
but that on balance it could make an important contribution to industrialization, industrial
restructuring and development generally.  The rôle of national policies in enhancing this contribution
of FDI to the development process was twofold.  Firs t, much attention at a national level focused  on
attracting FDI through the adoption of more liberal investment régimes.  Second, national policies
were important in encouraging FDI in priority areas for the economic development of individual
countries, reducing the possible negative effects of FD I with regard to, for ex ample, transfer pricing
and restrictive business practices and fostering backward and forward linkages with domestic
enterprises.10
− The point was made that there was a close interrelationship between the trade and FDI
decisions of firms and the importance of a sound and sustainable macroeconomic and financial
environment in order for a country to be able to attract continuing flows of FDI.  Sustained FDI
inflows were in particular dependant upon the existence of an open trade and payments system.11
21. In Members' comments on these contributions, the point was made that that they converged in
respect of their assessment of the positive contribution of FDI to economic development and growth.
In this connection, particular points emerging from these contributions were highlighted as follows:
the shift in attitudes of many developing countries toward a recognition of the positive contribution of
FDI;  the increasing rôle of factors such as technological capability, human skills, quality of
infrastructure as determinants of the location of FDI, as compared with access to natural resources and
                                                     
7 M/2, paragraph 4.
8 M/2, paragraph 6.
9 M/2, paragraph 8.
10 M/2, paragraph 5.
11 M/2, paragraph 7.WT/WGTI/2
Page 8
cheap labour;  the growing importance of FDI to  host economies as a vehicle for the transfer of
intangible assets, such as technology and managerial skills;  the complementary relationship between
trade and FDI, and the rôle of open trade policies in contributing to the attractiveness of countries as
locations for FDI.12  The point was made that the work of the Working Group should be viewed in the
context of the growing competition among governments to attract FDI and of the globalization of theworld economy, which were a challenge for all countries.
13  It was  also stated that, while the effects
of FDI for development were on the whole positiv e, as shown by the empirical evidence of the
positive correlation between economic growth and FDI inflows and of the importance of FDI as a
vehicle for the transfer of technology, there could also be negative effects, for example with respect to
the balance of payments.14  
22. The point was made that there was a need for more emphasis on the development implications
of FDI and for a balanced approach regarding pos sible negative effects of FDI.  The relationship
between FDI and economic development was a complex and multifaceted one, of which the trade
dimension was only one asp ect.  Other relevant aspects included the implications of FDI for domestic
savings and consumption patterns, finance and technology, ownership of productive and financial
assets,  the balance of holdings between domestic and foreign investors and within various
communities in a country, strategic and development policies at the sectoral level, macroeconomicimplications and sustainability of the developmen t process.  A number of specific suggestions were
made on themes to be pursued in the Working Group in order to give more prominence to the
development dimension:  the relationship between investment and trade liberalization and stages of
development, and, in particular the experience of countries, including the present industrialized
countries, in this connection;  the rôle of FDI in tr ansferring intangible assets, notably in the fields of
technology and human resource development and the implications of this for development;  the
relationship between different types of FDI and the development process;  and the experience with
sectoral targeting and the rôle of industrial policy.  The need for more attention to be paid to the
situation of the least developed countries was stressed.
15  In regard to the suggestion for further work
on issues relating to the transfer of technology, it was proposed that the Working Group also examine
the relationship between the transfer of technology and strong and effective protection of intellectual
property.16
23. Information was presented and statements were made on the experiences of individual
Members regarding the implications of the relationship between trade and investment for
development and economic growth:17
- The rôle of FDI in the recent growth and transformation of one Member's economy from a
centrally-planned to a free market economy was discussed, in which connection attention wasdrawn to the recent increase of FDI inflows to this Member resulting from the liberalization
of its regulatory framework for FDI and the im pact of FDI on the competitiveness and export
performance of the Member's economy.
18
With respect to the experience of one Memb er in whose economy FDI had played a rather
limited rôle until the early 1980s but which had recently liberalized its policies toward FDI,19
                                                     
12 M/2, paragraph 12.
13 M/2, paragraph 11.
14 M/2, paragraph 12.
15 M/2, paragraph 14.
16 M/2, paragraph 16.
17 It should be noted that information on experiences of individual Members regarding the rôle of FDI
in their economies, the relationship between trade and investment and policies toward FDI was also presented ina number of contributions made in relation to Item II of the Checklist.
18 M/2, paragraph 13.
19 M/2, paragraph 13.WT/WGTI/2
Page 9
empirical evidence was provided which showed th at FDI had contributed significantly to the
economic development of this Member through its effects on employment, technology
advancement, economic growth and competition.20
- It was stated that the experience of one Member with FDI echoed the positive experience of
several other Members in terms of the effects of FDI on economic development, and that theMember's success as an international trading, financial and manufacturing centre could
largely be ascribed to the presence of multinational enterprises which played a vital rôle in
improving its competitive edge through the transfer of technology, improved service
standards, and enhanced skills and management expertise to local companies.
21
- Evidence was provided on the positive contribution of foreign affiliates to science and
technology development of one Member.22
- Mention was made of the recent significant increase in FDI inflows to one Member, the
substantial economic contribution of foreign firms, especially in technology-intensive
industries, and the important rôle of inward FDI in creating employment and in encouraging
capital formation.  It was also stated that outward FDI, which had recently increased
significantly, had resulted in economic benefi ts.  Both inward and outward FDI stimulated
economic growth and job creation through several mechanisms:  increasing capital formation,enhancing trade flows, enhancing technology fl ows, improving the competitiveness of the
Member's firms in international markets, rais ing incomes through direct investment abroad
and increasing competition in markets.
23
- With regard to the experience of one Member, the point was made that it had for many
decades pursued an open policy towards FDI.  During the 1970s, when it was a major hostcountry for FDI, it had experienced rates of economic growth of 8-11 per cent annually.  In
the 1980s, economic growth had slowed as a result of the debt crisis and macroeconomic
difficulties but the Member had maintained its position among the top ten recipients of FDI in
the developing world due, inter alia , to debt equity conversion schemes and reinvestments by
established foreign investors.  Since 1994, debt rescheduling and the implementation of aninflation control programme had led to a significant increase of FDI.  It was expected that a
substantial proportion of future FDI inflows wo uld be related to privatization programmes.
24
- In relation to the experience of another Member, the point was made that there had been a
considerable increase in inflows of FDI in recent years, that there was a positive relationship
between FDI and indicators of human developm ent (which reflected the importance of the
level of development of human resources as a determinant of FDI), and that FDI had
contributed to employment creation and growth of industrial exports.  The main features ofthis Member's open policy toward FDI were also described.
25
- Attention was drawn to the important rôle which FDI had historically played in the economic
development of one Member, in particular in regard to the development of natural resources.26
24. Experiences of individual countries were also addressed in connection with a contribution
which the Working Group received from the OECD (W/26), which contained an analysis of the
                                                     
20 M/3, paragraph 4.
21 M/3, paragraph 6.
22 M/4, paragraph 6.
23 M/4, paragraph 14 and M/3, paragraph 6.
24 M/3, paragraph 6.
25 M/4, paragraph 5.
26 M/4, paragraph 15.WT/WGTI/2
Page 10
relationship between FDI and development through case studies of six countries. Several points
emerging from this analysis were identified as particularly relevant:  the contribution of FDI to
economic restructuring, export growth and diversific ation;  the rôle of FDI in improving the capacity
of host countries to respond to opportunities offered by global economic integration; the important
rôle of FDI in the context of privatization, notably in  infrastructure sectors;  and the beneficial effect
of FDI liberalization in financial services in prom oting the efficiency and stability of the financial
sector of host countries.27
25. It was argued that FDI on the whole played an important positive rôle in transferring
intangible assets to recipient countries, especially developing countries, but that developing countries
had sometimes also been confronted with negative effects of FDI.  Examples of these negative effects
were:  restrictions on the activities of foreign affiliates imposed by parents in the context of
technology transfer agreements;  the risk facing some developing countries of becoming locations forsimple assembly operations;  instability of the trade balance and of the balance of payments on
account of FDI, as illustrated by the recent experience of some countries in South East Asia;  the
exercise of undue political influence by foreign firms;  and the negative impact of foreign affiliates on
domestically available financing and competition in the domestic market, including on small- and
medium-sized enterprises.  Thus, whether FDI had positive effects on the whole was not at issue in
the Working Group, as shown by the efforts of all Members to attract FDI. Rather, the key question
was how host countries could minimize possible negative effects and maximize positive effects of
FDI through appropriate policies.
28
26. Regarding the point raised on the need to take account of the possible negative effects of FDI,
reference was made to the experience of certain Members which had not faced any negative effects ofFDI liberalization, including from a development perspective.  In this regard, the point was made,
with reference to the experience of one Member which at the initial stage of its development had
relied heavily on foreign public and commercial loan s rather than FDI, that the more liberal FDI
policy pursued since the early 1980s had contributed to rectifying the structural problems the
Member's economy had faced over the past decades and that a more active and aggressive FDIliberalization policy would have contributed even more to this restructuring process.
29
27. Regarding the reference made to possible negative effects of FDI arising from anti-
competitive practices of foreign affiliates or from arrangements between parents and foreign affiliates,
as in the case of restrictions on transfer of technology,  the question was raised whether there was
specific empirical evidence to substantiate these c oncerns.  It was stated in this regard that the
experience of one Member suggested that  restrictive practices were not a typical feature of foreign
firms and were adequately dealt with through a non-discriminatory application of competition law.The presence of foreign firms enhanced competition in domestic markets and was an important factor
to be taken into consideration in the application of competition law.
30  It was also said to be unlikely
that there was empirical support for the argument that FDI could have negative balance-of-payments
consequences, and it was noted that such an argument contradicted evidence contained in the OECD
contribution in W/26.31
28. The view was expressed that developing countries had encountered problems in regard to the
rôle of FDI as a channel for the transfer of t echnology and for enhancing organizational, managerial
and marketing skills.  This issue needed to be viewed from the perspective of the dependence of
developing countries on modern industrial technology and the ownership by multinational enterprises
                                                     
27 M/4, paragraph 9.
28 M/4, paragraphs 18 and 20.
29 M/4, paragraphs 11 and 12.
30 M/4, paragraph 22.
31 WT/WGTI/M/4, paragraph 9.WT/WGTI/2
Page 11
of critical technology which provided them with superior competitive power with which they could
enter into a bargain over technology with recipients. The monopoly acquired by multinational
enterprises on account of owning critical technology in fact allowed them to restrict the effective
transfer of technology to developing countries. In this context, reference was made to studies which
cast doubt on the extent to which transfer and diffusion of technology to developing countries hadoccurred in practice, and to empirical evidence on the excessive direct and indirect costs of
technology imports in developing countries. In light of the fact developing countries' experience with
technology transfer through FDI had sometimes been disappointing, there was a need to study
possible disciplines for ensuring the effective transfer of technology along with FDI and for
suggesting ways in which domestic capacity could be built up through FDI.  With reference to an
issue raised in another WTO body regarding transfer of technology on non-commercial, preferential
terms for achieving the global objective of sustainable development, it was stated that, at least in caseswhere high technology was specifically mandated under national, international or multilateral
régimes, transfer of technology on fair and favourable terms needed to be ensured.  With the gradual
reduction of overseas development assistance and the increased reliance on corporate flows, it was
even more important for technologies to be made available to developing countries at prices that were
affordable, in a way that was commercially viable a nd in such a manner as to be effective in building
domestic capacity.
32
29. Given that the work of the Group under this Item of the Checklist focused on the effects of
FDI, the view was expressed that the implications of portfolio investment for development and a
country's balance of payments merited more thorough examination.33  Reference was also made to a
recent study by UNCTAD on the Asian financial cris is, which confirmed that FDI was a more stable
source of financing than portfolio flows and commercial lending.34
30. Another important dimension of the Group's di scussions under Item I of the Checklist
pertained to policies toward FDI.  One theme discus sed in this regard concerned the importance of the
overall regulatory framework of host countries in maximizing the benefits from FDI and the special
importance of trade policy in this respect. In this connection, it was argued, inter alia , with reference
to the contribution from the OECD in W/26, that liberalization of FDI policies needed to be an
integral part of comprehensive economic reforms and that trade liberalization played a key rôle in
attracting FDI and enhancing the contribution of FDI to economic development.  Policies pursued in
the past by some countries with large domestic markets to attract FDI on the basis of a protected home
market had lost their effectiveness as they had run into market saturation and foreign investors had
shifted to more dynamic countries and markets.  Recent evidence showed that trade liberalization had
a positive effect  on the volume of FDI inflows for the following reasons:  first, it made domesticmarkets more dynamic, leading to higher growth and an expansion of demand in host countries;
second, a reduction of trade barriers meant that multinational enterprises could import better or lower-
cost inputs which made export-oriented production in the host country viable; and, third, regional or
multilateral agreements implied that these exports would face fewer barriers abroad.  Trade
liberalization had perhaps an even more important effect on the quality of FDI.  Several studies hadshown that FDI in a highly protected environmen t could have a negative effect on host countries.
Trade protection created economic rents which could be captured by foreign investors and transferred
abroad.  In addition, since the lack of competition in host country markets made it unnecessary for a
parent firm to transfer the most advanced technology to its affiliate, trade protection also dampened
the transfer of technology.
35
                                                     
32 M/5, paragraphs 4 and 5.
33 M/5, paragraph 8.
34 M/4, paragraph 23.
35 M/4, paragraphs 8 and 9.WT/WGTI/2
Page 12
31. It was also stated that, while there was ample evidence to confirm that openness was a
determinant for the attraction of investment and that greater investment encouraged further openness,
account should also be taken of restrictive features of particular business practices and strategies.  In
the case of FDI which targeted the domestic market of host countries, foreign affiliates sometimes
ended up dominating the domestic market, especially during the early stages of product and marketdevelopment.  In other cases, foreign affiliates attempted to secure  tariff and other forms of
protection.  Sometimes they were subject to export restrictions imposed by their parent firms.  Thus,
business strategies and practices, by themselves, had an equally important, if not determinative rôle in
the flow of investments.  Therefore, the view that  trade and investment went hand in hand, reinforcing
one another, and that they were largely determined by a host country's degree of openness, needed to
be qualified.
36
32. Comments were made on certain themes emerging from the experiences of individual
Members.  In regard to the historical evolution of FDI policies of one Member, the point was made
that in a globalizing economy restrictive policies su ch as those implemented by this Member in the
immediate post-World War II period were likely to have negative effects on economic growth and
trade.37 With reference to the experience of another Member, the point was made that an active FDI
liberalization policy contributed to economic development but that strong economic fundamentals aswell as effective management of macroeconomic policies were essential for investment liberalization
to produce the expected outcome, and that in order to maximize the positive effects of FDI,
liberalization policies should be tailored to meet the needs and priorities of each country's economic
development policy.
38  In respect of the rôle of FDI in the development of natural resources of one
Member, it was observed that national control had always been and remained a hotly debated issuebut that it had become clear that, in general, national control was not enhanced by discrimination
between domestic and foreign economic actors.
39
33. More generally, there was debate on the issue of whether or not certain policies pursued in the
past were still relevant in the present circumstances.  It was argued that the issue of FDI régimes and
the effects of FDI must be seen in a different light now than in the past and that restrictive policieslike those applied in the past by certain countries would be counterproductive in the present
environment of increasing global economic integration and accelerating technological change.
40
Reference was also made in this context to the findings of the OECD contribution (W/26) regardingthe declining rationale for and rising costs of FDI restrictions and performance requirements in an
environment of trade liberalization and an increasing orientation of FDI toward production for export
to regional or global markets, and the counter-productive effects of certain policies pursued by host
countries in the past aimed at augmenting the transfer of technology, for example through mandatoryjoint ventures or technology transfer requirements.  However, with reference to the assertion that
certain FDI policies were unlikely to be effective in the present context,  it was also stated that this
notion required further qualification and analysis in order to determine in detail which specific
policies had been effective in the past and would no longer be relevant in the present context.
41
Different views were expressed on whether the Working Group would benefit from conducting an
historical analysis of the evolution of  FDI policies in individual countries.42
34. Another point giving rise to discussion was the view that, in the face of possible negative
consequences of FDI, industrial policy, including sectoral targeting, was a necessary element of
                                                     
36 M/4, paragraph 18.
37 M/3, paragraph 4.
38 M/4, paragraph 12.
39 M/4, paragraph 15.
40 M/3, paragraph 5 and M/4, paragraphs 16 and 22.
41 M/4, paragraph 20.
42 M/3, paragraphs 7 and 8.WT/WGTI/2
Page 13
national investment régimes in order to optimize the benefits from, and to minimize, if not eliminate,
the negative effects of FDI and as an exercise of the sovereign right of each country to pursue
development policies in accordance with its domestic needs and priorities. It was stated that sectoral
targeting had proved its effectiveness in addressing not only national but also regional or locational
and sector-specific objectives, and that a sectoral targeting policy should be pursued in acomplementary relationship with a policy of general openness toward FDI.
43
35. In this connection, the argument was advanced that restrictive FDI policies based on infant-
industry protection grounds would, in the current context, seriously impede technological innovation,
given the rapid pace of technological change in today's world, and that contributions presented to the
Working Group and experiences of certain Members called into question the effectiveness of sectoral
targeting and protective policies.44  In response, it was stated that sectoral targeting should be
distinguished from the concept of infant-industry protection, which was not a basis for soundpolicies.
45
36. Regarding technology transfer,  it was argued that, despite the point that various measures
(such as joint venture requirements, mandatory transfer of technology, compulsory licensing and local
content requirements adopted by host governments to augment the transfer of technology) might have
had the opposite effect, it had to be recognized that joint ventures and investment policies involvingtraining of local employees were more beneficial for the effective transfer of technology to host
countries.
46  In response, it was stated that several contributions had made the point that import
substitution policies might enable multinational enterprises to undertake market-seeking investment
which would fail to incorporate state-of-the-art technologies, whereas export-oriented policies, under
which production had to be internationally competitive, were more likely to encourage theintroduction into the host country of the most advanced technology.
47
37. While support was expressed for the point in the the OECD's contribution (W/26) that the
presence of a screening mechanism was the most important barrier to FDI, it was also argued that a
properly administered screening mechanism, which provided for an expeditious assessment of an
investment proposal on the basis of transparent cr iteria, was not a hindrance to investment flows.48
38. The relationship between FDI restrictions and fiscal policies designed to offset such
restrictions and other disincentives was raised as a matter for further study.49
39. The Working Group considered a Note by the Secretariat (W/38), prepared at the request of
the Working Group, which contained a synthesis of the information made available by Members and
international intergovernmental organizations on the links between FDI and development, both
historically and in the present situation. It was stated that this Note was an accurate, balanced and
comprehensive reflection of the information provided and the discussions that had taken place so faron the relationship between FDI and development, and that it showed that the information presented
to the Working Group indicated that the effects of FDI on development were on the whole beneficial.
The view was also expressed that, though the Secretariat Note provided a good factual presentation of
information submitted and views expressed thus far in the Working Group, it did not obviate the need
for studies on the historical evolution of FDI policies, especially those of developed countries, and onthe possible negative effects of FDI.  It was also stated that the Secretariat Note did not represent an
                                                     
43 M/4, paragraph 18.
44 M/4, paragraphs 19 and 22.
45 M/4, paragraph 21.
46 M/5, paragraph 5.
47 M/5, paragraph 6.
48 WT/WGTI/M/4, paragraph 10.
49 M/5, paragraph 8.WT/WGTI/2
Page 14
adequate, balanced treatment of the issues arisin g in regard to the effects of FDI on development
because it was largely based on written contributions, which tended to endorse a certain point of view,
and did not take sufficient account of the concerns that were not always expressed in written
contributions.  In this connection, the Working Group agreed that the Secretariat would conduct in a
balanced manner a study of the effects of FDI on development and economic growth, with inputsfrom Members, if they so desired, and that the Secretariat would also conduct a study of the historical
evolution of FDI policies.
50  The first part of the study on the effects of FDI on development was
submitted to the Working Group at its meeting of 1 and 2 October 1998 in an informal Note by the
Secretariat (Job No. 5229).  A revised, expanded version of this Note was submitted to the Working
Group at its meeting of 25 and 26 November 1988 (document W/65).
40. Support was expressed for the point in the informal Note in Job No 5229 that the indirect
effects of FDI on development which arose from the diffusion of technology and other know-how
were more important than the direct effects of FDI, and that one should consider not only the actual
transfer of technology but also the spread of better managerial practices and the contribution of FDI to
enhancing competition in host country markets.  The emphasis on the technology-related spillover
effects of FDI was warranted in the light of the fact that most FDI originated from a small number of
developed countries which played a dominant rôle in the production of technology and thatmultinational enterprises from these countries dominated the demand and use of technology. In
addition, formal technology transfer agreements had been shown not to be a significant channel for
the dissemination of modern and advanced technology.  The overall positive effect of FDI in respect
of technology was undeniable, whether these effects occurred through actual transfers, licensing or
through spillover, "contagion" or demonstration effects.  In regard to the  point made in the informalNote on the importance of the level of development of a host country, the level of local technological
capabilities and the degree of competition in host country markets in harnessing spillovers, it was said
that this was an important issue for future consideration of the development implications of FDI.  It
was proposed that there be further study of th e issue of how technology spillovers occurred in
developing countries in which domestic firms were sometimes unable to respond to the innovationand competitive challenges introduced by multinational enterprises.  This would also allow the
Working Group to explore means by which linkages between multinational enterprises and domestic
firms could be strengthened, inter alia  through the upgrading of human resources so as to enhance the
capacity of domestic firms to absorb the various spillover effects of FDI.
41. With reference to the conclusions drawn in the informal Note that the positive effects of FDI
through technology spillovers varied depending upon the characteristics and policies of host countries,
and that the existence of a competitive environment and local technological capabilities wasespecially important in this regard, it was stated th at this confirmed that the best way to maximize the
benefits of FDI was through the adoption of measures of a generic nature aimed at improving the
overall regulatory and economic environment by enhancing competition and improving human skills
and technological capacity.  If the overall framework for economic activity was sound, FDI enhanced
competition in domestic markets of host countries and contributed to the dissemination of technologyand the upgrading of human skills.  Thus, there existed a close complementarity between the indirect
effects of FDI and the characteristics and policies of host countries in their contribution to
technological development.   The conclusions drawn in this Note were consistent with the view which
had been expressed  in the Working Group that there was a mutually supportive relationship between
liberalization of FDI  policies and the application of competition policies.
42. The point was made that there was a need for further study of the relationship between
mechanisms for the transfer and diffusion of technology and the rôle of certain  types of performance
requirements and incentives, and that this relationship should be viewed in the light of the
imperfections of markets for technology.  It was stated, in this regard, that experience had shown that
                                                     
50 M/5, paragraphs 8, 9 and 12.WT/WGTI/2
Page 15
multinational enterprises were perfectly capable of operating in an environment where market-
friendly performance requirements were used to maximize technology spillover effects, in particular
where such measures did not relate to their core process technology.  Thus, the view was expressed
that the rationale of the prohibition contained in several existing investment agreements and in the
draft Multilateral Agreement on Investment of performance requirements related to the transfer oftechnology and the promotion of research and development activities in host countries was
questionable.  The experience of a number of countries had demonstrated that it was possible to
promote the transfer of technology by using perfomance requirements and incentives which were
market-oriented and which did not in any way involve expropriation of technology.  In order to
understand the key rôle of this type of performance requirements and incentives,  it was essential to
take into account the fact that markets for technology did not correspond to the model of perfect
competition, but were typically characterized by the existence of oligopolistic equilibrium and theexistence of barriers to entry by small- and medium-sized enterprises.  This necessitated the
application of measures to level the playing field so as to enable such enterprises to negotiate on
equitable terms technology transfer agreements or to become part of alliances with other enterprises.
Investments by multinational enterprises were not only motivated by the objective of profit
maximization in regard to a particular investment,  but also by strategic considerations concerning themaximization of profit from a more global perspective.  This strategic behaviour was illustrated by the
fact that, even where it was possible for a multinational enterprise to purchase inputs in a local
market, it often preferred to use inputs produced in production facilities which it owned in other
markets to protect its dominant market position.  The existence of this type of strategic behaviour in a
context of oligoplictic equilibrium required the application of market-oriented measures to promotethe creation of linkages with domestic suppliers and to transfer technology.
43. The comment was made that, if there was a propensity of multinational enterprises to retain
control over core process technology, this was because they were concerned that transfer of this
technology might negatively affect their competitive position.  It was therefore difficult to see how the
application of performance requirements and incentives could alter this.  On the other hand,  if thetransfer of other types of technology was commercially rational, the application of such measures was
unnecessary.
44. In response to this observation, it was stated that, while it was not possible to demonstrate  ex
ante under what circumstances there was a need to apply incentives or performance requirements to
promote the transfer of technology, it was possible to demonstrate that these measures were not
market distorting in an oligopolistic environment.  The identification of market-oriented policies to
promote technology transfer was an important ar ea where the Working Group could make a pragmatic
contribution to finding common ground between developed and developing countries and would
address many of the concerns raised in the Group regarding the development implications of FDI.
II. THE ECONOMIC RELATIONSHIP BETWEEN TRADE AND INVESTMENT
45. The matter of the economic relationship between trade and investment was considered at each
meeting of the Working Group after its first meeting in June 1997.  At the second meeting, theWorking Group focused on four indents of Item II of the Checklist,
51 while at subsequent meetings it
also discussed three additional indents.52  However,  the last indent, concerning the relationship
                                                     
51 The degree of correlation between trade and investment flows, the determinants of the relationship
between trade and investment, the imp act of trade policies and measures on investment flows, including the
effect of the growing number of bilateral and regional arrangements, and the impact of investment policies andmeasures on trade.
52 The impact of business strategies, practices and decision-making on trade and investment, including
through case studies, the relationship between the mobility of capital and the mobility of labour, and country
experiences regarding national investment policies, including investment incentives and disincentives.WT/WGTI/2
Page 16
between foreign investment and competition policy,  was discussed at the meetings of 1 and 2 October
and 25 and 26 November 1998, in the light of a decision taken by the Working Group at its second
meeting that it would take this matter up only after it had been considered in the Working Group on
the Interaction between Trade and Competition Policy.
46. Written contributions on this Item of the Checklist were made by Hong Kong, China (W/10),
the European Community and its member States (W/12 and 63), Japan (W/11 and 59), Cuba (W/17
and 35), Colombia (W/15), Korea (W/16, 57, and 62), the United States (W/14 and 55), Turkey
(W/37), India (W/39), ASEAN WTO Members (W/41) , and Mexico (W/64).  Oral statements were
also made by Costa Rica, Norway, Australia, Sw itzerland, Egypt, Malaysia, Morocco, New Zealand,
the Dominican Republic, Canada, Venezuela and El Salvador.  The Secretariat submitted Notes on
"The Relationship between Trade and Foreign Direct Investment" (W/7 and Corr.1), "Availability of
Statistics on Foreign Direct Investment and on th e Activities of Foreign Affiliates" (W/24), "The
Relationship between Trade and Foreign Direct Invest ment:  Foreign Direct Investment Originating In
Developing Countries" (W/25)53, and on "The Impact of Investment Incentives and Performance
Requirements on International Trade" (W/56).
(a) The degree of correlation between trade and investment flows; (b) the determinants of the
relationship between trade and investment; (c) the impact of business strategies, practicesand decision-making on trade and investment, including through case studies
47. In the discussion of these three issues, reference was made to the survey of theory and
empirical research on the economics of FDI and on the relationship between trade and investment, as
found in the Note by the Secretariat in document W/7.  In addition, empirical studies on the
experiences of individual Members regarding the determinants of investment decisions and therelationship between trade and investment were presented in contributions made by a number of
Members.
48. In the light of the findings in the Note by the Secretariat in document W/7 that most empirical
studies had concluded that there was a complementary relationship between home country exports and
FDI and that empirical studies also had established an overall positive correlation between hostcountry exports and inward FDI, the significance of the Note in providing empirical support for the
complementary nature of trade and FDI for both home and host countries was emphasized.
54
Reference was also made to empirical studies presented in the contributions by a number of Memberswhich confirmed the complementary relationshi p between outward FDI and home-country exports
and studies which showed that the trade effects of FDI were positive for both home and host
countries.
55
49. The point was made that there was increasing overlap of the determinants of investment and
trade as  firms determined simultaneously where to invest and from where to export.56
50. The view was expressed that there was a tendency to place too much emphasis on the
complementarity between trade and FDI and that the point made in the Secretariat Note in W/7 that an
initial complementary relationship between outward FD I and exports could eventually turn into a net
substitutive relationship, demonstrated the complexity of the issue.  The need for a moredisaggregated analysis of the relationship between trade and investment in specific industries and
                                                     
53  This report does not include issues raised in questions of a factual and technical nature posed in
regard to these notes to which the Secretariat responded at the meetings of the Working Group.
54 M/2, paragraph 27.
55 M/2, paragraph 31 and M/3, paragraph 14.
56 M/2, paragraph 31.WT/WGTI/2
Page 17
service sectors was also emphasized in this regard. 57  In response to the point made on the emphasis
on the complementarity between trade and investment, it was stated that this emphasis was a logical
result of a changed economic environment in which import substitution policies were no longer as
prevalent as in the past.58
51. Regarding the analysis in several contributions of the effects of FDI on trade balances,
caution was expressed against undue focus on the trade balance.  In response, it was stated that the
analysis was not intended to suggest that the trade balance was important per se  but simply to make
the point that empirical evidence showed that FDI had no negative effects on the trade balance.59
52. A point of a more general nature was that it could not be assumed that increased trade as a
result of FDI was beneficial per se  and that trade should not be used as the sole parameter for
evaluating the impact of FDI.  Rather, it was also necessary to look at the effects of FDI on efficiency,
employment and economic development.60
53. In regard to a study referred to in a contribution by one Member, which had found that
outward investment strategies of firms in different sectors differed with respect to whether outward
FDI was preceded by exports,61 the comment was made that it was interesting that the study had found
that firms sometimes invested abroad without export ing first because of the existence of legislation
which prevented market access through exports.  This underscored the point that in examining therelationship between trade and investment, it was necessary to take into account the effects of
restrictive trade policy measures.  Related to this was the point made in this contribution that cost
factors were less important in explaining FDI decisions than considerations relating to market
access.
62
54. In respect of the Secretariat Note on the relationship between trade and FDI in the context of
outward FDI from developing countries (W/25), s upport was expressed for the conclusion drawn
therein that outward FDI from developing countries was driven by the same factors as outward FDI
from developed countries.  In this connection, attention was drawn to the rôle of cost and efficiency
factors in explaining vertical outward FDI and the rôle of trade barriers, such as anti-dumping and
voluntary export restraints, in explaining horizontal  outward FDI.  The conclusion drawn in this Note
that there was a positive relationship between tr ade and outward FDI from developing countries was
also stressed.  While the view was expressed that this required further examination in relation to
horizontal, "tariff-jumping FDI", it was stated that there was empirical evidence which showed that, in
the case of one Member, the export inducement ef fect of that Member's horizontal outward FDI
exceeded the import inducement effect.63  Interest was expressed in further study on the differences
between the patterns of outward FDI from the econom ies studied in the Secretariat Note, the impact of
currency appreciation on outward FDI, and the distor tive effect of non-tariff barriers in developed
countries in diverting investment from developing countries.64
55. In regard to the issue of the experiences of developing countries as outward investors,
reference was also made to the experience of one  Member whose firms had engaged in outward FDI
in a range of sectors, in many cases driven by the need to establish channels for the distribution of
exports.  In this regard, mention was made of the impact of an embargo applied by another Member to
                                                     
57 M/3, paragraph 17.
58 M/3, paragraph 19.
59 M/3, paragraph 21.
60 M/3, paragraph 3.
61 M/2, paragraph 31.
62 M/3, paragraph 22.
63 M/4, paragraph 33.
64 M/4, paragraph 34.WT/WGTI/2
Page 18
trade with this Member and concern was expressed  about possible future action against the operations
of firms of this Member in third countries.65
56. The question was raised as to how the findings of studies discussed in a contribution on
determinants of FDI and problems facing investors in developing countries supported the conclusion
drawn in that contribution that a multilateral lega l framework for investment was necessary.  In this
connection, it was argued that the problem identified in these studies of lack of transparency of host
country legislation could be addressed in many ways and was therefore insufficient as an explanation
of the need for a multilateral framework.  In res ponse, the view was expressed that international rules
in general, and a multilateral framework in particular, were important to secure a transparent and
predictable investment climate.66  In response to a question as to how a multilateral agreement would
contribute to the promotion of investment flows to  developing countries, it was stated that, while
bilateral investment treaties concentrated on the protection of investment,  a multilateral frameworkcould promote investment by contributing to greater transparency and predictability.  Another view
expressed was that the objective of investment promotion did not provide a rationale for a multilateral
framework as this matter was inherently difficult to address in any international agreement.
67
(d) The relationship between the mobility of capital and the mobility of labour
57. The point was made that there was a basic complementarity between capital and labour as
production factors and between capital mobility and labour mobility as delivery modes for trade and
investment in goods and services.  Although this complementary relationship between capital and
labour called for a liberal, integrated approach to th e mobility of labour as part of the free global flow
of capital, goods and services, in reality mobility of capital and mobility of labour had been treated
quite differently.  The GATS showed an inadequate treatment of labour mobility insofar as the "ModeFour" provisions on the supply of services through the movement of natural persons applied only to
narrowly circumscribed categories of persons.  An examination by the Working Group of the
limitations on market access and national treatment commitments made under the GATS could help
elucidate the different barriers to the mobility of capital and the mobility of labour.  The failure to
ensure mobility of labour more comprehensively as a complementary and critical factor to themobility of capital had far-reaching adverse economic consequences, particularly by creating labour
shortages which prevented the efficient use of capital.  It was important for the Working Group to
hold discussions to explore the nature and extent of issues in labour resources faced by different
sectors.  In considering ways to overcome the labour crunch and improve the productivity of capital
by enhancing the mobility of labour, it would be useful to focus on selected categories of labour apart
from the higher categories of personnel for which most Members had already undertaken
commitments under the GATS.  In this context,  the Working Group could suggest ways for such
selected categories of labour to move from surplus regions to deficit regions.
68
58. In response to a question about the treatment of labour from neighbouring countries, it was
further stated that what should be addressed in the Working Group was not the movement of labour
per se  but the movement of labour in the context of a demand for free movement of capital. Another
comment made was, given that restrictions on movement of labour inside the European Communityhad largely been abolished, it might be interestin g for the Working Group to study the experience of
the Community regarding the relationship between investment and movement of labour.
69
                                                     
65 M/4, paragraph 29.
66 M/3, paragraph 23.
67 M/3, paragraph 24.
68 M/4, paragraph 36.
69 M/5, paragraph 17.WT/WGTI/2
Page 19
(e) The impact of trade policies and measures on investment flows, including the effect of the
growing number of bilateral and regional arrangements
59. In regard to the impact of trade policies and measures on investment, the importance of the
findings in the Secretariat Note in W/7 on the different effects of open and protective trade policies on
the type and size of FDI inflows was emphasized.  At the same time, it was suggested that there was aneed for an elaboration of the point made in the No te that countries with an open trade régime seemed
to attract more FDI than countries with a closed régime, especially in light of the fact that FDI
responded not only to the trade régime but to the overall conditions of an economy.  It was also
argued, however, that the question of the different effects of open and protective trade policies on FDI
was becoming less relevant as most countries were liberalizing their trade policies.  In addition,
account had to be taken of the specific characteristics of the services sector in which investment was
often the only means of gaining effective market access because of the nature of impediments to tradein services.
70
60. The point was made that long-term trade protection, temporary trade remedies and
discriminatory regional trade arrangements could di stort investment flows, in which connection it was
proposed that the Working Group undertake an examination of the impact on FDI of the relevant
WTO provisions71.
61. In respect of the impact of regional arrangements on investment, the point was made that
there was a trend toward more integrated treatment of trade and investment in regional arrangements.
Another comment was that, in explaining the evol ution of FDI flows between a number of Members
which were parties to a  particular regional economic integration agreement, it was necessary to take
into account not only the existence of free trade between those Members but also the existence of
specific rules on investment. Interest was also expressed in exploring the issue of the relationship
between rules of origin and FDI in the context of regional trading arrangements.72
62. The Working Group agreed to request the Secretariat to supplement its analysis in its Note on
the relationship between trade and FDI (W/7) with further analysis of the effects of trade measures on
investment.
(f) The impact of investment policies and measures on trade 73
63. With reference to the Secretariat Note on the relationship between trade and FDI (W/7), the
view was expressed that various types of investment measures could have a trade-distorting effect.74
Performance requirements and investment incentives were mentioned in particular in this respect.The Working Group requested the Secretariat to supplement its analysis in the Note with further
analysis of the trade effects of investment incentives and performance requirements.
75  In response,
the Secretariat prepared a Note which was circulated in document W/56.
64. In regard to performance requirements, it was stated that in addition to the trade effects, it was
also important to examine how, if at all, pe rformance requirements had contributed to the
development process of developing countries, whether they had a negative impact on source countries
of FDI and the compatibility of the treatment of performance requirements in the WTO with the
                                                     
70 M/2, paragraph 28 and M/3, paragraphs 17 and 19.
71 M/2, paragraph 28 and 31.
72 M/2, paragraph 30.
73 Points made and issues raised in regard to the broader policy aspects investment incentives are
recorded below in the section on country experiences regarding national investment policies, includinginvestment incentives and disincentives.
74 M/2, paragraph 29.
75 M/4, paragraph 43.WT/WGTI/2
Page 20
treatment of such measures in other arrangements.  In the latter regard, the question was raised as to
the economic rationale of the more lenient treatment of performance requirements in other
arrangements, as compared to the strict prohibition under the TRIMs Agreement.76
65. It was observed that the Secretariat Note in document W/56 could have taken a more dynamic
approach in its analysis by considering that performance requirements were made known a priori tothe investor and/or the home country.  Thus, if an investor decided to proceed with an investment
project knowing that there were performance requiremen ts attached to the projec t, this meant that the
project was viable despite the performance requirements.  It was also stated that, like investment
incentives, performance requirements were an important development tool for developing countries
within the parameters of present WTO rules.
66. The point was made that, when analysing the issue of performance requirements in this
Working Group, one should be careful to re cognize commitments already acknowledged by
Members, for example in Article III of the GATT and the TRIMs Agreement.
67. It was argued that performance requirements deprived enterprises from the flexibility needed
to adapt to changing economic circumstances.  Performance requirements and incentives created
distortions not only in international markets but also in domestic markets of host countries insofar as
competition between different investors was distorted when investments made at different times weresubject to different requirements and incentives.
68. The view was expressed that certain types of performance requirements, such as those related
to transfer of technology and the promotion of research and development, had been demonstrated to
be an effective instrument of the development policies of host countries.
77
(g) Country experiences regarding national investment policies, including investment incentives
and disincentives
69. Information was provided on the legislative framework of one Member regarding joint
ventures and their economic impact.  Concern was expressed in this connection that the interests of
this Member might be adversely affected by developments in the context a bilateral understanding
reached between two other Members and in the cont ext of an ongoing negotiation on a Multilateral
Agreement on Investment.78
70. In regard to the experience of one Member,  a contribution was made which described the
significant recent increase of FD I inflows, the beneficial effects of FDI on its economy, the influence
of trade policy on the amount and types of FDI, and the evolution of this Member's legal framework
for FDI.79
71. With regard to another Member, a contribution was made which highlighted the liberalization
of its FDI régime that had occurred in the early 1980s as part of the change in its economic policiesfrom an import substitution-oriented approach to  an outward looking development strategy. This
contribution also discussed this Member's current domestic legal framework for FDI, relevant
international agreements to which it was a party, the potential for further increases in FDI inflows, the
                                                     
76 M/4, paragraphs 39 and 40.
77 See also infra, paragraph 99.
78 M/3, paragraph 12.
79 M/3, paragraph 13.WT/WGTI/2
Page 21
effects of FDI on trade and employment and the need to develop a better understanding of how
national trade policies and investment policies could be made mutually supportive.80
72. The point was made that it was perhaps too easily assumed that there was a similarity
between trade liberalization and investment liberalization.  Investment liberalization raised more
complex issues than trade liberalization,  especially in light of the multifaceted nature of the effects ofinvestment on economic development.
81  It was also stated that various contributions had
acknowledged that FDI could also have negative ef fects and that it would be useful to study what
particular policy tools had been effective in different countries to address such effects.82  In response,
it was stated that the contributions in question had concluded that FDI on the whole had positive
effects on development and that if there were negative effects of FDI they needed to be identified with
more precision than had been the case so far in the Working Group's discussions.83  Divergent views
were expressed on the merits of an examination of the relationship between investment liberalizationand economic development based on historical analys is of the evolution of investment policies in
individual countries.
84
73. A prominent theme of debate was the issue of the experience of Members concerning the
effectiveness and costs and benefits of investment incentives.
74. With reference to the Secretariat Note on the relationship between trade and FDI (W/7), the
point was made that, although the Note stated that incentives and tax breaks were less important as
factors determining the location of investment than other fundamental factors such as market size,
production cost and availability of natural resources, the experience of a number of Members
suggested that investment incentives played an equally important rôle in attracting FDI and that the
long-term benefits resulting from attracting FDI thr ough the use of incentives often exceeded the short
term-costs.85
75. With reference to a recent UNCTAD study on investment incentives, it was stated that in
theory incentives made sense to the extent they covered the difference between the private gains for
the firms involved and the social gains for the countries involved.  However, it was very difficult to
measure precisely this gap between private and social gains, especially when long-term effects weretaken into account. For example, while it might make sense to attract a firm at great expense if that
firm generated sequential investments, it was di fficult to know whether this would happen and
whether enterprises paid much attention to incentives when they made their investment decisions.
Empirical evidence suggested that firms typically ba sed their investment decisions on the long-term
rationale of a particular investment location, with incentives typically playing only a marginal rôle.
Thus, the assessment of the costs and benefits of investment incentives in a given case required a
very careful and complex analysis.  A second th eme of the UNCTAD study concerned the type of
investment incentives used.  A distinction could be made between fiscal incentives, financial
incentives and other incentives, such as the provision of infrastructure.  It might make more sense,
especially for developing countries with limited resources, to focus on other incentives which also
benefited domestic firms or on fiscal incentives which only came into play once an investment project
became profitable, as opposed to financial incentives, which were typically granted up front.Regarding the issue of competition between countries in the use of investment incentives,
transparency and information exchange could perhaps help to avoid the most serious negative
                                                     
80 M/4, paragraph 28.
81 M/3, paragraph 23.
82 M/3, paragraph 16.
83 M/3, paragraph 20.
84 M/3, paragraphs 17 and 20.  However, as noted above, the Working Group agreed at its meeting of
16 and 17 June to request the Secretariat to prepare a study on the evolution of FDI policies in individual
countries.
85 M/2, paragraph 29.WT/WGTI/2
Page 22
implications of this competition. UNCTAD's experience indicated, however, that policy makers
considered incentives as a tool that they were not easily prepared to give up but instead tried to use as
efficiently as possible.86
76. It was stated that, although some of the UNCT AD studies seemed to suggest that incentives
were not as important as some other factors, some developing countries believed that incentives didplay an essential rôle in attracting FDI.
87
77. The point was made that, notwithstanding arguments advanced in recent academic literature,
investment incentives remained a useful policy inst rument in the pursuit of development strategies.
The argument that incentives were nothing more than a transfer of income from countries to firms and
that the more intense the competition among potential hosts, the greater was the proportion of
potential gains that was transferred to multinational enterprises, failed to give due recognition to the
fact that incentives were not intended to support enterprises that were not viable.  Rather, they weregeared towards attracting growth, income and employ ment-creating investment.  The part transfer of
income through incentives would not be politically feasible if not for this wealth-creating impact of
FDI. Three particular aspects of the positive rôle of investment incentives could be distinguished.
First, investment incentives could be considered to  fulfil a "risk premium" function insofar as they
provided a partial counterweight to poor economic fundamentals, for example in the field ofinfrastructure.  By compensating investors for their perceived country-specific risks, they provided a
reason for investors to go ahead with a project which otherwise would not have been viable at the
normal rate of return. Second, even in a situation where the economic fundamentals were sound,
investment incentives had an essential rôle to play as tools by which investment could be directed to
meeting particular development or regional objectives. This was illustrated by the rôle of incentives todirect FDI to particular industrial sectors and the us e of incentives to regulate the type and nature of
FDI received.  For example, the granting of incentives could be tied to a commitment to sequential
investment in the form of additional production capacity, modernization, upgrading or diversification
into related products. Third, investment incentives  also contributed to long-term competitiveness in
that they could help countries to secure dynamic gains from economies of scale and learning bydoing.
88
78. It was also argued, however, that while investment incentives were widely regarded by
countries at all levels of development as important policy instruments,  a comprehensive and balanced
consideration of this subject should include not only the issue of the effectiveness of incentives in
attracting FDI and the benefits derived from the investment attracted with incentives but also the
negative implications of the increasing competit ion between countries to attract FDI by granting
incentives.89
79. In regard to one Member's experience with tax incentives, three factors were mentioned to
explain the gradual scaling down of tax incentives granted by this Member since the 1960s.  First,
liberalization of this Member's FDI policy meant that incentives could no longer be justified on the
grounds that they were necessary to compensate for the effects of discrimination against foreign
investment.  As a result of increasing concern that tax incentives gave a disproportionate advantage toforeign enterprises over domestic enterprises, the Member had decided to link FDI liberalization to
the reduction of tax incentives for foreign enterprise s. However, tax incentives to foreign enterprises
conditional on the introduction of advanced technology had increased as part of the Member's
structural reform policies.  Second, it was agreed that tax incentives granted by this Member had
generally failed to achieve their desired effects because the level of taxation was only a minor
                                                     
86 M/5, paragraph 20.
87 M/5, paragraph 21.
88 M/5, paragraph 18.
89 M/5, paragraph 19.WT/WGTI/2
Page 23
consideration in investment decisions of firms and because the tax incentives were insufficient
compensation for the Member's relatively high factor costs.  Third, the effects of tax benefits had been
partially nullified as a result of taxation of repatriated profits by home countries of the foreign
enterprises.90
80. It was suggested that three key themes emerged from the experience of this Member.  First,
FDI liberalization implied that there was less rationale for the granting of investment incentives.
Second, while incentives had an important positive rôle to play in correcting market failures, it was
also likely that competition among countries to at tract FDI would become so fierce that they might
end up offering incentives whose costs outweighed their benefits.  This situation resembled a
prisoner's dilemma in which only cooperation among participants provided a mutually beneficial
solution.  Third, the relationship of incentives to  bilateral taxation agreements deserved further
consideration.91
81. It was also stated that studies by international organizations had demonstrated that investment
incentives were not a major determinant in location decisions, but that they could influence the choice
of location where all other circumstances were equal between two sites.  In the last decade the use of
incentives had increased and the types of incentives used had become more diversified.  This had
engendered a harmful competition between countries to attract FDI.  The indiscriminate use ofincentives could result in a distortion of investment flows in favour of countries that could afford to
finance incentives but, in the long run, the use of incentives implied losses for all countries involved
in such competition, ultimately leading to a transfer of resources to foreign investors.  Competition for
FDI through incentives not only resulted in a loss of resources but also diverted resources from uses
that were more productive for development, such as the improvement of physical infrastructure,which was a more important determinant of investme nt decisions.  Moreover, incentives could distort
international trade flows by artificially favouring production in certain countries to the detriment of
countries that were not able to grant incentives, especially when production was destined for export.
Empirical studies had also shown that investment incentives could distort the productive structure in
host countries by favouring production in certain sectors.  In addition, investment incentives entailedhigh administrative costs, were difficult to administer, and were often granted in a non-transparent
manner.  In this connection, it was proposed that, as part of the future work of the Working Group, a
more thorough study be undertaken of the implications of fiscal investment incentives and their
distortionary effects on investment and trade flows.
92
82. The point was made that the experience of a number of Members regarding the use of
investment incentives at sub-federal levels of government confirmed that such incentives only had a
marginal impact on investment decisions and often failed to produce the expected results.93
83. Reference was made to the possible negative implications of investment incentives in terms of
erosion of the tax base.  It was also suggested that further work be done to examine the possible
distorting impact of tax havens on investment flows.94
84. The point was also made that where the alleged rationale for the granting of an investment
incentive was to correct for a regulatory distortion, the first-best solution was to eliminate both the
                                                     
90 M/6, paragraph 10.
91 M/6, paragraph 11.
92 M/6, paragraph 12.
93 M/6, paragraph 13.
94 M/5, paragraph 19.WT/WGTI/2
Page 24
distortion and the incentive.  In response to this argument, it was stated, however, that in an imperfect
world this approach was not always feasible.95
85. It was argued that non-discrimination in the application of incentives was important to avoid
distortions of competition that could result from the granting of incentives only to foreign enterprises.
Similarly, from a competition perspective, it was also essential that incentives should not take theform of monopoly rights to enterprises.
96
86. The view was expressed that there was a need to explore possibilities for enhanced
international cooperation to address harmful effects of the use of investment incentives.  It was stated
in this regard that, as governments were faced with a prisoner's dilemma, restraint on the use of
incentives was difficult to achieve in a unilateral or bilateral context.  It was suggested that a balance
should be struck between recognising the benefits of incentives as domestic policy tools, on the one
hand, and limiting their harmful effects in the cont ext of increasing competition between countries to
attract FDI, on the other, and that existing WTO rules on subsidies illustrated how such a balance
could be achieved.  An important feature of these rules was that the mere fact that a subsidy was
aimed at achieving an important policy objective did not by itself obviate the need for disciplines to
control its possible trade-distorting effects.  The issue of investment incentives should be considered
from a similar perspective.97
87. In response to some arguments on the negative effects of the use of incentives, the point was
made that, while the argument was sometimes advanced that the granting of investment incentives
could lead to rent-seeking behaviour, this problem was not unique to incentives.  Rent-seeking and
other directly unproductive activities were possible outcomes of any market intervention by
governments.  The question that should be posed was how governments should deal with such directlyunproductive activities.  Experience showed that th e more stringent the institutions of governments
were the less likely they were to be captured by vested interests.  The appropriate response was
therefore to strengthen the institutional and admi nistrative capacity of governments to administer
incentives effectively rather than to prohibit incentives. In regard to the argument that it was very
difficult to determine exactly the value and size of the positive externalities associated with a projectand that competition through incentives could lead to  overbidding, it was stated that the capacity to
apply incentives effectively varied widely among countries.  Nevertheless, this did not constitute an
argument against incentives per se .  The point was also made that some views expressed on the issue
of incentives seemed to be internally contradictory in that it was argued, on the one hand that
investment incentives often resulted in distortions of investment and trade and, on the other, that
incentives did not play a major rôle in location decisions.
98
88. The view was expressed that, while incentives were not a major factor in determining the
location of investment, more attention should be paid to the rôle of incentives in promoting
development objectives.  Reference was made to positive experience of one Member with the granting
of incentives to stimulate enterprise development, for example by improving productivity through
encouraging the creation of linkages between foreign enterprises and domestic small- and medium-
sized firms.  It was also stated that further discussi on of the benefits of investment incentives for small
developing countries was warranted.  While it might be true that in some cases incentives had failed
to produce the expected positive results, it was necessary to guard against generalisations, bearing in
mind the different levels of development, objectives and needs of countries.  At least in some
countries incentives had been shown to be a useful instrument, for example for the creation of
                                                     
95 M/4, paragraph 22 .
96 M/5, paragraph 19 and M/6, paragraph 10.
97 M/6, paragraphs 12,13 and 15.
98 M/6, paragraph 14.WT/WGTI/2
Page 25
employment, the attainment of regional development objectives and the spread of technology and
know-how.99
89. With reference to the experience of a number of Members in the context of a process of
regional economic integration, the point was made that the implementation of policies removing
barriers to the right of establishment and the free movement of capital necessitated the adoption ofmeasures to avoid distortions of investment flows as a result of incentives and disincentives.  The
instruments used for this purpose allowed for a consideration of regional development objectives.
100
90. It was stated that, although it was often argued that fiscal investment incentives were useful to
promote the competitiveness of host countries, to promote regional development, to correct market
failures and to realize positive externalities associated with FDI, in most cases the use of fiscal
incentives represented a second best solution as there existed more efficient alternatives to attain the
desired objectives.  For example, regional development objectives were more efficiently attained byincreasing spending on physical and human capital in a particular region.  Where incentives were
granted to compensate for regulatory distortions, th e first best solution obviously was to reform the
relevant regulations.  The use of incentives aimed at achieving positive externalities of foreign
investment raised the difficulty of calculating the externalities and the appropriate level of incentives
and entailed a risk that the costs of incentives exceeded their benefits, especially where variouscountries competed to attract a particular investment project.  In sum, in most cases the use of fiscal
incentives was not justified on the basis of efficiency and equity criteria, and the preferable course of
action was to correct, rather than to compensate for,  structural or regulatory failures.  On the other
hand, fiscal incentives entailed significant costs and distortions.  Since empirical studies had shown
that investment decisions were often made irrespective of the availability of fiscal incentives, thegranting of such incentives involved an unnecessary  cost.  In addition, to the extent that fiscal
incentives did play a rôle, there was the risk that investors enjoying temporary incentives would
attempt to obtain them on a permanent basis.  Likewise, if there was positive discrimination in the
granting of fiscal incentives to foreign investors, domestic firms would attempt to obtain similar
benefits.  Other important negative effects of fiscal incentives arose from the erosion of the tax baseresulting from fiscal competition between countr ies and between different levels of government
within countries, the distortions of economic activity due to the fact that the granting of fiscal
incentives to certain sectors amounted to a tax on other sectors, and the distortions of international
trade.  In the latter regard, it was argued that there was both an indirect and a direct distortionary
effect of fiscal incentives on international trade.  The indirect effect arose from the impact of fiscal
incentives on FDI flows.  Given the close relations hip between trade and investment, fiscal incentives
which resulted in an inefficient allocation of investment, also resulted in  a  distortion of internationaltrade.  Since not all countries had the financial resources to compete for FDI, the use of fiscal
incentives resulted in a diversion of investment and trade in favour of countries which could afford to
grant such incentives.  Fiscal incentives could also ha ve a direct impact on international trade, such  as
when they were geared to influencing certain operational margins, for example fiscal incentives
linked to production for export.  The trade effects of such fiscal incentives were similar to the tradeeffects of performance requirements, with which they were often used in conjunction.
91. The observation was made that the issue of the use of investment incentives needed to be
analyzed within a proper historical perspective, which was particularly relevant to the development
implications of incentives.  Thus, for example, while reference had been made to the Agreement on
Subsidies and Countervailing Measures and the TRIMs agreement as relevant WTO instruments, thismatter should also be viewed in the light of the rights of developing country Members under the
provisions of Part IV of the GATT.  The historical perspective was essential to understand the positive
rôle which incentives could play in the process of economic diversification in developing countries
                                                     
99 M/6, paragraph 16.
100 M/3, paragraph 25.WT/WGTI/2
Page 26
where colonization had often engendered a specialization on a narrow range of commodities.   In this
regard, reference was made to the positive experience of one Member with the granting of investment
incentives in the context of free zones, which had resulted in substantial growth and diversification of
exports and the creation of employment.   The important rôle of incentives was demonstrated not only
by their widespread use in developing countries but also by the fact that many developed countrieshad actually developed as a result of successful incentive policies, and that these countries continued
to use incentives, for example in the context of local and regional development programmes.
Document W/56 provided ample evidence of this rôle as an effective development policy instrument,
which had allowed countries to diversify their export capability and integrate more effectively into
international markets.  Given the value of incentives as a market oriented instrument of development
policy, a cautious approach was warranted in regard to possible initiatives in the WTO.
92. The view was expressed that the unrestrained use of investment incentives to attract foreign
investment posed problems in terms of economic efficiency for several reasons.  First, the offer of
incentives was usually selective and discretionary, and different foreign investors might be given
different treatment.  Second, the use of incentives might cause distortions in international trade and
investment flows and in allocation of resources.  Third, incentives were often offered as compensation
for inadequacies in the investment environment,  for example, limited market access, performance
requirements and insufficient infrastructure.  The prevalence of incentives would slow down the
liberalization and improvement of the investment  régime concerned.  However, some investment
incentives might only affect the distribution of benefits rather than the existence of benefits.  Besides,
some Members would continue to use, rightly or wrongly, investment incentives as a policy tool to
meet their development needs.  It therefore did not appear possible to call for the prohibition of allinvestment incentives in the WTO context at this stage.  A more appropriate approach might be to
explore ways to discourage Members from engaging in unhealthy competition in the use of
investment incentives and to minimize the distortive effects of investment incentives.  It would also
be useful to explore the criteria to differentiate objectionable and non-objectionable investment
incentives.  In this connection, WTO Members' experience in classifying actionable and non-actionable subsidies under the Agreement on Subsidies and Countervailing Measures might be
relevant.  The suggestion was made that two broad principles could help minimize the distortive
effects of investment incentives.  First, the application of investment incentives should be based on
the principle of non-discrimination so as to minimize distortions arising from favouritism towards
foreign or domestic enterprises.  Second, it was necessary to ensure maximum transparency in the
dissemination of information of interest to investors including the forms and amount of incentives
which had been or would be awarded and the criteria  for the award.  With adequate knowledge of the
investment incentives granted, prospective investors would be able to better assess the real costs and
benefits of the investment projects.
93. It was stated that, although measures to resolve structural economic problems were essential
to attract FDI, this often required time and involved difficult political decisions.  Another view was
that the use of incentives entailed a risk of delaying the necessary structural reforms.  It was alsostated, with reference to the point in the Secretariat Note in document W/65 that incentives and
performance requirements might divert attention from general policy reforms which would improve
the investment climate, that the overriding policy objective of most, if not all, governments was to
improve the investment climate precisely through policy reforms.  In this sense, incentives and
performance requirements played a very useful but only compensatory rôle where necessary and werenot  used to avoid necessary policy reforms.
94. With respect to incentives aimed at regional development objectives, it was argued that the
first best policy was to strengthen the general regulatory and economic infrastructure in particular
regions, but that it had to be acknowledged that this was not always realizable in the short term.
While it was therefore understandable that governments often decided to subsidise the location offirms in particular regions, it was necessary to bear in mind that this was a second best solution andWT/WGTI/2
Page 27
that, notwithstanding the important social objectives which might be served by the granting of such
incentives, their use inevitably involved a cost in terms of economic efficiency.  Another comment
made was that it should be acknowledged that the issue of regional development incentives was
delicate, in which connection mention was made of the special provisions on regional development
subsidies in the Agreement on Subsidies and Countervailing Measures.  More generally, an importanttheme for further work was the question of whether certain types of incentives warranted different
treatment.
95. It was stated that the arguments put forth against the use of investment incentives did not
detract from their usefulness as developmental policy instruments and that the fact remained that
incentives could help attract growth, income and employment-creating investment.  In support of this
view, mention was made of an empirical study which showed that in the case of one Member the
capital inflows associated with foreign investment  by enterprises which had been granted investment
incentives was 27 times larger than the amount of the incentives granted.  Other countries had
experienced benefits of roughly similar magnitudes.  It was further argued that many of the problems
which were alleged to arise from the use of incentives could be adequately addressed through a
strengthening of the administrative  capabilities of host countries.  The point was reiterated that some
views expressed on investment incentives seemed to be internally contradictory in that it was argued,on the one hand, that investment incentives often resulted in distortions of investment and trade and,
on the other, that incentives did not play a major rôle in location decisions. With reference to the
Secretariat Note in document W/56, attention was drawn to the point that, because of severe data
problems, not much systematic evidence existed on the impact of incentives and performance
requirements on international trade and that interview studies were obviously inferior to systematicstatistical analysis.  In light of these significant limitations, it was observed that there was nothing
doctrinal that could be concluded on this issue.
96. It was also observed, with reference to the Secretariat Note in document W/56, that
dissimilarities between investment promotion strategies of individual countries mainly concerned the
choice of incentives.  Developing countries mainly used fiscal instruments, such as tax holidays, whiledeveloped countries mainly used financial incentives, including cash grants.  As pointed out in this
Note, this reflected differences in wealth, as the developed countries could afford to use up-front
subsidies to pay for some investment whereas developing countries could at best afford to ease the tax
burden ex post.  These dissimilarities as regards the type of incentives granted were an important
element in any consideration of the development dimension.  It was also emphasized that attention
should be paid to the use of incentives at all levels of government, including regional and local
governments.
97. It was stated that the argument that a strengthening of institutional capabilities would address
most of the negative problems associated with incentives did not address the problem of the
distortions created by the granting of investment incentives in a context of competition between
governments to attract investment.  This required a br oader, international perspective.  In regard to the
argument that there was a contradiction between the assertion that incentives distorted investment andtrade and the argument that they were not a major factor in location decisions, it was stated that
incentives were not a fundamental factor in investment decisions but played a secondary rôle which
came into play in a marginal context where all other circumstances were equal between potential
investment sites.  However, to the extent that th ey influenced the location of investment, they also
disrupted trade flows.  Another observation on th is issue was that investments could benefit from
incentives even where the availability of the incentives was not a factor in the choice of the location
of the investment.  In such a situation, a trade distortion resulted from the fact that the goods produced
by the investment had benefitted from an artificial competitive advantage.
98. The view was expressed that, in analyzing the rationale of investment incentives and
performance requirements it was necessary to distinguish between specific policy objectives.WT/WGTI/2
Page 28
Investment policy could be aimed at simply attracting investment or at economic modernization, the
creation of linkages and the increase of an economy's competitiveness through a process of
technological innovation.  The use of investment ince ntives to attract investment without significant
spillover effects, such as investment in the exploitation of natural resources, was generally not a sound
policy.  By contrast, the use of investment incentives aimed at attracting investment in a particularstage of the production chain  so as to create linkages with other sectors had been demonstrated to
have positive effects.  Likewise, while trade-related performance requirements, such as local content
measures, had been demonstrated not to have positive effects, performance requirements relating to
transfer of technology, the promotion of research and development and the promotion of alliances
between foreign and domestic firms generally had been shown to have positive effects.  If applied in a
market-friendly manner, performance requirements w ith regard to the transfer of technology and the
conduct of research and development could also be viewed as indirectly contributing to the attainmentof objectives of competition policy, insofar as they  facilitated access to technology by firms, including
small- and medium-sized firms, and to economic diversification.   To illustrate these points regarding
the beneficial impact of certain types of investment incentives and performance requirements,
reference was made to one Member's experience with the use of incentive-related performance
requirements with a view to promoting alliances be tween international firms and domestic firms in the
oil industry, which had resulted in a significant increase in the capacity of the domestic firms to
export services and capital goods.  Mention was also made of developments in this Member's
automobile industry where incentive-related performance requirements were proving successful in
promoting the development of domestic subassembly facilities through the creation of linkages with
foreign investors. In sum, market-friendly performance requirements related to incentives aimed atfacilitating transfer of technology and research were an effective and legitimate instrument to ensure
the benefits of FDI for technological capacity building of host developing countries.
99. It was stated that incentives acted to redirect economic activity either within an economy or
between economies.  As a result, while investment incentives were often used in an attempt to
stimulate job creation, attract investment to a particular region or encourage the development ofspecific industries, such redirection of economic activity was likely to be at the expense of economic
growth in other areas of the economy.  Incentives th erefore represented a subsidy to the recipient and
an implicit tax on other activities in the economy.  The implications of this were that, where the
disruptions to investment decisions created by incentives caused investment to flow to inefficient
sectors, both national and global welfare was reduced.  In this connection, reference was made to the
experience of one Member which had maintained a range of tax incentives up to the mid-1980s.
These appeared to have the desired effect in boosting investment in general and in particular sectors.Yet economic growth had languished.  The quantity of investment might have been high, but that had
not always been the case with the quality.  There had also been a high fiscal cost associated with the
provision of incentives.  In the mid-1980s, this Member had begun removing incentives and
reforming the tax system to reduce tax-induced behaviour.  These reforms had made a significant
contribution and the level of investment in this Member, both domestic and foreign, was high.  Thepoint was made that competition in the provision of incentives might result in more negative impacts
for all countries than would be the case if incentives  were absent.  This was well illustrated in the
"prisoners dilemma" examples that had been given in some contributions.  This suggested that, despite
the welfare gains from unilateral removal of distortionary incentives, addressing the issue through a
multilateral body might make it easier for individual countries to take that action.  While theAgreement on Subsidies and Countervailing Measures contained disciplines on subsidies at the point
of production (i.e., those distorting outputs) incentives, which were effectively subsidies which
distorted inputs, currently fell outside the framework of multilateral disciplines.  It would seem
appropriate therefore for one element of further work in this area to be an examination of the way in
which the multilateral system had sought to discipline output subsidies under the Agreement onSubsidies and Countervailing Measures.WT/WGTI/2
Page 29
100. The observation was made that the fact that some Members had pointed to positive
experiences with the granting of incentives, while others had had negative experiences with
incentives, underscored the need for further study of the costs and benefits of incentives.  Regarding
the point that incentives aimed at specific policy objectives might be beneficial, attention was drawn
to the concept of specificity which was a key criter ion for the applicability of WTO rules on subsidies.
It was also said that the point that certain types of incentives were perhaps less distortionary than
others indicated the need for a more detailed study of different kinds of incentives.
(h) The relationship between fore ign investment and competition policy101
101. Views were expressed on the mutually reinforc ing nature of open policies towards FDI and a
properly constituted and functioning competition policy.102 The point was made that, on the one hand,
a liberal FDI régime could increase competition in the market and, on the other, a well-functioningcompetition policy could help remove obstacles to inward FDI resulting from the behaviour of
incumbents, contribute towards providing an attr active legal framework for foreign investors, and
enhance the benefits of inward FDI.
102. With regard to the contribution of FDI to competition, the point was made that an open FDI
regime increased the prospects for new entry and thus competition in specific markets.  By facilitatingentry of new competitors, liberal investment rules could challenge domestic oligopolies, mitigate or
eliminate local distribution bottlenecks and reduce the likelihood od cartels and monopolies.
103  It was
also stated that open investment policies could increase pressure on incumbents to behave more
competitively even in the absence of actual increased FDI flows, by making the markets more
contestable.104  Attention was also drawn to the rôle that open FDI policies could play in enhancing
the competitiveness of domestic firms, not only by reinforcing market pressures on them to behave
competitively, but also through technological and other spillovers from foreign investors.105
103. In regard to the contribution that a well-formulated and operated competition policy could
make to promoting inward FDI, it was said that sound competition policies and laws could assist
investors by preventing local cartels or monopolies from abusing new entrants or driving them out.106
As barriers to inward FDI were reduced, incumbents should be prevented from negating the impact of
such policies by establishing alternative barriers to entry, in the form of vertical and horizontal
restraints or abuses of a dominant position.107  In this connection, the point was made that a sound
competition policy and law could contribute to providing an attractive environment for FDI.108  I n
addition, reference was made to several studies which had confirmed the importance of ensuring
effective domestic competition to reap the full benefits of inward FDI. 109 The point was also made
that competition policies that were not implemented in a transparent, stable, neutral andnon-discriminatory (with regard to nationality) way, could constitute a deterrent to inward
investment.
110
                                                     
101 The Working Group was informed by the Chairman of the Working Group on the Interaction
between Trade and Competition Policy of the discussion which had taken place in that Group on the relationshipbetween investment and competition policy.
102 M/6, paragraphs 23-28.
103 M/6, paragraph 23.
104 M/6, paragraph 24.
105 M/6, paragraph 26.
106 M/6, paragraphs 23,24 and 27.
107 M/6, paragraphs 24 and 27.
108 M/6, paragraphs 27 and 28.
109 M/6, paragraph 23.
110 M/6, paragraphs 24 and 26.WT/WGTI/2
Page 30
104. The rôle of competition policy and law in safeguarding against possible abuses of market
power by foreign investors was also discussed.111  It was stated in this connection that the entry of
highly competitive foreign companies might lead to the displacement of local competitors and that the
liberalization of FDI might entail restrictive business practices by foreign investors.112  The point was
made that, provided a liberal investment environment and an effective competition policy wasmaintained, any resulting market power could be expected, as a general rule, to be offset by the actual
or potential entry of other multinational companies as well as possible local start-ups.
113 The
application of competition law and policy to mergers, acquisitions and joint ventures was viewed as a
particularly important aspect of the interface between investment and competition policy.114
105. The view was expressed that many of the concerns that had been voiced in the Working
Group from the perspective of host countries appeared to have as an underlying common theme a
concern about abuse of market power by foreign investors, and that this was addressed moreappropriately through the application of competition law to specific cases than through the application
of general restrictions on FDI.
115  It was also stated that, though the use of screening of FDI had often
been rationalized asa means of maintain a competitive environment, in reality the opposite had often
occurred, as screening in many cases protected established competitors.116 .
106. The view was expressed that, though in general competition would lead to greater economic
efficiency and ultimately to economic growth and development, there could be reasons for some
developing countries to limit the pursuit of efficiency as an immediate objective.  This arose from the
need to take into account competing objectives, including, in particular, development objectives and
the promotion of small and medium-sized-enterprises, and from the difficulty of pursuing such
objectives through measures that would not distort competition or reduce efficiency.  Identifying andpursing policies and measures designed to achieve long-term economic development objectives, while
ensuring the positive benefits of increased contestability and competition through FDI liberalization
was a very complex challenge for many developing countries.
117
107. It was stated that, if the existence of an effective competition policy was a necessary
condition to benefit fully from FDI liberalization, this logically implied that FDI liberalization shouldbe implemented gradually and perhaps be phased in sequence with the progressive implementation of
competition policy.  It was also argued, however, that, as demonstrated by the experience of some
Members,  delaying the liberalization of investment policies and the implementation of competition
policies, made the process of adjustment to a more competitive external environment more difficult.
118
108. The point was made that in considering the relationship between competition policy and
investment policy, the rôle of trade policy should also be taken into account.  It was suggested that, at
the risk of some over-simplification, trade policy could be regarded as determining the relevantmarket for the purposes of the application of competition policy and investment policy as determining
the relevant players in that market.
119  Another point was that it was increasingly difficult to separate
those aspects of the condition of international competition that related to trade in goods and services
from those relating to movement of factors of production.120
                                                     
111 M/6, paragraphs 25-26 and 29.
112 M/6, paragraphs 26 and 32.
113 M/6, paragraph 26 and 32.
114 M/6, paragraph 25.
115 M/6, paragraph 29.
116 M/6, paragraph 23.
117 M/6, paragraph 32.
118 M/6, paragraphs 33 and 34.
119 M/6, paragraph 24.
120 M/6, paragraph 28.WT/WGTI/2
Page 31
109. The point was made that the interlinkages between trade, investment and competition were
already recognized in a number of WTO instruments, such as the GATS and the TRIMs and TRIPS
Agreements.121  Reference was also made to regional arrangements where the same interlinkage was
evident.122  The view was expressed that, apart from providing for cooperation and consultation
procedures and paving the way for possibly more detailed rules, the existing WTO instruments fellshort of preventing restrictive business practices or limiting regulatory abuses in the field of
competition policy;  the challenge was to remove the inadequacies of existing WTO rules and to
increase the synergies between investment and competition policies in a more systemic manner.
123  It
was also stated that since existing bilateral investment treaties did not directly address issues related to
competition policy, there was a gap in existing international rules in respect of the relationship
between investment and competition.124  It was suggested that the mutually supportive relationship
between investment and competition policy could be reinforced through the establishment in amultilateral context of rules providing for the application of non-discrimination standards in these two
areas.
125
110. In support of the view that liberal trade and investment policies and deregulation policies
needed to be supported by the establishment of a domestic competition policy and competition
authority,  it was stated that an effective domestic competition policy ensured the existence ofcompetition in sectors not affected by trade and investment liberalization, that the success of
demonopolization depended upon the existence of sound competition in the demonopolized sectors,
and that a stable framework of domestic competition policy was a key element in creating confidence
on the part of foreign investors in the regulatory framework of host countries.  Competition policy
was a more efficient policy instrument than ex ante  mechanisms for screening of foreign investment,
which had often entailed significant costs and had deterred foreign investment and technology
transfer.  Since the impact of foreign investment on the level of competition in host country markets
could vary,  a case by case examination under competition law was necessary.  The existence of an
effective competition law was also necessary to address anti-competitive practices on the part of
domestic firms which could form obstacles to foreign investment.  In sum,  a domestic competitionpolicy structure enabled countries to increase the benefits to be derived from FDI,  and the benefits of
implementing a competition policy clearly outweighed its costs.  It was also observed in this regard
that the complementarity between trade and investment liberalization and competition policy had
found expression in the GATS and a number of other international agreements.  The development of a
multilateral framework on both investment and competition policy would contribute to enhancing
coherence, predictability and convergence and would reinforce the multilateral trading system.
111. With reference to the experience of one Member, it was stated that the existence of a stable
and transparent non-discriminatory competition framework for business did not necessarily require
the existence of a domestic competition law.  In this connection, it was argued that the best approach
was to refrain from subjecting investment to inefficient and administratively burdensome screening
mechanisms.
112. In response, it was stated that competition policy should indeed not be seen as another
administrative procedure which could be used for purposes of screening of foreign investment.
Rather, competition policy was more efficient and less administratively burdensome than screening
mechanisms in addressing risks of negative effects of FDI on competition, which was often mentioned
as a rationale for screening mechanisms.
                                                     
121 M/6, paragraph 28.
122 M/6, paragraph 31.
123 M/6, paragraph 28.
124 M/6, paragraph 31.
125 M/6, paragraph 30.WT/WGTI/2
Page 32
113. The view was expressed that,  while competition policy was a very useful instrument in
dealing with competition problems created by FDI, this did not provide an argument in favour of
removing screening mechanisms.  As shown by th e significant inflows of FDI experienced by one
Member, it was the method of application of a screening mechanism, not the existence of such a
mechanism per se , which under certain circumstances could constitute a barrier to FDI.   If applied in
a transparent manner, a screening mechanism did not co nstitute an impediment to FDI.  Thus, it was
important to view a particular screening mechanism in the policy context in which it was operated.
Reference was made in this connection to the experiences of a number of Members which used
screening mechanisms in the context of liberal FDI policies.  Another view expressed was that the use
of a screening procedure was incompatible with the need to provide non-discriminatory treatment to
foreign investors.
114. It was also stated that there was no substitutability between competition policy and the use of
screening mechanisms because, in addition to co mpetition-related objectives, the screening of
investment often served a range of purposes, including sectoral, locational and development
objectives.  In response, it was stated that to the extent the alleged rationale for the use of a  screening
mechanism was the need to address competition-related problems, the use of competition law was
more efficient.
115. The point was made that one Member had used screening of foreign investment inter alia  for
environmental reasons at a time when its administrative capacity to ensure compliance with
environmental regulations was not yet sufficiently developed.   The variety of purposes for which
screening procedures could be used underscored the need for further study on this subject in the
Working Group.  It was also suggested that further work be done to clarify the meaning of the conceptof screening.
116. The observation was made that privatization and deregulation in a number of countries had
failed to produce the expected benefits as a result of the lack of a competition policy to prevent abuse
of market power by privatized firms with dominant market positions.
117. It was stated that the provisions in the GATS on competition policy needed to be
strengthened.  While specific provisions had been developed in the context of basic
telecommunications, the prevalence of anti-competitive practices in many service sectors, for example
tourism, meant that the absence of adequate competition rules of a horizontal nature would pose
problems in future negotiations under the GATS.  It was also stated, however, that the existing
provisions of the GATS on competition were sufficient.
118. The view was expressed that whether investment policies should be complemented by
competition policy was a question which could not be answered in general terms.  Rather, the need forthe introduction of competition laws needed to be assessed by each country individually in the light of
its circumstances.
119. The point was made that the existence of a domestic competition law was not a necessary
condition for the negotiation of a multilateral set of rules on competition.  The TRIPs Agreement was
mentioned as an example of a multilateral agreement which had been concluded at a time when manycountries did not have relevant domestic legislation.  It was also observed that,  in considering the
relationship between investment and competition policy, account should be taken of certain trade
measures which could distort investment, such as rules or origin and quantitative restrictions on
textiles, and which were not covered by competition laws.WT/WGTI/2
Page 33
III. EXISTING INTERNATIONAL INSTRUMENTS AND ACTIVITIES REGARDING
TRADE AND INVESTMENT
120. At its first meeting, the Working Group discussed WTO provisions on matters related to
investment and activities and initiatives in other fora.  Subsequently, these issues were taken up at
each meeting of the Working Group as part of its consideration of existing international instrumentsand activities regarding trade and investment.  Discussion on bilateral, regional, plurilateral and
multilateral agreements was initiated at the meeting held in December 1997, while discussion on the
implications for trade and investment flows of existing international instruments was started at the
meeting held in March 1998.
121. Written contributions on this Item of the Checklist were provided and introduced orally by
Japan (W/18 and 34), Australia (W/23), Canada (W/19), the United States (W/29), Switzerland
(W/28), Korea (W/42), Peru (W/47), Cuba (W/45), Niger (W/48), Turkey (W/51).  Oral statements
were also made by India, Costa Rica, the Europ ean Community, Argentina, Hong Kong China, Egypt,
Malaysia, Mexico, Norway, Pakistan, Brazil, Venezuela and the Philippines on behalf of ASEAN
WTO Members.  The Secretariat submitted Notes on "Information on other International Activities
and Initiatives" (Job Nos. 2843 and 5279), "WTO Provisions on Matters Related to Investment" (Job
No. 2988) and "Bilateral, Regional, Plurilateral and Multilateral Agreements" (W/22).  Written
contributions were also submitted by the APEC  Investment Experts Group and by UNCTAD (W/21,
46, 50, 53 and 58).
(a) Existing WTO provisions
122. In regard to the Note by the Secretariat on WTO provisions on matters related to investment,
the comment was made that it went beyond a factual description of relevant WTO provisions bymaking certain interpretative observations and that it did not include references to provisions on
developing countries in the GATS and the TRIPS Agreement.
126
123. The view was expressed that existing WTO provisions on matters related to investment
lacked coherence and were limited in scope and that a major task of the Working Group was to
identify and assess deficiencies in the coverage of current WTO provisions related to investment in
the light of provisions on investment in other international agreements.127  It was also stated that in
examining WTO provisions from this perspective, account should be taken of the development
dimension.128
124. The point was made that there was a disparity in the treatment of investment matters between,
on the one hand, the WTO rules in the area of services and intellectual property and, on the other,
WTO rules in the area of trade in goods.129  Specifically, mention was made of the disparity in the
treatment of goods and services under the GATS and the TRIMs Agreement and, related to this, of theabsence of provisions on performance requirements in the GATS.
130  The point was made that,
whereas WTO provisions related to investment differentiated between goods and services, national
investment policies did not make such a distinction.131  Reference was made to the 1994 Agreement
on Government Procurement as an example of trade disciplines which had initially focused on cross-
                                                     
126 M/1, paragraph 6.
127 M/2, paragraph 36.
128 M/2, paragraph 37.
129 M/1, paragraph 6.
130 M/2, paragraph 36.
131 M/3, paragraph 30.WT/WGTI/2
Page 34
border trade in goods but which now also dealt with services and the treatment of foreign affiliates in
domestic markets.132
125. As examples of what were perceived by a number of Members to be limitations of existing
WTO provisions on matters related to investment, mention was made of the absence of rules on
investment protection, the limited scope of the TRIMs Agreement as compared with the wide range ofmeasures that had been under consideration in the Uruguay Round negotiations on TRIMs, the limited
effectiveness of the trade-oriented disciplines of the Agreement on Subsidies and Countervailing
Measures with regard to investment incentives, and the difference between WTO and international
investment agreements in respect of the coverage of portfolio investment.
133
126. While the absence of provisions on investment protection in the WTO agreements was
mentioned, the point was also made that the TRIPS Agreement was relevant to the protection of
investment.134
127. In relation to a suggestion that the Working Group examine how portfolio investment was
treated in the context of definitions of the term "investment" in international investment agreements,
the view was expressed that portfolio investment was less related to trade than direct investment and
that there was therefore no need to examine in detail in the Working Group how different agreements
dealt with portfolio investment.  It was also suggested  that it would be useful to clarify to what extent
portfolio investments were already covered by the GATS as a consequence of footnote 8 to
Article XVI of GATS.135
128. Interest was also expressed in comparing the "positive list" approach used in the GATS
context with the "negative list" approach used in some investment agreements and envisaged in the
negotiations on a Multilateral Agreement on Investment.136
129. It was stated in this connection that both negative list and positive list approaches had their
advantages in certain circumstances.  While a negative list approach promoted transparency and
permitted the identification of measures that might be amenable to gradual liberalization, positive lists
had their use when confidence-building measures were required.  A generalized judgement as to the
superiority of either approach was not possible.  It was noted that the GATS combined the twoapproaches.  It was also stated that this issue s hould be considered not only in relation to the GATS
but also in the context of the WTO agreements as a whole in order to take account of instruments, for
example in the field of intellectual property and tariff bindings, which had a different structure from
that of the GATS.
137
130. With reference to negotiations on a Multilateral Agreement on Investment, the question was
raised whether this envisaged agreement could be construed as an economic integration agreement
within the meaning of Article V of the GATS.138
131. While it was stated that a number of WTO agreemen ts had been identified in the work of the
Working Group dealing with investment issues but on ly in an incomplete and partial manner, it was
                                                     
132 M/3, paragraph 30.
133 M/2, paragraph 36, M/3, paragraphs 31, 32 and 34 and M/6, paragraph 37.
134 M/3, paragraph 32.
135 M/3, paragraph 34.
136 M/2, paragraph 36.
137 M/3, paragraph 33.
138 M/1, paragraph 6.WT/WGTI/2
Page 35
also stated that further discussion was necessary on the extent to which WTO provisions that had been
referred to by some Members were indeed relevant to investment.139
132. It was proposed that the Working Group undertake work aimed at identifying the effects of
trade policy measures on FDI, focusing on the following six areas:  high tariffs and tariff escalation as
determinants of investment  flows;  the effects on inward FDI of the invocation of the WTO balance-
of-payments provisions;  the relationship between protection of intellectual property and transfer of
technology;  the impact of preferential rules of origin on FDI;  the investment implications of actions
by firms to escape the application of anti-dumping measures;   and the impact of subsidies on trade
and investment flows.  The impact on investment of regional trade agreements was also mentioned as
an area for further examination.  In response to a co mment that these issues were best addressed in the
context of the work under the second Item of the Checklist,  the point was made that further work in
relation to WTO provisions under Item III should include both a comparison of WTO provisions withprovisions of international investment agreements and an analysis of the potential effects on
investment of the implementation of WTO provisions.
140  It was also suggested that the Working
Group examine the issue of the transfer of tech nology, limitations on commitments with respect to
investment, as revealed by schedules of specific commitments under the GATS, and the treatment
accorded under the GATS to the movement of natural persons.141
(b) Bilateral, regional, plurilateral and multilateral agreements and initiatives;  (c) implications
for trade and investment flows of existing international instruments
133. While the work of the Working Group under this part of Item III involved the examination of
key features of existing international investment ag reements,  issues were also raised regarding the
advantages and disadvantages of existing agreements as compared with possible multilateral rules oninvestment.  In this regard,  there was overlap between the debate under this part of Item III and the
debate under Item IV of the Checklist.
134. Information on existing agreements was provided through contributions by Members
regarding agreements to which they were parties, a Note by the Secretariat on bilateral, regional,
plurilateral and multilateral agreements (W/22) and a contribution by UNCTAD.
135. In regard to the experience of one Member with bilateral and regional investment agreements,
the main differences between the provisions of these agreements and the TRIMs Agreement and the
GATS were highlighted and attention was drawn to the merits of agreements which integrated trade
and investment, as compared with bilateral investment treaties, which focused only on the treatment
of foreign investment.
142  With respect to another Member's experience with bilateral investment
treaties, the relationship between the conclusion of such treaties and adequate protection of
intellectual property rights was stressed.143
136. It was stated, in regard to one Member which had recently begun to conclude bilateral
investment treaties, that there was a close relationship between the significant growth of this
Member's outward FDI since the mid-1980s and the conclusion of bilateral investment treaties.  The
model bilateral investment treaty used by this Member was aimed at providing protection of foreign
investment through provisions on fair and equitable treatment, full protection and security, nationaltreatment and MFN treatment, free transfer of funds, and rules on expropriation and dispute
settlement.  Although this Member's existing bilateral investment treaties did not provide for
                                                     
139 M/6, paragraph 38.
140 M/2, paragraph 9.
141 M/2, paragraph 37.
142 M/3, paragraph 39.
143 M/4, paragraph 47.WT/WGTI/2
Page 36
obligations regarding the admission of investment, a recent development of interest was that the
Member had agreed to start negotiations with another Member on a comprehensive bilateral
investment treaty covering both the establishment and the post-establishment treatment of
investment.144
137. In regard to another Member, it was pointed out that, in the context of the overall reform of its
investment régime initiated in 1990, it had been considered necessary to combine the adoption of
legislation on FDI liberalization with the provision of assurances regarding the protection of
investment through the conclusion of bilateral investment treaties.  The experience of this Member
with these treaties showed that they were important as one of many factors influencing investment
decisions but that they might not be a determining factor.145
138. In a discussion of the experience of another Member with bilateral investment treaties, it was
stated that this Member had pursued a policy of entering into bilateral investment treaties with a viewto providing a predictable climate for inward foreign investment as well as to protect its investments
abroad.  Typically, the treaties entered into by this Member tried to promote foreign investment by
providing protection, i.e., by giving assurances that foreign investments that had been admitted in
accordance with the host country's laws, regulations and policies were guaranteed fair and equitable
treatment, including national and MFN treatment, full and consistent legal security and disputeresolution through international mechanisms, including for investor-state disputes.  The domestic
legal system of this Member had built-in provisions for the various elements of bilateral investment
treaties.  Bilateral investment treaties had found fa vour with developing countries because they did
not place restrictions on host countries in follow ing their own FDI policies in the light of the
countries' unique circumstances.  Generally, these treaties aimed at the protection and equitabletreatment of FDI after the investment had taken place in accordance with the host country's laws and
regulations.  The increasing number of such treaties was a recognition of the positive rôle that foreign
investment could make to economic development.  However, as many such treaties had been
concluded only in the very recent past, there was little empirical evidence to establish a correlation
between the conclusion of such treaties and the growth of investment.  Bilateral investment treatieswere one of the factors in creating a favourable investment climate, in addition to factors such as size
and growth of the market, the quality of infrastructure, manpower skills and political, economic and
legal stability.  The Member was engaged in improving its investment climate and attracting FDI
flows through its own autonomous measures regarding the liberalization of its policy and regulatory
framework relating to FDI.
146
139. In respect of several other Members which were parties to a regional arrangement, the point
was made that they had individually entered into a number of bilateral investment treaties with bothdeveloped and developing countries.  These treaties, which normally focused on the promotion and
protection of investment, allowed for flexibility for the parties to pursue locational, sectoral and
developmental objectives.  These Members had also concluded a regional agreement on the
promotion and protection of invest ment, which was broad in coverage by virtue of the definition of
investment covering all forms of assets, but which provided for conferring the right to invest orestablish on the basis of prevailing law.  The Members were also in the process of concluding a
regional agreement on the removal of investment barriers.  The experience of these Members
suggested that bilateral investment treaties and regional agreements added a level of comfort for both
the foreign investor and the host country but that they were not by themselves a determining factor in
investment decisions.  Economic fundamentals rema ined the prime driving force for both inward and
outward FDI.
147  The point was also made that the definition of investment should be viewed in the
                                                     
144 M/5, paragraph 27.
145 M/5, paragraph 27.
146 M/5, paragraph 28.
147 M/6, paragraph 51.WT/WGTI/2
Page 37
light of the objectives of an investment agreement, and that these Members remained to be convinced
that there was a need for investment rules in the WT O.  Thus, the fact that they had adopted a broad
definition of investment in a regional agreement did not necessarily indicate that they were advocating
the use of an equally broad definition in the context of this Working Group.
140. Reference was made to recent developments regarding domestic legislation of one Member
and a bilateral understanding among other Members on the issue of expropriated foreign investment,
and concern was expressed regarding the possible incorporation of this understanding in the envisaged
Multilateral Agreement on Investment.148  The point was also made that the benefits of bilateral
investment treaties were sometimes negated by the application of unilateral measures of an
extraterritorial nature and that an important subject for consideration in regard to a multilateral
approach to investment was how to avoid such measures.149
141. The Working Group was informed by the observer from UNCTAD of the results of
UNCTAD's analytical work on international investment  agreements.  In regard to bilateral investment
treaties, the key themes that emerged from this wo rk were the following:  the rapidly increasing
number and diversity of countries that had concluded such treaties;  the considerable uniformity in the
broad principles of bilateral investment treaties along with numerous and important variations in the
specific formulations;  the lack of detailed info rmation on and analysis of the actual application of
bilateral investment treaties;  the absence of evidence of a significant influence of such treaties on
investment flows, as revealed by analysis of inve stment flows between parties to bilateral investment
treaties;  the significance of bilateral investment treaties as evidence of a certain convergence of
approaches to the treatment and protection of investment, even though these treaties had not given rise
to the formation of new rules of customary international law;  and the interaction between bilateralinvestment treaties and national laws.  Regional investment agreements exhibited a greater degree of
diversity in their content and purposes than bilateral investment treaties.  The main objective typically
pursued at the regional level was the liberalization of restrictions to entry and establishment of FDI,
followed by the reduction of discriminatory operational restrictions.  A pattern that appeared to be
emerging in recent regional agreements was to consolidate in one instrument an expanded set of itemsfor liberalization and protection in combination with procedures for the gradual reduction of
investment restrictions and for the settlement of investment disputes, including those between
investors and host states.  In addition to standards of treatment and protection of foreign investment,
some regional agreements dealt with the transfer of technology, competition, environmental
protection, conflicting requirements and standards of conduct for multinational enterprises in areas
such as disclosure of information, and employment and labour relations. Multilateral investment
instruments mostly related to particular sectors or specific issues, including services, performancerequirements, intellectual property rights, investme nt insurance, dispute settlement, employment and
labour relations, consumer and environmental protection and competition.
150
142. Areas of commonality and divergence between existing investment agreements were
identified.  Thus, the point was made that, although there were important areas of commonality
between investment arrangements in regard to matters such as expropriation and compensation,national treatment, most-favoured-nation treatment and dispute settlement, none of these issues was
treated in a uniform manner.
151  Another view was that existing agreements converged with respect to
the principle that foreign investors were to be ac corded national treatment, subject to exceptions as
provided for in national legislation, and that areas of divergence included dispute settlement, the
treatment of balance-of-payments issues, incentives, performance requirements, objectives, coverage
                                                     
148 M/5, paragraph 30.
149 M/6, paragraph 42.
150 M/4, paragraphs 47 and 48 .
151 M/4, paragraph 46.WT/WGTI/2
Page 38
and the rôle of the promotion of development.152  It was also stated that existing agreements had many
elements in common, for example in regard to the definition of investment, admission, national
treatment and MFN treatment, transfer of payments, expropriation and dispute settlement.153  T h e
point was made that, while bilateral investment treaties concluded by certain countries required, in
principle, national treatment and most-favoured-nati on treatment in regard to both the post- and pre-
establishment phases of an investment, in most other bilateral investment treaties these standards
applied only to the post-establishment phase.154  Another observation was that, given that international
investment agreements had historically evolved autonomously, it was significant that recent
agreements showed a tendency towards integrated treatment of trade and investment.155
143. The view was expressed that there were a number of gaps in existing international investment
arrangements, including with respect to the scope of the definition of investment, the lack of an
integral approach to development, the lack of provisions on privatization, fiscal havens, technicalcooperation, monopolies, state enterprises and concessions, corporate practices and technology
development, the social responsibility of states towards marginalized groups, the adverse effects of
volatile, short-term capital movements, and the distortive effects of certain kinds of incentives.
156
144. It was suggested that the Working Group undertake a systematic review of international
investment arrangements in order to determine their possible value from the perspective of WTOdisciplines, and that it analyze the interaction between the various existing international investment
agreements, notably in regard to the implications of most-favoured-nation clauses, including Article II
of GATS.  It was also proposed that there be further analysis of the experiences of Members with the
impact on their investment régimes of regional agreements,  and that the Working Group examine
existing international investment arrangements from the perspective of fundamental WTO principles,such as non-discrimination, most-favoured-nation and national treatment, fair trade, predictability of
policies, encouragement of competition, special provisions for developing countries and
transparency.
157
145. The point was made that the information presented to the Working Group on the widespread
rule-making on investment in bilateral and regional settings showed that Members had chosen to build
rules-based investment relations and that the outstanding question was what could be gained by
consolidating this activity at the multilateral level.158
146. One argument advanced in this connection was that, from the viewpoint of transparency and
efficiency,  multilateral rules on investment were desirable in view of the complexity for governments
of administering a growing number of investment agreements and that multilateral rules were also
essential in order to ensure the consistency of those agreements with WTO principles of non-
discrimination.159
147. The point was made that the pursuit of developmental objectives in the light of the unique
needs and circumstances of individual countries required sufficient freedom and flexibility for
countries to pursue their own policies.  This meant that there should be freedom to regulate the entry
of foreign investment while at the same time providing predictable policies, laws and regulations,
once the foreign investment had entered.  It was significant in this connection that most of thebilateral investment treaties provided an assurance for investment protection in accordance with host
                                                     
152 M/4, paragraph 46.
153 M/5, paragraph 29.
154 M/4, paragraph 47 and M/5, paragraph 29.
155 M/4, paragraph 46 and M/5, paragraph 29.
156 M/4, paragraph 46 and M/5, paragraph 29.
157 M/4, paragraph 49.
158 M/5, paragraph 29 and M/6, paragraph 41.
159 M/5, paragraph 29.WT/WGTI/2
Page 39
countries' laws, regulations and policies.  Any multilateralization or consolidation of bilateral
investment treaties might not serve this objective.160
148. In response to this argument, it was stated that the issue of the development implications of a
possible multilateral framework of rules on investment needed to be viewed in the light of the factors
that motivated investment decisions of firms. The po int was made in this regard that an investment-
friendly environment was to a large extent also development-friendly.  It was argued that
predictability of host country laws and policies was a major factor influencing investment decisions
and that a multilateral agreement on investment was a means of enhancing such predictability.161  In
addition, the view was expressed that, contrary to the assertion that bilateral investment treaties
provided an assurance of protection of investment in accordance with the domestic laws of host
countries, the purpose of such treaties was to establish an international standard of protection
irrespective of host country laws.162
149. The view that an investment-friendly environment was also development-friendly was
contested.  The point was also made that, while predictability was positive for investment, it was
questionable whether a multilateral agreement was the best guarantor of such predictability.
Predictability could also be provided by other arrangements.163  I n  r e g a r d  t o  t h e  i s s u e  o f  t h e
relationship of bilateral investment treaties to domestic law, it was stated that many bilateralinvestment treaties provided in their national tr eatment and MFN clauses that these disciplines were
subject to national laws.
164
150. In regard to the notion of a consolidation of existing international agreements, the point was
also made that, since it appeared that the suggestion for a multilateral approach to investment went
beyond investment promotion and protection to incl ude liberalization of investment régimes, it was
not productive to debate the possible need for a multilateral framework on investment in terms of
investment promotion and protection when, in reality, the intention was to address issues that were far
more sensitive for developing countries and that required further study.165
151. The question was raised whether a case could be made that a multilateral framework would
help host countries to attract investment.  Refere nce was made in this regard to the experience with
bilateral investment treaties which appeared to indicate that their rôle as determinants of investment
decisions was not as important as that of other factors.166  The argument was advanced that since the
available evidence suggested that bilateral inve stment treaties were not a major determinant of
investment decisions, there was little to support the view that a multilateral framework based on such
treaties would have a significant impact on investment flows.167  It was also argued that, more
generally, there was little empirical evidence to suggest that location decisions were greatly
influenced by the existence of investment agreements.168  Another point made on this issue was that
the argument that multilateral rules were necessary to create a stable, transparent and consistent
environment for firms operating in the global market appeared to confine the consideration of benefits
to those that would accrue to the source of the FDI.  To balance the discussion, it should also be asked
whether multilateral rules would indeed translate into more investment flows and consequent net
benefits for host countries.  In this regard, an important consideration was the fact that, in the currentcontext of closer global economic integration in which the importance of FDI to development was
                                                     
160 M/6, paragraph 43.
161 M76, paragraph 46.
162 M/6, paragraph 45.
163 M/6, paragraph 47.
164 M/6, paragraph 45.
165 M/6, paragraph 49.
166 M/6, paragraph 48.
167 M/6, paragraph 43.
168 M/6, paragraph 47.WT/WGTI/2
Page 40
generally recognized, countries were likely to make every effort through legislation or best practices
to compete successfully for FDI.169
152. However, it was also argued that there was no reason to expect an automatic correlation
between the existence of bilateral investment treaties  and the size of investment flows, given that such
treaties were concluded by governments and not  by private parties.  Governments presumably
negotiated such treaties for a variety of reasons, and it was possible to conceive of situations in which
governments entered into negotiations on such treaties for long-term benefits without necessarily
expecting short term results.  Bilateral investment treaties and other investment agreements were
valuable in that they put a floor on the ability of  governments to add new impediments that would not
necessarily be seen at the time by the investor.  This was a concept that was very familiar from the
WTO context and which enhanced predictability.170
153. The view was expressed that,  while the objective of the WTO was trade liberalization
through the establishment of rules on market access, including national treatment and MFN treatment,
investment liberalization was conceptually different from market access and therefore required in-
depth and broad discussion before it could be taken up in the WTO.171  In a similar vein, the point was
made that certain concepts might easily apply to trade in goods or services but not to FDI.  In
particular, under the WTO the right to trade under free and non-discriminatory conditions was anaccepted principle but the right to invest or establish, which more often than not meant production
operations taking place in the same country of sale, did not lend itself easily to the same approach.
Some countries would probably prefer an approach where the starting-point was not the foreign
investor's right to invest or establish, but the host country's permission for it do so.  It was also unclear
how it could be ensured that all countries would benefit from a multilateral framework on investmentwhen host countries might not have the same capacity or interest to invest abroad as home
countries.
172  It was also stated that, given that trade relations were affected by governmental
measures, while investment involved private parties, the argument in favour of a multilateral approach
to trade was perhaps not equally applicable to investment.173  The question was raised as to whether
the principle of national treatment, which was well known in the WTO context, was readilytransferable to the investment context and wh ether national treatment would differ depending on
whether it was applied to the pre-establishment or post-establishment phase of an investment.  The
point was made in this context that granting national treatment could not be equated with a liberal
investment régime in all circumstances.
174
154. The argument was advanced that a key consideration in favour of a multilateral approach was
that a multilateral framework, especially in the WTO context, could build on a body of basic
principles, such as non-discrimination, transparency and predictability of policies, which wereapplicable to a wide range of economic transactions.
175  It was stated that a parallel could be drawn
between the relationship between trade liberalization and the desirability of a multilateral framework
for trade on the one hand, and the relationship between investment liberalization and the desirability
of a multilateral framework for investment on the other.  Trade and investment were not as different
as had been suggested by some Members.  Both tr ade and investment involved private actors.  As in
the case of trade, the basic question arising in regard to investment was whether governments
collectively were prepared to submit themselves to rules that prevented each of them individually
from hampering the flows of investment.  To the extent that trade and investment were becoming
                                                     
169 M/6, paragraph 51.
170 M/6, paragraph 52.
171 M/6, paragraph 43.
172 M/6, paragraph 51.
173 M/6, paragraph 48.
174 M/4, paragraph 49.
175 M/6, paragraph 44.WT/WGTI/2
Page 41
more closely interrelated, the lack of rules on investment reduced the effectiveness of existing rules
on trade, as illustrated by the limited effectiven ess of the WTO rules on subsidies with respect to
investment incentives.  As investment flows were becoming more important than trade flows, the
need for action by governments to provide a fram ework of rules on investment became more urgent.
The expansion of the network of bilateral investment treaties increased the potential for distortions ofinvestment flows arising from the discrepancies be tween such treaties.  The proliferation of the
number of such treaties also indicated that the need for rules to provide stability was generally
recognized.  While it was true that some investment  issues were likely to be more controversial
between WTO Members than others, the same applied to trade.  However, it was easier to find an
accommodation and balance between different interests in a multilateral context than in a bilateral
setting.
176
155. In support of the view that a parallel could be drawn between the rationale for multilateral
trade rules and the rationale for multilateral investment rules, it was further stated that, while traders
did not make membership of the WTO a precondition for trading with non-WTO members, the real
question was whether it was in the long-term interest of traders for such countries to be parties to an
established body of trade rules.  This was where the analogy with investment was quite pertinent.
Another aspect of this analogy was that trade rules did not stop governments from taking measureshaving an effect on trade.  Rather, governments had agreed to circumscribe their discretion in a
politically and economically rational way.  The same concept applied to existing investment
agreements and to any future multilateral rules on investment.
177
156. It was also suggested that, since most WTO Members were bound to some type of non-
discrimination rules regarding foreign investment, for example in the GATS rules as they related tocommercial presence, a multilateral approach including common rules in respect of the pre-
establishment phase but with a flexible scope for exceptions would be more transparent and efficient
than today's varied legal situation.
178
157. It was argued that, as discussions had not shown clearly the benefits which might emanate
from the multilateralization of bilateral treaties, it might be more advisable to continue with the
existing trends and arrangements, namely autonomous liberalization of FDI policies and régimes,
together with bilateral, regional, and interregional treaties, and to continue discussions on the crucial
issues identified by the Working Group.  This w ould enable existing trends and arrangements to
evolve and gather further strength and momentum in time for a review once the discussions on the
issues before the Working Group had reached a definitive stage.179
158. The ideas that work in the WTO should be ai med at promoting bilateral investment treaties
and that the educative process in the Working Group should be continued for a considerable period oftime were contested.  Bilateral investment treaties were the most widespread instrument used by
countries to provide predictability and stability to investment but there were also important regional
agreements on investment with different degrees of strength.  It was significant that the countries most
in favour of regional and multilateral approaches to investment were those with the largest number of
bilateral investment treaties.  While the educative process on which the Working Group had embarkedwas not easily confined within a time constraint, this applied to any subject discussed in the WTO.
180
159. The view was expressed that, in considering the merits of a multilateral framework on
investment so far in the debate in the Working Gr oup, insufficient account had been taken of the fact
                                                     
176 M/6, paragraph 50.
177 M/6, paragraph 52.
178 M/5, paragraph 29.
179 M/6, paragraph 43.
180 M/6, paragraph 44.WT/WGTI/2
Page 42
that there could be different kinds of multilateral rules.  Further work in the Working Group on this
subject would benefit from a greater focus on the various possible options for multilateral rules.181
160. Another comment on the direction of future wo rk was that many issues would need to be
considered before any pronouncement could be made on the advantages and disadvantages of a
possible multilateral set of rules on investment.  These included definitions, rules on entry,performance requirements, incentives, national treatment, MFN treatment, taxation and other related
issues, status of personnel, technology transfer, payments and financial transfers, competition,
restrictive business practices, transparency, expropriation and compensation, and dispute settlement.
Furthermore, in discussing the advantages and disadvantages of multilateral rules, it was necessary to
assess whether the bilateral investment treaties and regional arrangements were working well and
serving their purpose, and to consider whether it was necessary to work toward multilateral rules
whose value was at best untested.  The feasibility of multilateral rules on investment would hinge onwhether or not they filled a void that must be fi lled and, if so, on whether these rules would address in
a balanced manner the diverse and evolving interests of all countries.  Future discussions, if any, on
this matter would require a very pragmatic approach, especially in respect of issues such as the right
to invest or establish and other elements relating to the development dimension.
182
161. As part of its work on the issues mentioned in the second and third indents of Item III of the
Checklist, the Working Group also considered information on relevant ongoing activities and
initiatives in other contexts:
- At its first and second meetings, the Working Group considered an informal Note by
the Secretariat (Job No. 2843) which described ongoing activities in other
international fora.183
- At the first meeting, observers from the OECD, the World Bank and UNCTAD made
statements on the activities of these organizations relevant to the Working Group
(W/4-6).
- Members presented information on developmen ts in the context of APEC (W/9), the
Free-Trade Area of the Americas initiative, MERCOSUR, the Asia-Europe Meeting,the Andean Community and ASEAN.
- The observer from UNCTAD informed the Working Group of the relevant work of
the UNCTAD Commission on Investment, Tec hnology and Related Financial Issues,
expert meetings convened by the Commi ssion, seminars organized by UNCTAD and
relevant UNCTAD publications and studies.
- The observer from the OECD provided information on relevant activities of the
OECD, in particular regarding the negotiations on a Multilateral Agreement onInvestment.
- The Secretariat provided information on recent developments regarding the
conclusion of a supplementary treaty in the context of the Energy Charter Treaty.
                                                     
181 M/6, paragraph 46.
182 M/6, paragraph 51.
183 This Note covered activities in the context of APEC, ASEAN, the Energy Charter Treaty, the Free
Trade of the Americas Initiative, the IMF and the United Nations.  An Addendum to this Note dealt withactivities in the context of the Andean Community, the Asia-Europe Meeting, the Common Market for Easternand Southern Africa, the European Bank for Reco nstruction and Development, the Southern African
Development Community, the United Nations Industrial Development Organization and the United Nations
Economic Commission for Western Asia.WT/WGTI/2
Page 43
IV. ITEM IV OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY
162. As agreed at the meeting of 8 December 1997, the Working Group started its work under this
Item at the meeting of 30 and 31 March 1998 by considering the factual aspects of the first indent.  At
the meetings of 16 and 17 June, 1 and 2 October and 25 and 26 November 1998, the Working Group
discussed all indents of this Item.
163. Written contributions on this Item of the Checklist were provided and were introduced orally
by the European Community and its member States (W/30 and 54), the United States (W/32), Hong
Kong China (W/33), Canada (W/36), Japan (W/34 and 43), Korea (W/49) and Costa Rica (W/60).
Oral statements were also made by Switzerland, Aust ralia, Malaysia, Pakistan, Hungary, India, Brazil,
Colombia, Peru, Venezuela, Egypt, the Philippines on behalf of ASEAN WTO Members, Argentina,
New Zealand and Norway.  In addition, written contributions were submitted by the OECD (W/49),
UNCTAD (W/50) and the IMF (W/60).
(a) Identification of common features and differences, including overlaps and possible conflicts,
as well as possible gaps in existing international instruments
164. Views were expressed on the diversity of existing bilateral, regional and multilateral
investment agreements and the absence of a coherent set of rules at the multilateral level;  the need for
a more integrated treatment of trade and investment  in international agreements;  the limitations of
current WTO provisions related to investment;  th e potential for conflicts arising from investment
agreements that were designed to address the priorities and concerns of the parties involved without
proper regard to the potential negative impacts on third parties;  and the fact that, although there was a
large degree of commonality between existing instruments in terms of basic principles, specific rights
and obligations varied.184  It was also stated that gaps in the existing legal framework were
particularly evident at the multilateral level and that the majority of multilateral agreements
encouraged investment through non-binding princi ples and guidelines, whereas most plurilateral
instruments were legally binding.185
165. The point was made that possible gaps and conflicts among existing international investment
instruments might restrict market contestability, distort investment flows, reduce economic efficiency,and thus frustrate the objective of such instruments.  In this respect, several policy questions arose
which required further consideration.  First, international investment might be distorted by policies
involving a denial of national treatment or right of establishment to international investors, failure to
provide a certain threshold of investor protection, measures that distorted competition between
domestic and foreign firms,  and performance requirements and investment incentives.  Since
substantial economic gains might be derived from further liberalization of these policies, a pertinent
question was whether and how such policies should be altered in today's globalized economy.Second,  since the disciplines provided for in the WTO Agreement on Subsidies and Countervailing
Measures might not be adequate to deal with investment incentives and the coverage of performance
requirements in the Agreement on Trade-Related Investment Measures was incomplete, the question
should be addressed whether these apparent gaps in the existing WTO instruments pointed to the need
for reforming investment-reacted rules at the multilater al level.  Third, there was a need to consider to
what extent overall economic-related benefits were affected by the markedly different standards in
existing investment agreements at various levels  and whether global economic welfare would benefit
from a comprehensive and coherent framework for investment.
186
                                                     
184 M/4, paragraph 59.
185 M/4, paragraph 62.
186 M/6, paragraph 63.WT/WGTI/2
Page 44
166. A number of more specific themes were addressed in the work under this part of Item IV
regarding substantive norms and concepts contained in existing international investment instruments,
particularly in relation to the issue of the admission of investment and the definition of the term
investment.
167. It was suggested that a distinction could be made between three broad categories of existing
international investment instruments -  bilateral inve stment treaties;  the rules on investment of the EC
Treaty, the Agreement on the European Economic Area (EEA) and the Europe Agreements;  and
other regional and multilateral instruments – and that a basic element common to all instruments in
these three categories was the key rôle of the principle of non-discrimination, in combination with a
recognition of the right of governments to take measures to attain public policy objectives.  None of
these instruments provided for an unqualified right of establishment.187  It was also stated that the
principle of non-discrimination was well established at national and bilateral levels but that fewobligations of a multilateral nature ex isted in regard to national treatment.
188
168. The view was expressed that a common characteristic of existing international instruments
was that there was no right to invest and no guarantee of market access,  although agreements like the
EC Treaty and the EEA Agreement provided for a right of establishment, and that screening
procedures existed in many countries.189  Another comment made on this point was that it was
significant that it had emerged clearly from the information presented to the Working Group that no
country was presently providing for a free right of investment given that, in discussions on investment
prior to the Singapore Ministerial Conference, the achievement of a right of establishment had been
proposed as an objective of multilateral work on investment.  Also significant as a common element
identified by the contributions presented to the Working Group was the fact that national treatmentwas not provided in regard to the pre-establishment phase of an investment.
190
169. The point was made, however, that the existence of a right to invest and national treatment
were central elements of a large number of existing investment agreements, although these standards
were sometimes subject to exceptions and limitations.  In response, it was stated that the fact that
certain agreements provided for a right to investment and national treatment upon establishment, butsubject to exceptions and limitations, confirmed that there was no automatic right to invest and no
automatic granting of national treatment in the pre-establishment phase.  The large number of
reservations proposed in the ongoing negotiations on a Multilateral Agreement on Investment
highlighted the fact that even developed countries were not in a position to allow for an automatic
right to invest.
191
170. The point was made that the Working Group should avoid discussing existing investment
régimes and international instruments in terms of overly broad generalisations, such as the assertionthat resort to screening procedures was widespread, and that more detailed analysis of certain issues
was necessary.
192  In particular, there was a need for the Working Group to develop a better
understanding of the different legal standards and concepts used in existing international investment
agreements with respect to the admission of foreign investment.
171. In this regard, it was stated that four approaches could be distinguished.  First, while it was
possible to conceive of an unconditional right to invest, this was a purely theoretical notion which was
                                                     
187 M/4, paragraph 57.
188 M/4, paragraph 62.
189 M/4, paragraph 62.
190 M/4, paragraph 68.
191 M/4, paragraphs 69 and 70. In connection with the latter observation, the Working Group heard a
statement by the representative of the OECD on the scope for exceptions with respect to the establishment of
investment envisaged in the negotiations on a Multilateral Agreement on Investment. M/4, paragraph 74 .
192 M/4, paragraph 71.WT/WGTI/2
Page 45
not reflected in any existing agreement.  Second, a narrower concept was that of "right of
establishment", which referred to the setting up of enterprises or the provision of services by a natural
person in another country.  This concept  existed only in a small number of agreements that aimed at
far-reaching economic integration in a regional context. Since the standard of right of establishment
went beyond a requirement to eliminate measures that were discriminatory against foreign investors,it was to be distinguished from a third approach, which involved the application of non-discrimination
standards to the pre-establishment phase. This was the approach most frequently used in international
agreements that contained binding rules on the admission of investment. The application of the
standards of national treatment and MFN treatment to the admission of investment was typically
associated with a "top down" approach that provided for a general application of non-discrimination
standards, subject to country-specific exceptions. A fourth approach to the admission of investment,
which could be characterized as a "market access, bottom up" approach, was exemplified by theGATS, in which Members had obligations regarding the admission of investment only to the extent
that a specific sector had been inscribed in their schedules of commitments, although the GATS also
contained some obligations of a general nature, such as MFN.  The scope of application of these
various standards depended crucially on the definition of the term investment.  Each of the above-
mentioned approaches to the admission of investment was qualified by various types of exceptions.With regard to the meaning of the concept of non-discrimination, it had been clarified in the context
of the existing OECD investment instruments that th e standard of "no less favourable treatment" did
not necessarily mean "identical treatment" and that in certain circumstances this standard could allow
for different treatment, provided that the treatmen t was equivalent. The GATS showed an interesting
further evolution of the non-discrimination standard in the sense that, compared to the more legalisticorientation of the non-discrimination rules found in the OECD instruments, the provisions of the
GATS on market access and national treatment reflected a more economic orientation, as evidenced
by the emphasis on the removal of numerical restrictions and on equality of competitive
opportunities.
193
172. In a further clarification of the distinction between the right of establishment, on the one hand,
and the application of national treatment to the pre-establishment phase, on the other, it was stated
that the concept of the right of establishment, as applied in one existing international agreement,
required the removal of obstacles to the establishment of nationals of other parties to that agreement
irrespective of the treatment accorded by a party to its own nationals, whereas the application of
national treatment to the pre-establishment phase involved a relative standard which rested on a
comparison between the treatment of foreigners and the treatment of nationals.  Thus, most
international investment agreements which dealt with the admission of investment did notcontemplate obligations that were as far reaching as the obligations in agreements based on the
principle of the right of establishment.
194  As a consequence,  the concept of right of establishment and
similar concepts were not relevant to the work of the Working Group.195
173. In connection with the issue of the treatment of admission of investment in international
agreements, the argument was also advanced that the relevance of the distinction between the pre-establishment and post-establishment phase of investment depended upon the scope of the definition
of investment.  This distinction originated in inve stment agreements that defined investment narrowly
in terms of the establishment or acquisition of enterprises and was more relevant in that setting than in
more recent agreements which defined investment in terms of a wide range of assets. 
196  
174. In a comment on this argument that the distinction between pre-establishment and post-
establishment treatment was particularly relevant to agreements which used narrow definitions of
                                                     
193 M/5, paragraph 36.
194 M/5, paragraph 37.
195 M/6, paragraph 59.
196 M/4, paragraph 64 and M/5, paragraph 36.WT/WGTI/2
Page 46
investment, it was observed that proposals made in the preparation for the Singapore Ministerial
Conference for the launch of work on investment in the WTO had specifically focused on FDI.197  
175. The view was also expressed that effective protection of investment in the post-establishment
phase could not be dissociated from the treatment of investment in the pre-establishment phase and
that, to protect investment adequately, an investment agreement must address the three periods in thelife of an investment:  entry, operation after establishment, and liquidation of investment.  The
treatment of investors and their investment should be non-discriminatory in each of these periods.
The standard for non-discrimination was appropriate ly national treatment and MFN treatment.  The
conditions which applied to and determined entry to a market were often conditions which remained
in force throughout the life of an investment because the government could set the terms of the
investment's entry and operation at this point and also because, once such conditions had been set,
even if later lifted by the government, it was often too costly or impractical then to restructure theinvestment.  In other words, the issue of discrimination and an investor's ability to compete on equal
terms with the domestic investor might be moot after establishment because the discrimination that
had taken place prior to the establishment of the investment had put the investor at a competitive
disadvantage for the life of the investment or precluded the investment altogether.  Market access was
also a key ingredient of an investment treaty.  WTO rules which applied to trade in goods and servicesnecessarily addressed discriminatory treatment of products both at the time a product entered a market
and once it had crossed a border.  If a product was able to cross a border free of tariffs but could not
be sold once it had crossed the border due to an internal restriction, the value of tariff free entry was
nullified.  Similarly, if a quota prevented entry,  non-discriminatory treatment of the product after
entry was meaningless.  This analogy applied to investment.  A commitment not to discriminate was
meaningless if the investment was precluded altogether or so handicapped by restrictions and
conditions applied during establishment that it was at a competitive disadvantage vis-à-vis  its
competitors.
198
176. Reference was made to the issue of forced divestiture, whereby some countries that
maintained limitations on foreign equity ownershi p also required investors to reduce their equity
interests after the passage of a certain amount of time.  The view was expressed that this practice was
inconsistent with an open and fair investment régime, ran counter to the fundamental objectives of the
WTO, and discouraged investment and hindered economic growth in the long term.199 In a comment
on this point, it was stated that, although FDI contributed to the objective of the promotion of
economic development, it also had other implications, and that this issue should be seen from the
perspective of the need to ensure a general appl ication of rules designed to serve important public
interests.200
177. Another important dimension of the Group's work under this part of Item IV concerned the
definition of the term investment in international agreements.
178. Statements were made on the merits of a broad, asset-based definition of investment covering
both direct and portfolio investment.201  It was argued that such an approach was desirable in order to
provide adequate protection to foreign investment, to ensure consistency with the large number ofexisting agreements that used this broad definition and to avoid the difficulty of distinguishing
between direct and indirect investment.
202  The view was also expressed, however, that the Working
                                                     
197 M/4, paragraph 68.
198 M/6, paragraph 62.
199 M/4, paragraph 58.
200 M/4, paragraph 65.
201 M/5, paragraphs 52-55.
202 M/6, paragraph 90.WT/WGTI/2
Page 47
Group had been established at the Singapore Ministerial Conference on the understanding that its
work would be limited to consideration of FDI.203
179. It was stated that any definition of investment should be based on the key concept that an
investment was a capital transaction in which the investor expected a return.  This concept of an
expectation of a return would ensure that govern ment grants and contractual arrangements for the
supply of goods and services were not included within the definition of investment.204
180. The interrelationship between the definition of investment and the nature of substantive
obligations in an agreement was emphasized.  Thus, the point was made that the fact that bilateral
investment treaties defined investment in terms of every kind of asset should be seen in conjunction
with features of these treaties that narrowed the scope of application of the definition, for example by
providing national treatment only in respect of post- establishment treatment of investment.  The need
to view the definition of investment in its interrelationship with other aspects of an agreement meantthat approaches adopted in bilateral investment treaties were not necessarily appropriate in other
contexts.
205  With reference to the distinction made in the domestic law of one Member between a
narrow, enterprise-based definition of FDI in connection with the pre-establishment phase of
investment and a broad, asset-based definition of investment for purposes of the protection of
investment in the post-establishment phase, it wa s suggested that the work in the WTO should be
limited to FDI when considering issues  relating to liberalization.  In the latter regard, use of the IMF's
definition of FDI was proposed.206  The point was also made that, while there was clearly a difference
between considering portfolio investment in re lation to the protection of investment against
expropriation and considering portfolio investment in the context of the application of national
treatment to the pre-establishment phase of an investment, the use of different definitions for thepurpose of different obligations could easily lead to unintended results.  Likewise, a narrow definition
was undesirable in the context of investment protec tion.  The most promising approach appeared to be
to start with a single, broad definition, but to carefully examine the applicability of specific
substantive obligations to the elements covered by that definition.
207  It was stated that problems that
could arise from the inclusion of portfolio investment in the definition could be addressed throughexceptions and qualifications to obligations.  Thus, including portfolio investment in a definition of
investment in an agreement did not necessarily imply that all obligations of the agreement would
apply to such investment.
208
181. The point was made that the inclusion of portfolio investment in a definition of investment
might have certain policy implications that required further study, in particular the causes and
direction of volatility of portfolio investment flows and the impact on host economies.  It was
suggested that the Working Group analyze whether existing international instruments drew any
distinction between FDI and portfolio investment.209  Interest was also expressed in discussing the
findings of the UNCTAD World Investment Report 1997  on the effects of portfolio investment in the
context of balance-of-payments and in considering how this issue had been dealt with in the IMF.210
182. It was noted that the IMF Balance-of-Payments Manual stated that FDI was investment that
reflected the objective of a resident entity in one economy obtaining a lasting interest in an enterpriseresident in another economy, and that the lasting interest implied the existence of a long-term
                                                     
203 M/5, paragraphs 52 and 56 and M/6, paragraph 88.
204 M/6, paragraph 87.
205 M/5, paragraph 56.
206 M/5, paragraph 52.  Pursuant to a request by the Working Group, the IMF submitted a contribution
on its definition of FDI.  See document W/61.
207 M/5, paragraph 60.
208 M/6, paragraph 90.
209 M/5, paragraph 57 and M/6, paragraph 92.
210 M/5, paragraph 58.WT/WGTI/2
Page 48
relationship between the direct investor and the enterprise and a significant degree of influence by the
investor on the management of the enterprise.211  The question was raised which criteria were used by
the IMF to determine the existence of a lasting interest and a significant degree of influence.  In
response, it was stated that the concept of lasting interest was not defined by the IMF in terms of a
specific time-frame, and that the more pertinent criterion was that of the degree of ownership in anenterprise.  A percentage of 10 or above of ownership was often deemed to reflect a lasting interest.
Although this criterion was specified in the Manual, some countries might choose to  allow for further
qualifications which involved a degree of subjective judgement.  Thus, if a direct investor owned less
than 10 per cent of the ordinary shares or voting power in an enterprise, but had an effective voice in
the management of the enterprise, the investment could be considered as FDI.
183. The issue of the relationship between the defini tion of investment and concepts used in the
GATS was raised.  Thus,  in regard to the distinction between FDI and portfolio investment, the viewwas expressed that in the context of an instrument  on trade-related investment issues, the relevant
question was perhaps more whether the approach should be asset-based, as in the draft Multilateral
Agreement on Investment, or whether it should be based on the concept of "commercial presence" as
in the GATS, but extended to goods as well.
212  It was also stated that a major issue to be addressed
was the need to clarify the relationship between the coverage of the term investment and the coverage
of WTO agreements, particularly the GATS.213
184. A large number of specific issues were raised as requiring attention in regard to the
appropriate coverage of an asset-based definition of investment.  These issues pertained to: the
treatment of branches and other unincorporated forms of business enterprise; majority and minority
shareholdings; the implications of including intellec tual property rights;  the treatment of loans and
contracts as investment; whether a commitment of capital or other resources located in the host
country should be a condition for an asset to be covered;  how to ensure flexibility and
comprehensiveness of coverage so as to include new forms of investment; the need to exclude capital
transactions which were not investments but mere financial transactions with speculative purposes;
conditions under which real estate should be treated as investment;  the treatment of investments madethrough third-country subsidiaries;  the treatment of rights conferred pursuant to law, such as licences
and permits; and the treatment of certain types of complicated transactions, including transactions
which should not be treated as investments, such as the provision of public funds by a government to
a government-owned institution, and the purchase of services by a government from a private
entity.
214
185. A number of issues were raised regarding the matter of the categories of natural and juridical
persons which should be considered as investors.  Thus, the question was raised whether, in additionto the nationals of a country, permanent residents should be included among the natural persons
considered to be investors.  With regard to ju ridical persons, the following issues were raised:
whether any enterprise formed under the law of a party should be considered an investor of that party,
regardless of the nationality of the ultimate ownership or control of the enterprise;  whether a
combination of place of incorporation, administrative seat, and nationality of control or ownershipshould be used to determine whether an enterprise should be considered an investor of a party;  the
possible merits of a "denial of benefits" clause to prevent non-party nationals from establishing "mail
box" companies solely to gain benefits under an ag reement;  the treatment as investors of all types of
                                                     
211 See document W/61.
212 M/5, paragraph 57.
213 M/5, paragraph 59.
214 M/5, paragraphs 52-56 and 59 and M/6, paragraph 91.WT/WGTI/2
Page 49
business entities recognized by applicable law, including those not requiring formal registration;  and
the treatment as investors of governmental and non-profit organizations.215
(b) Advantages and disadvantages of entering into bilateral, regional and multilateral rules on
investment, including from a development persp ective; (c) the rights and obligations of home
and host countries and of investors and host countries;  (d) the relationship between existingand possible future international cooperation on investment policy and existing and possible
future international cooperation on competition policy.
186. It was stated that an important advantage of bilateral investment treaties was that they could
be tailored to the specific circumstances of the parties concerned and could address specific concerns,
such as development issues.  They could also be concluded more quickly than regional or multilateral
agreements and could improve bilateral economic and diplomatic relations.  Like bilateral investment
treaties, regional agreements on investment were more politically feasible than multilateralagreements as they involved fewer participants and could be more precisely customized to address
individual concerns. Nevertheless, as the number of bilateral investment treaties and regional
agreements continued to proliferate, an economy might sign on to various investment agreements
containing provisions with different standards and disciplines.  This might create confusion for
multinational enterprises operating on a global scale.
216
187. The view was expressed that a comprehensive set of consistent rules among all WTO
Members would allow for a stable, transparent and consistent environment for firms operating in the
global market, whatever their ownership structure or place of incorporation.  The global application of
broadly the same investment disciplines would remo ve the complexity arising for investors from the
existing framework of bilateral and regional investment agreements and thus facilitate compliance.The value of a multilateral set of rules on investment  in enhancing the predictability of the legal and
regulatory environment in host economies was also stressed.  A multilateral régime was likely to be
more stable since an open commitment to investment liberalization could deter economies from
backtracking and would thus give greater confidence to investors.  The point was made that a
multilateral approach should also provide benefits to governments and the peoples they represented.In this regard, it was stated that the complexity for governments of administering a multitude of
investment agreements, possibly with different st andards for investors from different investment
partners, and many with most-favoured-nation treatment commitments incorporated into them,
provided a strong argument in favour of a multilateral set of investment rules.  Another important
consideration concerned the benefits to be derived from incorporating investment rules into an
existing framework of established WTO principles, in particular the principle of non-discrimination.
A multilateral agreement could diffuse conflicts between economies' rules and reduce distortions ofinvestment flows and the inefficient allocation of resources caused by the great number and variety of
regulations on investment issues.
217
188. The point was also made, however, that, while predictability was an important consideration
in investment decisions, it was not obvious that a multilateral set of rules was necessary to ensure
predictability.218  With reference to one written contribution, the point was made that the fact that a
range of instruments existed which, as stated in this contribution, met the basic objective of striking a
balance of rights and obligations for states and investors, might be interpreted as an argument for
maintaining the status quo rather than striving for a multilateral framework.219  In response, it was said
                                                     
215 M/5, paragraphs 54-56.
216 M/5, paragraph 66
217 M/4, paragraphs 60,66 and 67;  M/5, paragraphs 66 and 67 and M/6, paragraph 81.
218 M/4, paragraph 66.
219 M/4, paragraph 66.WT/WGTI/2
Page 50
that this statement should be viewed in its proper context of a factual analysis of existing agreements,
which did not deal with the issue of the rationale of possible multilateral rules.220
189. Another point was that multilateral investment rules were likely to represent the lowest
common denominators acceptable to the participants and that the negotiation of a multilateral
framework would take time.  Prolonged negotiations would inevitably create uncertainties toinvestors.
221  However, it was also stated that, although the level of ambition of a multilateral
agreement could not be as high as that in a bilateral or regional agreement, it would not necessarily
lead to the lowest common denominator.222
190. A prominent theme of the Working Group's ensuing debate was the issue of the development
implications of possible multilateral rules on investment.
191. In this connection,  the observer from UNCTAD informed the Working Group of UNCTAD's
work on criteria to evaluate the development dimension of international investment agreements.  Itwas stated that the starting point of UNCTAD's work in this area was the consideration that
development was the fundamental objective of developing country governments and of the
international community as a whole.  To what extent and how this objective could be served by
international agreements that specifically addressed investment issues was a matter that was currently
receiving considerable attention.  If international agreements could indeed be helpful in this respect,an important issue was how the concerns of the principal actors in this regard, - i.e., host countries,
home countries, investors - could be addressed in a mutually beneficial manner.  It needed to be
recalled in this context that to a large extent  an investment-friendly environment was also a
development-friendly environment.  The requirem ents of such an environment needed to be
determined carefully.  There were various approaches that could be taken in this respect that were notnecessarily mutually exclusive.  One approach wa s to establish a catalogue of development-friendly
elements of international investment agreements.  Such a catalogue could be a checklist of elements,
of issues and concerns, without establishing priori ties or hierarchy, that could be consulted when
negotiating international investment agreements.  It would be compiled to ensure that, when
negotiating agreements, negotiators had indeed considered all relevant issues.  Given the considerablecongruence of an investment-friendly environment and a development-friendly  environment, such a
catalogue would include virtually all issues that needed to be considered in the context of investment
agreements.  A more elaborate version of this approach would be to analyse each of these elements in
greater detail, including to determine how they cont ributed, singly or collectively, to the development
objective of host countries.  This kind of analysis might be necessary in any event because in practice
it was possible that one element would counteract another. A second approach began with the
recognition that not only the contents, i.e., the sp ecific treaty provisions of investment agreements,
needed to be development-friendly, but that their ve ry structure needed to reflect this objective, as
should their implementation in terms of specific actions by various parties involved.  The challenge
was to spell out in operational detail what "structure" meant, beyond the statement of objectives.  On
the other hand, when it came to the contents, the catalogue of development-friendly elements was
relevant.  A third approach would be to identify a set of development objectives that internationalinvestment agreements should serve.  Such objectives could include, for example, securing a stable,
predictable and transparent investment climate;  increasing the level and quality of FDI flows;
strengthening domestic entrepreneurship; and recognizing the non-discriminatory exercise of
governmental regulatory power in pursuing development objectives.
223
                                                     
220 M/4, paragraph 67.
221 M/5, paragraph 66.
222 M/5, paragraph 67.
223 M/5, paragraph 46.WT/WGTI/2
Page 51
192. It was stated that the three approaches outlined by the observer from UNCTAD were
complementary, that the development dimension of an investment agreement should be reflected in
concrete legally operative provisions, and that consideration should also be given to the social
dimension of development.224
193. The point was also made that UNCTAD's work on this subject seemed to be aimed at
exploring how the development dimension could be taken into account in individual elements of a
multilateral framework for investment.  However, it was questionable whether this approach
adequately addressed the fundamental concern that a multilateral agreement, in particular one that
included rules on the pre-establishment phase, would inherently remove the flexibility for developing
countries to pursue development policies tailored to their specific needs.  Rather than assuming that
the development dimension could be accommodated in specific provisions of an agreement, it was
necessary to deal first with the basic question of whether the very notion of a multilateral frameworkon investment was per se  compatible with the need to preserve the ability of governments to pursue
development strategies suited to the specific problems confronted by individual countries.
225
194. In response to the latter point,  it was stated that it should be acknowledged that in order to be
development-friendly an investment régime had to be investment-friendly, and that, in the absence of
disciplines to encourage inward investment, the attainment of the development objectives of anagreement would be difficult.  Another observation made was that a basic question which had to be
addressed in relation to both the pre- and post-establishment phases of investment was whether policy
flexibility, which had been referred to and which was important to all governments, necessitated
discrimination against foreign investment.
226  It was also stated that there was inherently a tension
between the establishment of a multilateral framework in any area and retaining flexibility fornational governments, and that finding a proper balance between them was perhaps the single biggest
challenge.  This could not be met simply by addi ng the development dimension to individual elements
of an agreement;  rather, one also had to look into the structure and design of an instrument and the
guiding objectives which informed its concrete content.
227
195. The argument was advanced that the issue of how the development dimension of international
investment agreements should be approached should be considered in light of the implications of the
discussions on the previous Items of the Checklist.  Insufficient attention had been paid in the
discussion under Item IV to basic development issues, due to a failure to recognize that the work
under the previous Items had generated a number of issues requiring further discussion in the
educative process before any conclusions could be drawn for the work on Item IV.  In this regard, it
was emphasized that progress under Item IV de pended on the extent to which the Working Group
could arrive at a common understanding on these previous items of the Checklist.228  In this
connection, a number of themes which had emerged from the discussions on Items I-III of the
Checklist were mentioned as being particularly rele vant to the consideration of development issues
under Item IV.  It was stated that one important result of the discussion on the determinants of
investment decisions in developing countries was that, while such decisions depended upon factors
such as the availability of natural resources, the existence of a large domestic market, the existence ofa suitable platform for manufacturing exports, the strength of local institutions, the quality of local
infrastructure and the work force and the degree of macroeconomic stability, it had been found that
the existence of an investment agreement was not an important determinant of investment decisions.
Another relevant conclusion from the Group's work under the previous Items was that FDI was not a
panacea, nor the most important factor in development and that national policies might significantly
                                                     
224 M/5, paragraph 47.
225 M/5, paragraph 48.
226 M/5, paragraph 48.
227 M/5, paragraph 49.
228 M/6, paragraphs 68 and 71.WT/WGTI/2
Page 52
influence development-oriented FDI flows.  In part icular, national policies had an important rôle to
play by attracting FDI through a liberal régime, encouraging FDI in priority areas and reducing
possible negative effects of FDI.  In certain circum stances, FDI might need to be phased in at a slower
rate than the rate determined solely by market forces.  Also, the importance of a sound and sustainable
macroeconomic and financial environment could not be overemphasized.  Sectoral targeting policiesmight be effective in addressing not only national but also regional or sector specific objectives.
While non-market capital flows were more amenable to addressing development priorities due to the
inevitable involvement of national governments, fr ee market flows might need stricter disciplines at
the national as well as international levels.  It was questionable whether these disciplines could be
multilateralized, in view of the unique circumstances of each FDI recipient.  Selective and judicious
intervention by governments might often be required to support domestic industry and technology
creation and to ensure a level playing field for domestic enterprises. A correct policy environment wasa necessary prerequisite to the full realization of FD I benefits,  notably in regard to the transfer of
technology, since various studies had pointed out that countries at low levels of development were
likely to be able to induce FDI only into low tech nology activities.  The discussions in the Working
Group had also shown that, while FDI on the whole ha d positive effects, it was essential to consider
possible negative effects, such as restrictions on technology transfer, the impact on balance ofpayments and exchange rates and the possible crowding out of domestic entrepreneurial activity.
229
196. It was also stated, in this connection, that many questions requiring further consideration had
been raised in the Group's discussion under Item II of the Checklist regarding the economic
relationship between trade and investment.  Some of the concluding statements in the Note submitted
by the Secretariat on this subject (W/7) did not adeq uately take into account the complexity of the
issues. The need for an examination of the relationship between investment liberalization and
economic development through historical analysis of investment policies in individual countries had
been raised, and it had been pointed out that the rôle of FDI in economic development went far
beyond its relationship to trade.  Developing countries were net importers of capital and technology
and were faced with a huge competitive gap between their enterprises, particularly small- andmedium-sized, and multinational enterprises.  Developing countries recognized the importance and
value of FDI and foreign technology for their gr owth and development, as evidenced by their
autonomous liberalization of FDI and trade régimes and by their increasing shift towards market and
outward-oriented approaches in economic policy.  However, their experiences showed that the
building up of domestic entrepreneurial, industrial and technological capabilities was essential not
only to cope with, but also to realize the full benefits from, FDI and foreign technology.  Without
sufficient domestic capabilities, FDI and foreign technology seldom permeated the productive systemof the national economy.  Selective and judicious interventions by governments were therefore
considered necessary. Academic studies had shown that FDI had contributed optimally to
development in those countries where governments had played a strong rôle in directing FDI to
certain sectors. Developing countries also needed to employ an appropriate mix of incentives and
performance requirements for FDI to achieve specific developmental and political and socialobjectives.
230
197. In response to these arguments, it was stated that the Working Group had already addressed
many of the points and that it had not neglected the development dimension.  The argument was
advanced that it appeared that underlying these points was a concern regarding the implications of
multilateral rules for the ability of countries to regulate economic activities.  This concern was validand shared by all countries but did not constitute an argument against the benefits of establishing
collective disciplines regarding the exercise of re gulatory authority in certain areas.  Regulatory
sovereignty was adequately protected by the principle of non-discriminatory treatment of foreign
investment.  While it might be justifiable for regulatory purposes to make a distinction between
                                                     
229 M/6, paragraph 69.
230 M/6, paragraphs 70 and 73.WT/WGTI/2
Page 53
investments depending upon objective characteristics, it was difficult to find a rationale for making a
distinction between investments solely on the grounds of foreign ownership.  The principle that
countries could make regulatory distinctions based upon objective factors but subject to the
requirement of non-discrimination on grounds of nationality was widely accepted in international
agreements, including in WTO agreements.231  The point was also made that, while it was true that
favourable market conditions and the existence of a stable domestic legal and regulatory framework
were more important as determinants of investment decisions than adherence to international
investment rules, a favourable domestic environment could change during the lifetime of an
investment.  International rules were therefore important to enhance the stability provided by
domestic rules.  As to whether this purpose was best served by international rules in a bilateral or
multilateral context, it was significant that countries which had concluded a very large number of
bilateral investment treaties had found that the prol iferation of such treaties now created the need for a
more coherent approach in a multilateral setting.232
198. In regard to these comments, the view was expressed that discrimination on grounds of
nationality was common in respect of movement of persons and that there was a need for a consistent
approach to the movement of capital and to the movement of labour.  The point was also made that a
multilateral framework on investment might enhance predictability from the perspective of providingprotection to foreign investment, which was important for capital exporting countries, but that, from
the perspective of capital-importing countries, a multilateral approach would not enhance
predictability, given that there was no guarantee that it would actually lead to increased inflows of
FDI.
233  Since the lack of a multilateral investment fr amework had not hindered investment flows, and
since there was no evidence that the creation of such a multilateral framework would lead to increasedinvestment flows and a more even spread of in vestment, the costs of embarking on a multilateral
investment negotiation needed to be weighed against benefits that were uncertain.
234
199. In response to these arguments, it was stated that, since a number of Members were both
capital exporting and capital importing countries, the dissimilarities in perspective were not as great as
had been suggested and that protection of foreign investment was important not only for capital-exporting countries but also for host countries insofar as investment was a source of their economic
growth.
235   Regarding the issue of the impact of multilateral rules on investment flows, it was stated
that a parallel could be drawn with multilateral rules on trade liberalization. What could be guaranteed
by such rules was not increased trade flows per se  but the existence of increased opportunities to
trade, which could be exploited by firms depending upon their competitiveness.  The same concept
applied to multilateral rules on investment.236  Whether investment flows would actually increase as a
result of such a framework was impossible to predict, just as there had been no absolute certainty thata multilateral framework for trade would lead to increased trade at a time when the GATT was
concluded.
237  The need to view this matter in a long-term perspective was underscored, in which
connection the point was made that in the case of trade, efforts at multilateral liberalization over the
past fifty years had sometimes been slow in producing results.  The effect that a multilateral
framework would have on investment flows also depended upon whether it would address
impediments to FDI that arose from unnecessary  regulations on FDI and differences in trade
régimes.238  Reference was also made to the experience of one Member which showed that investors
with an interest in investing in a particular ma rket often encouraged the conclusion of bilateral
                                                     
231 M/6, paragraph 72.
232 M/6, paragraph 72.
233 M/66, paragraph 73.
234 M/6, paragraph 78.
235 M/6, paragraphs 74 and 81.
236 M/6, paragraph 74.
237 M/6, paragraph 80.
238 M/6, paragraph 81.WT/WGTI/2
Page 54
investment treaties because they regarded such trea ties as providing a margin of comfort regarding the
investment climate in the country in question.  The fact that in many cases negotiations on bilateral
investment treaties were initiated at the request of third countries showed that in their perspective such
treaties made a difference in attracting investment.239  The argument was also advanced that, although
it was difficult to point to a single cause of the increase in FDI flows, there was a clear correlationbetween this increase and the widespread liberalization of investment régimes.  This raised the
question of how to consolidate this liberalization by international rules.  In this regard, bilateral
treaties were a second-best approach, as compared with a multilateral approach.  Thus, more relevant
than the question of whether the lack of a multilateral framework for investment had hindered
investment flows was the value of such a framew ork in avoiding a backsliding of liberalization.
240
200. The point was made that the notion of predictability as a possible rationale for multilateral
investment rules was more relevant to long-term than to short-term investment.  This highlighted theimportance of clarifying whether such rules should cover both long-term and short-term capital
flows.
241
201. The view was expressed that the contours of any set of rights and obligations on investment
would depend on whether the objective was the promotion, treatment and protection of investment, its
liberalization, or both.  The definition of investment would also be relevant in identifying such rightsand obligations.  Broadly speaking, the host country would need to ensure the effective promotion,
fair treatment and full protection of FDI, while th e home country would need to respect the policies
and rules of the host country and actively assist in the realization of its objectives, or at the very least,
not undermine such objectives.  The crux of the matter was how multilateral rules could take into
account the development dimension in a more meaningful manner than through references inpreambles and through transition periods.  The deve lopment dimension should be manifest in each of
the elements of any set of multilateral rules on inve stment.  For example,  it might be argued that in
respect of the issue of the right to invest or establish, which was invariably linked to the matter of
extending national treatment to foreign investors at the entry stage, the incorporation of the
development dimension would require that there be no such automatic right.  This would ensure thathost countries retained the ability to screen, to allow and to oversee only the types of FDI that would,
on the one hand, best suit their industrial policies and developmental needs and, on the other, not stifle
both investment and development.   Also meriting further examination was the question of whether a
positive list or negative list approach, or a combination of both, should be used, especially in light of
the experience gained in the negotiation and implementation of the GATS.  It was likely that a
positive list would be very short and a negative list very long because host countries would wish to
maintain a certain level of flexibility in screening and approving investment.  In addition to the issue
of the use of a positive list or a negative list, the advantages and disadvantages of developmental
exceptions should be considered.  Taking into account existing WTO obligations, the issue of
performance requirements and incentives was another area in which the development dimension could
be manifested in order to allow developing host countries the flexibility to institute certain measures
that would permit the establishment and growth of ancillary industries, whether upstream or
downstream.  In regard to payments and financial transfers, the ability to freely repatriate or remit
earnings was an important consideration for the home country or investor.  At the same time,
investors were expected to bring in fresh capital so as not to put undue pressure on the domestic
financial market of host countries.  The transfer of technology was another area where the
development dimension should be addressed, althoug h it was not clear how binding obligations might
be formulated, given that this was primarily a matter for private enterprises.  This issue was
nonetheless important for developing host countries, especially those which needed to display an
                                                     
239 M/6, paragraph 83.
240 M/6, paragraph 80.
241 M/6, paragraph 76.WT/WGTI/2
Page 55
economic justification for their production and export capability and thus avoid being vulnerable to
anti-circumvention measures in the framework of anti-dumping laws.242
202. The point was made that openness to, and non-discriminatory treatment of, foreign
investment were not incompatible with development.  It was stated in this regard that, contrary to the
impression that might be conveyed by the discussions in the Working Group, there was no singleconception of the development dimension of a multilateral agreement.  Reference was made to the
experience of one Member which had based its development approach on the attraction of FDI and
which viewed the development dimension within a regulatory framework that permitted openness and
predictability.  A multilateral agreement would contribute to these objectives.
243
203. The view was expressed that the development dimension should not be viewed from the angle
of a confrontation between home countries of multinational enterprises and host countries.  The key to
giving effect to the development dimension of a possible set of multilateral investment rules was anappropriate degree of flexibility so that it would neither subject developing countries to an unqualified
application of such rules nor provide for a total exemption of developing countries from disciplines.
The GATS exemplified the type of approach that could be taken with respect to the development
dimension.  Another aspect of flexibility was the need to take into account the interests of both capital
exporting and capital importing countries.  For example, developing countries had a legitimate interestin the promotion of technology transfer on reasonable commercial terms as part of technological
capacity building, while developed countries had an equally legitimate interest in the adequate
protection of intellectual property rights.
244
204. The point was made that, given that FDI involved activities of private firms, a framework of
rules on the treatment to be accorded to private firm s by governments would need to be balanced by a
set of rules on the conduct of firms, notably in the field of competition policy.245
205. The point was made that the development perspective of a future course of action should be
addressed more fully, through a deepening and widening of the debate in the Working Group, while at
the same time existing agreements should be allowed to continue and evolve organically.  In parallel,
work might be advanced on some issues relating to rights and obligations.  In this context, a common
definition of investment would have to be explored further, while there was also a need for further
work on the issue of the admission of investment.  In regard to the issue of obligations of investors,  it
would be useful to explore further the OECD Guid elines for Multinational Enterprises, the draft UN
Code of Conduct for Transnational Corporations a nd the UN set of Multilaterally Agreed Equitable
Principles for the Control of Restrictive Business Practices.246  It was also stated that there should be a
more detailed examination of the costs and benefits of a multilateral framework on investment and
that future discussions on the development impact of FDI should be more concrete and focused.247
206. It was stated that differences between bilateral investment agreements and a multilateral
framework for investment existed in three principal areas:  the negotiation of rules, the substance of
rules and the use of rules.   It was argued in this connection that, with regard to the negotiation of
rules,  a distinction could be made between bilateral agreements and a multilateral framework in terms
of fairness and equity, efficiency and length of time of negotiations.  While the negotiation of abilateral investment agreement, especially an agreement between a developing country and a
developed country might be affected by the unbalanced political and economic power relations
                                                     
242 M/6, paragraph 79.
243 M/6, paragraphs 75 and 84.
244 M/6, paragraph 77.
245 M/6, paragraph 76.
246 M/6, paragraph 71.
247 M/6, paragraphs  81 and 82.WT/WGTI/2
Page 56
between the  countries in question, this risk was reduced in a multilateral negotiation.  Even though
there were differences between countries, obligations under a multilateral agreement could be tailored
to those acceptable to all countries.  A multilateral approach could enable countries to take a
progressive approach to liberalization.  The expans ion of the existing network of bilateral investment
agreements was a more costly and inefficient appr oach to provide the necessary legal framework for
the growing globalization of economic activity than the creation of a multilateral investment
agreement, which could be built on the common elements of existing bilateral agreements.  However,
the negotiation of a multilateral agreement was likely to take more time than the negotiation of
bilateral investment agreements.  With regard to differences between bilateral investment agreements
and a multilateral agreement in terms of substantive rules,  it was argued that a multilateral agreement
could resolve the problem of the inconsistencies between bilateral investment agreements,  and that,
by negotiating a multilateral agreement on investment in the WTO,  consistency of multilateralinvestment rules with the GATS, the TRIMs Agreement and other WTO provisions could be ensured.
A multilateral agreement would also provide more scope for harmonization of rules and, since
changes to the rules would need to be agreed on by all parties, would result in greater predictability of
rules.  The periodical review of a single set of rules in a multilateral framework was more efficient
and less time-consuming than the review of the numerous existing bilateral investment agreements.  Itwas also argued that,  compared with the many different rules contained in bilateral investment
agreements, the existence of a single set of rules in a multilateral framework would enhance the
predictability for investors,  and that dispute settl ement procedures were likely to be more fair and
effective in a multilateral context than in a bilatera l context.  The establishment of investment rules in
a multilateral organization could also enlarge the geographical scope of application of such rules ascountries acceding to that organization would accept all its rules as a package.
207. It was argued that another important advantage of multilateral investment rules concerned the
development dimension.  A multilateral agreement which encompassed developed and developing
countries would necessarily take into account the implications of all of its provisions for developing
countries, while ensuring mutual advantages and increased benefits for all parties.  Such an agreementwould therefore need to protect development objectives, for example by allowing for specific
derogations for developing countries.  The desirabi lity of a multilateral framework on investment also
arose from the need for a more integrated treatment of trade and investment in the same multilateral
framework, the contribution which a multilateral framework could make to consolidating the
unilateral liberalization of investment regimes which had occurred over the last decades,  the need to
provide disciplines to avoid distortions arising from the competition for FDI, the greater consistency
and effectiveness of multilateral rules,  as compar ed to the diversity of the existing international
investment agreements, and the possibility to build on established WTO principles and dispute
settlement mechanisms.
208. The view was expressed that, while the creation of multilateral rules on investment was
desirable,  this did not mean that multilateral rules should replace bilateral investment agreements.
Rather, multilateral investment rules and bilateral investment agreements could be complementaryand mutually reinforcing.  In this context, it was also stated that it was doubtful whether a multilateral
framework on investment could remove all the deficiencies of bilateral investment agreements.
209. The point was made that,  to substantiate the argument that the establishment of a multilateral
framework on investment would entail significant benefits, especially when compared with existing
bilateral investment agreements,  it would need to  be shown that such a fr amework would provide for
the same degree of flexibility as bilateral investment agreements for countries to pursue development
objectives while attracting foreign investment.  It was also necessary to address the point that there
remained uncertainty as to the benefits of such a framework in terms of stimulating flows of FDI and
promoting the transfer of technology to developing c ountries.  In this regard, it was stated that the
propositions advanced so far in favour of a multilateral framework on investment were too general tobe persuasive.  The assertions that obligations under a multilateral agreement could be tailored to beWT/WGTI/2
Page 57
those acceptable to all countries,  and that the unique situation of each country could be
accommodated in such an agreement,  did not seem very plausible in the light of recent experiences in
multilateral negotiations.  Similarly, the view that a multilateral framework was preferable to bilateral
investment agreements because such bilateral agreements were affected by power relations between
the countries in question, was contradicted by the fact that the countries which were advocatingbilateral investment agreements were the developing countries.  Moreover, the idea that power
relationships would not come into play in a multilate ral context was questionable.  With regard to the
point that a multilateral agreement would contribute to enhancing predictability because there would
be less occasion for changes, it was stated that if, as argued, bilateral investment agreements involved
an unequal power relationship, it was highly unlikely that such agreements would be the subject of
frequent changes.
210. In response to the comment that rules on trade or investment, whether in a bilateral or
multilateral context could not guarantee an increase in trade or investment flows,  but could only
guarantee the existence of increased opportunities to trade and investment,  it was stated that,  while it
was obvious that no guarantee could be given that multilateral rules on investment would lead to an
increase in FDI flows,  it was incumbent upon the proponents of such rules to point out that the
potential benefits of such rules outweighed their potential costs.
211. It was stated that the fact that the debate in the Working Group on a possible multilateral
framework on investment had been rather general was due to the fact that this debate had started
rather late.  As part of the Group's future work, there should be a more detailed discussion on various
possible types of rules which could be provided for in a multilateral framework.
212. Comments were made on a number of specific issues raised in a proposal made in one written
contribution that the Working Group examine common elements of existing international investment
instruments in order to determine whether or not su ch elements should be incorporated into future
multilateral treaties.
248
213. In this connection, the view was expressed that the principle of national treatment was the
cornerstone of a scheme that would promote growth of investment flows at a global level and that it
was therefore necessary to guarantee national treatment in the fullest manner possible, on the basis of
clear and precise concepts and in a manner that ensured transparency.  National treatment should
apply not only to established investment but also to  the pre-establishment phase.  It should apply both
de jure  and de facto and at both federal and sub-federal levels of government.  Clear criteria should be
developed to identify the potential investor.  Exceptions, reservations and temporary safeguards
would be necessary but these had to be explicit and clearly identified and subject to control.  National
treatment should be of a general character, and provision should be made for the removal andprogressive liberalization of sectoral reservations within appropriate timetables.  It might be necessary
to allow for various types of sectoral reservations, for example temporary reservations, that would be
subject to pre-set timetables for removal and other types of reservations that would be subject to
periodic rounds of negotiation.  General exceptions should not go beyond what had been established
in the WTO agreements. A temporary safeguard might be necessary for serious balance-of-paymentsdifficulties,  the invocation of which would be subject to verification.  The preceding considerations
also applied to the issue of MFN treatment, prov ided, however, that MFN treatment be considered as
a minimum advantage and as such be subject only to general exceptions and not to sectoral
reservations and temporary derogations. MFN treatment should also be accorded unconditionally.
249
214. It was pointed out that agreements which provided for the application of national treatment to
both the pre-establishment and the establishment phase of investment generally adopted a negative list
                                                     
248 M/4, paragraph 61.
249 M/5, paragraph 63.WT/WGTI/2
Page 58
approach, which meant that the national treatment obligation applied to all laws, regulations and
sectors, except those which were the subject of explicit reservations.  Such agreements also usually
contained a prohibition of the introduction of new measures incompatible with the national treatment
principle.  With regard to the principle of MFN tr eatment, the point was made that, in addition to a
standstill commitment and specific reservations, exce ptions to this principle were frequently provided
for in regard to regional trade agreements and bilateral taxation agreements.
215. It was stated that the contents of the national treatment principle, its relationship to the MFN
principle, and the scope and nature of exceptions to national treatment should be a central theme of
further work in the Working Group.
216. In regard to the issue raised in the above-mentioned proposal of the advantages and
disadvantages of negative list and positive list approaches, the point was made that this matter needed
to be considered in the light of the purpose of an agreement.  If the purpose was liberalization of rules,the principles of national treatment and MFN should apply and a negative list should reflect
temporary exceptions.  The GATS was a hybrid of the two approaches, containing a positive listing of
sectors and a negative listing of limitations on market access and national treatment.  Given that the
purpose of international instruments on investment was to provide transparency and predictability of
treatment, and that negative lists outlined exceptio ns to general treatment, the question arose as to
whether negative lists should represent permanent exceptions or areas which were currently not in
conformity but which would be brought into conformity through gradual liberalization.  Another
relevant point was that the majority of bilateral investment treaties applied MFN and national
treatment standards to investment only once it had been admitted.  This underlined the importance of
the definition of investment and how certain principles would be applied to the pre- and post-establishment phase of an investment.  This could also suggest that any definition related only to post-
establishment investment.  As a general matter, it was important to ensure that any approach
converged with that of the GATS.
250
217. With respect to the issue of procedures for investment approval, the view was expressed that
transparency in the mechanism would be an important factor.  A transparent screening process did notnecessarily impede FDI but, rather, might be a predictable factor in the administration of FDI and not
a determining factor in FDI decisions.
251
218. On the question of whether mechanisms for investor-state disputes should be provided and
whether the scope of such disputes should be limited to investment protection, the view was expressed
that there might be a need to make a distinction between the pre- and post-establishment phases of
investment. Given the intergovernmental nature of the WTO, the issue of investor-state dispute
settlement in the WTO required careful examination.  However,  there could be rules requiringdomestic judicial review.
252
219. It was stated that issues such as the merits of positive and negative list approaches and the
nature of dispute settlement procedures raised complex questions that might usefully be discussed in
the Working Group from an educational perspective but that it would be premature to attempt to reach
conclusions.  The point was made that difficulties had been encountered with regard to the use of anegative list approach in the OECD negotiations on a Multilateral Agreement on Investment and that
the experience with the GATS appeared to indicate that a positive list approach was preferable when a
new area was, for the first time, the subject of liberalization at a multilateral level.
253
                                                     
250 M/5, paragraph 64.
251 M/5, paragraph 64.
252 M/5, paragraph 64.
253 M/5, paragraph 65.WT/WGTI/2
Page 59
220. Another subject discussed in the Working Group with respect to the issue of rights and
obligations of home and host countries and of investors and host countries was the OECD Guidelines
for Multinational Enterprises.  At the request of the Working Group, the observer from the OECD
made a contribution on the experience with these Guidelines (W/40).  In explaining the background to
these Guidelines, it was stated that their adoption in 1976 as part of the Declaration on InternationalInvestment and Multinational Enterprises reflected a desire of OECD member countries to address in
a balanced manner related issues of international c ooperation in the field of international investment.
The key elements of the Declaration were a commitment of a political character by the member
countries to offer foreign-controlled enterprises op erating on their territories national treatment and a
set of recommendations to multinational enterprises on how they should behave in the territory of
OECD member countries.  While the Guidelines were not legally binding, the OECD governments
were committed to promoting their observance and they were the subject of tripartite cooperationinvolving the business and labour communities.  The object of the Guidelines was the behaviour of
multinational enterprises within the territories of the OECD member countries, but the introductory
paragraphs of the Guidelines made it clear that there was an expectation on the part of OECD
governments that these enterprises would behave in accordance with the Guidelines wherever they
operated around the world.  The Guidelines were not designed to introduce different norms formultinational enterprises and domestic enterprises.  Areas covered by the Guidelines included
competition policy, environment, disclosure of information, and employment and industrial relations.
Regarding the implementation of the Guidelines, provision had been made for the establishment by
member countries of national contact points that were responsible for conducting relations with
parties interested in the Guidelines, particularly  the business and labour communities,  and that were
also to act as channels for contacts with government s of other countries that might be interested in a
particular case.  Within the OECD, the Committee on International Investment and Multinational
Enterprises ("CIME") had the responsibility for matters relating to the implementation of the
Guidelines, for conducting periodic reviews and for handling specific issues that arose.  One of the
features of the follow-up process was the possibility of the adoption by CIME of clarifications of theGuidelines when a particular case had not been resolvable at the national level and had raised issues
that warranted a clarification of the Guidelines.  Most of the clarifications adopted to date related to
the sections on labour relations.  The Guidelines were reviewed periodically, normally every five
years.  A review was aimed primarily at assessing the experience with implementation of the
Guidelines and did not necessarily lead to changes in their text.  However, it was possible that such
textual changes resulted from reviews, as for example on the occasion of the last review when a
chapter on environmental protection had been added.
254
221. In regard to the relationship between the Guidelines and the Multilateral Agreement on
Investment (MAI)  which was being negotiated in the OECD,  it was stated that there was broad
support among the countries participating in these negotiations on the following principles:  first,
countries would use this occasion to reaffirm their commitment to the Guidelines;  second, non-
OECD countries acceding to the MA I would be expected to join in this commitment and establish
national contact points to ensure effective follow-up in their countries;  third, the text of the
Guidelines would be annexed to the MAI without, however, altering their legal status;  and, finally,
arrangements would be put into place within th e OECD to ensure that non-OECD member countries
would be able to participate fully in the CIME on an equal footing with OECD member countries.255
                                                     
254 M/5, paragraph 39.
255 M/5, paragraph 40. The representative of the OECD answered specific questions raised by Members
regarding the mechanism for ensuring compliance with the Guidelines;  the reasons for their legally non-bindingcharacter; the experience with specific issues that had arisen in regard to their implementation;  the relationshipbetween the Guidelines and the OECD National Treatment Instrument;  and whether it was possible for non-
OECD member countries to raise issu es relating to non-compliance with the Guidelines before the relevant
OECD bodies. M/5, paragraph 41.WT/WGTI/2
Page 60
222. At the request of the Working Group, UNCTAD submitted a contribution on the differences
between the OECD Guidelines for Multinational Enterprises and the draft UN Code of Conduct for
Transnational Corporations (W/52).  It was stated that the OECD Guidelines were part of a package
that also contained decisions on national treatment, investment incentives and conflicting
requirements as part of the Declaration on International Investments and Multinational Enterprises.On the other hand, the draft UN Code, negotiations on which had been terminated in the early 1990s
without adoption of the Code, would have addressed in a single, comprehensive instrument both the
rights and responsibilities of states and foreign investors. Like the Guidelines, the draft UN Code had
been intended to be a legally non-binding instrument.  Regarding the definition of foreign investors,
both the Guidelines and the draft UN Code adopted a broad definition of transnational corporations,
covering public and private enterprises and equity and non-equity forms of investment.  Both the draft
UN Code and the Guidelines established procedures for follow-up review and amendment.  In regard
to norms for the conduct of enterprises, subjects that were dealt with in both the draft UN Code and
the Guidelines included:  applicability of host country national laws to foreign enterprises;  adherence
to general policy goals and development objectives of host countries;  cooperation with host country
governments;  non-interference in internal political affairs of host countries;  abstention from corrupt
practices;  disclosure of information;  competition;  balance of payments and financing; taxation andtransfer pricing;  employment and labour relations;  environmental protection;  consumer protection
and technology transfer.  In addition, the draft UN Code contained provisions on respect for human
rights and fundamental freedoms, adherence to socio-cultural values of host countries and review and
renegotiation of contracts.  Regarding standards of treatment of transnational corporations by host
governments, the draft UN Code covered a number of issues not dealt with in the OECD Declaration,for example, expropriation and compensation and the settlement of disputes.  In regard to
geographical coverage, the draft UN Code was intended to be a universal instrument, while the
Guidelines were formally applicable only within the OECD area.  It was difficult to compare the
precise formulations of standards in the draft UN Code and in the OECD Guidelines as there had been
many versions proposed and discussed during the course of the negotiations of the draft UN Code.
256
223. It was also stated that one important difference between the OECD Guidelines and the draft
UN Code was that the Guidelines addressed only the behaviour of enterprises and did not contain
provisions involving commitments by governments.  However, the Guidelines were part of a package
that included other elements that brought into  play commitments by governments, notably a
commitment to accord foreign enterprises national tr eatment.  The Guidelines themselves and other
elements of the Declaration on International Investment and Multinational Enterprises were in the
nature of political commitments but certain foll ow-up procedures had been established through a
legally binding OECD Council Decision.  The Guid elines did not contain a formal definition of
multinational enterprises.  They contained a sentence  that described the fact that these entities were
enterprises operating in more than one country but there was no attempt to define the term
"enterprise" as such.257
224. Attention was drawn to the complementarity between the OECD Guidelines for Multinational
Enterprises and recent business-driven initiatives to develop voluntary codes of conduct for domestic
and international business activities.  Another observation made was that it was interesting that both
the draft UN Code of Conduct for Transnationa l Corporations and the OECD Guidelines had
attempted to strike a balance between obligations of governments and obligations of enterprises.  In
the draft UN Code this balance had been sought within a single instrument, while in the case of theGuidelines, it was reflected in separate but related instruments.  This notion of balance should also be
                                                     
256 M/5, paragraph 43.
257 M/5, paragraph 43.WT/WGTI/2
Page 61
kept in mind in discussions in the WTO and was particularly pertinent to the relationship between
work on investment and work on competition.258
225. At the request of the Working Group, UNCTAD made a contribution which, in addition to a
comparison between the OECD Guidelines for Multinational Enterprises and the draft UN Code of
Conduct for Transnational Corporations, contained the text of this draft Code as well as of the draftCode on the Transfer of Technology and the set of Multilaterally Agreed Equitable Principles and
Rules for the Control of Restrictive Business Practices.
259
D. RECOMMENDATION
226. Paragraph 20 of the Singapore Ministerial Declaration provides, inter alia, that the General
Council will keep under review the work of th e Working Group on the Relationship between Trade
and Investment established under that provision and will determine, after two years, how the work of
the Working Group should proceed.
227. The Working Group recommends that the General Council decides as follows:
The Working Group shall continue the educational work that it has been  undertaking on the
basis of the mandate contained  in paragraph 20 of the Singapore Ministerial Declaration.
The Work of the Working Group, which shall be reviewed by the General Council, shall
continue to be based on issues raised by Members with respect to the subjects identified in theChecklist of Issues Suggested for Study
260.  It is understood that this decision is without
prejudice to any future decision that might be taken by the General Council, including in the
context of its existing work programme.
                                                     
258 M/5, paragraphs 42 and 44.
259 Document W/52.
260 See Annex 1.WT/WGTI/2
Page 62
ANNEX 1
CHECKLIST OF ISSUES SUGGESTED FOR STUDY
Non-Paper by the Chair
Revision
It was widely recognized that the Working Group's work programme should be open, non-
prejudicial and capable of evolution as the work pr oceeds.  It was also emphasized that all elements,
not only category I, should be permeated by the de velopment dimension.  Particular attention should
be paid to the situation of least-developed countries.  In pursuing the items of its work programme, theWorking Group should avoid unnecessary duplication of work done in UNCTAD and other
organizations.
_______________
I. Implications of the relationship between trade and investment for development and economic
growth, including:
- economic parameters relating to macroeconomic stability, such as domestic savings,
fiscal position and the balance of payments;
- industrialization, privatization, employment, income and wealth distribution,
competitiveness, transfer of technology and managerial skills;
- domestic conditions of competition and market structures.
In this work, the Working Group should seek to benefit from the experience of Members at
different stages of development and take account of recent trends in foreign investment flows
and of the relationship between different kinds of foreign investment.
II. The economic relationship between trade and investment:
- the degree of correlation between trade and investment flows;- the determinants of the relationship between trade and investment;- the impact of business strategies, practices and decision-making on trade and
investment, including through case studies;
- the relationship between the mobility of capital and the mobility of labour;- the impact of trade policies and measures on investment flows, including the effect of
the growing number of bilateral and regional arrangements;
- the impact of investment policies and measures on trade;- country experiences regarding national investment policies, including investment
incentives and disincentives;WT/WGTI/2
Page 63
- the relationship between foreign investment and competition policy.
III. Stocktaking and analysis of existing international instruments and activities regarding trade 
and investment:
- existing WTO provisions;- bilateral, regional, plurilateral and multilateral agreements and initiatives;- implications for trade and investment flows of existing international instruments.
IV. On the basis of the work above:
261
- identification of common features and differences, including overlaps and possible
conflicts, as well as possible gaps in existing international instruments;
- advantages and disadvantages of entering into bilateral, regional and multilateral rules
on investment, including from a development perspective;
- the rights and obligations of home and host countries and of investors and host
countries;
- the relationship between existing and possible future international cooperation on
investment policy and existing and possible future international cooperation oncompetition policy.
                                                     
261 The question of the timing of work under section IV was the subject of a decision taken by the
Working Group at its meeting of 2-3 June 1997.WT/WGTI/2
Page 64
ANNEX 2
Summary of contributions received in the Working Group
on the Relationship between Trade and Investment
Symbol
(WT/WGTI/W/-)Member / Other
sourceWhere introduced
(Reference in Minutes)Topic
W/1 European
Community andmember StatesM/1, Paras. 7-9 General submission on issues for
study
W/2 Switzerland M/1, Paras. 7-9 General submission on issues for
study
W/3 India M/1, Paras. 7-9 General submission on issues for
study
W/4 OECD M/1, Para. 4 Presentation on relevant activities
of organization
W/5 WORLD BANK M/1, Para. 4 Presentation on relevant activities
of organization
W/6 UNCTAD M/1, Para. 4 Presentation on relevant activities
of organization
W/7 + Corr.1 M/2, Para. 18 The Relationship between Trade
and Foreign Direct Investment –Note by Secretariat
W/8 + Adds.1-4 M/2, Paras. 4-8 Implications of the Relationship
between Trade and Investment for
Development and EconomicGrowth – Work Undertaken inOther IntergovernmentalOrganizations
W/9 APEC M/2, Para. 41 Presentation on relevant activities
of organization
W/10 Hong Kong,
ChinaM/2, Para. 28 Experience of Hong Kong, China
regarding the relationship betweenFDI and development;  therelationship between trade andinvestment and betweeninvestment and competition
policy;  WTO provisions relevant
to investment;  possibleapproaches for addressing theinterrelationship between trade,investment, competition
W/11 Japan M/2, Para. 12 Impact of FDI on development and
growth;  the relationship between
trade and investment;  existing
international instruments andactivities regarding trade andinvestment
W/12 European
Community and
member StatesM/2, Para. 31 Analysis of the relationship
between trade and FDI and
determinants of FDI, based on
study of outward FDI from theUnited KingdomWT/WGTI/2
Page 65
Symbol
(WT/WGTI/W/-)Member / Other
sourceWhere introduced
(Reference in Minutes)Topic
W/13 Poland M/2, Para. 13 The rôle of FDI in Poland's
transition from a centrally-planned
economy to a free market
economy
W/14 United States M/3, Para. 4 Trade of foreign affiliates in the
United States;  FDI relationshipbetween the United States and theEuropean Union;  US-EU goods
and services trade between related
parties
W/15 Colombia M/3, Para. 13 Impact of FDI on the Colombian
economy;  the influence of tradepolicy on FDI;  FDI policy ofColombia
W/16 Korea M/3, Para. 16 Trends in FDI;  rôle of FDI in
Korea's economic development;
the relationship between trade and
investment
W/17 Cuba M/3, Para. 12 Impact of FDI on the Cuban
economy
W/18 Japan M/3, Para. 4 Japan's historical experience with
FDI policies;  analysis of existinginternational investmentagreements
W/19 Canada M/3, Para. 39 Stocktaking of existing agreements
W/20 Bolivia Trends in FDI;  rôle of FDI in the
Bolivian economy;  theinterrelationship betweeninvestment, trade and technologyand implications for development;analysis of existing investment
agreements;  issues relevant to a
possible multilateral frameworkand implications for development
W/21 UNCTAD Reports on expert meetings on
investment held in May andSeptember 1997 and on the secondsession of the Commission on
Investment, Technology and
Related Financial Issues held on29 September-3 October 1997
W/22 M/4, Para. 45 Bilateral, Regional, Plurilateral
and Multilateral Agreements –Note by the Secretariat
W/23 Australia M/3, Para. 29 WTO provision relevant to
investment
W/24 M/4, Para. 30 Availability of Statistics on
Foreign Direct Investment and onthe Activities of Foreign Affiliates– Note by the SecretariatWT/WGTI/2
Page 66
Symbol
(WT/WGTI/W/-)Member / Other
sourceWhere introduced
(Reference in Minutes)Topic
W/25 M/4, Para. 30 The Relationship between Trade
and Foreign Direct Investment:
Foreign Direct Investment
Originating in DevelopingCountries – Note by the Secretariat
W/26 OECD M/4, Para. 8 Analysis of the relationship
between FDI and economicdevelopment on the basis of case
studies of six developing countries
W/27 United States M/4, Para. 6 Effect of foreign affiliates on
science and technologydevelopment in the United States
W/28 + Corr.1 Switzerland M/4, Para. 47 Bilateral investment treaties
W/29 United States M/4, Para. 47 Bilateral investment treaties
W/30 European
Community andmember StatesM/4, Para. 57 Identification of common features
and differences of existinginternational investmentinstruments from the perspective
of the European Community and
its member States (including rightsand obligations of home and hostcountries and of investors and hostcountries)
W/31 Costa Rica M/4, Para. 5 Trends in FDI;  impact of FDI on
the Costa Rican economy;  FDI
policy of Costa Rica
W/32 United States M/4, Para. 58 Faced divestiture
W/33 Hong Kong,
ChinaM/4, Para. 59 Identification of differences,
possible conflicts and gaps inexisting international investmentinstruments
W/34 Japan M/4, Para. 47 Bilateral investment treaties;
common elements of existing
investment treaties;  suggestions
regarding treatment of specificissues in future multilateral work
W/35 Cuba M/4, Para. 29 Outward FDI from Cuba
W/36 Canada M/4, Para. 59 Stocktaking of existing
agreements;  benefits ofmultilateral rules
W/37 Turkey M/4, Para 28 Evolution of FDI policy of
Turkey;  legal framework of FDI
in Turkey;  impact of FDI
liberalization on FDI flows;relationship between trade andFDI
W/38 M/5, Para. 7 Synthesis of the Information made
available to the Working Group on
the Links between Foreign Direct
Investment and Development –Note by the Secretariat
W/39 India M/4, Para. 36 Relationship between the mobility
of capital and the mobility oflabourWT/WGTI/2
Page 67
Symbol
(WT/WGTI/W/-)Member / Other
sourceWhere introduced
(Reference in Minutes)Topic
W/40 OECD M/5, Para. 39 Guidelines for Multinational
Enterprises
W/41 ASEAN M/5, Para. 18 Investment incentives
W/42 Korea M/5, Para. 27 Bilateral investment treaties
W/43 Japan M/5, Para. 52 Definition of investment
W/44 W/44 WAS NEVER ISSUED
W/45 Cuba M/5, Para 30 Measures affecting Cuba's trade
and investment relations
W/46 UNCTAD M/6, Para. 53 Report on the UNCTAD expert
meeting on Existing Regional andMultilateral InvestmentAgreements and theirDevelopment Dimension,
1-3 April 1998
W/47 Peru M/5, Para. 27 Bilateral investment treaties
W/48 Niger M/6, Para. 40 Bilateral investment treaties
W/49 Korea M/5, Para. 52 Definition of investment
W/50 UNCTAD M/6, Para. 53 Calendar of UNCTAD activities in
the field of investment
W/51 Turkey M/6, Para. 40 Bilateral investment treaties
W/52 UNCTAD M/6, Para. 64 Comparison of draft UN Code of
Conduct on TransnationalCorporations and OECDGuidelines for Multilateral
Enterprises;  texts of UN
documents on transnationalcorporations, transfer oftechnology and restrictive businesspractices
W/53 UNCTAD M/6, Para. 53 Recent UNCTAD publications
relevant to the Working Group
W/54 European
Community and
member StatesM/6, Para. 59 Different approaches to the
admission of investment in
international investmentagreements
W/55 United States M/6, Para. 23 The relationship between foreign
investment and competition policy
W/56 M/6, Para. 9 The Impact of Investment
Incentives and Performancerequirements on International
Trade – Note by the Secretariat
W/57 Korea M/6, Para. 24 The relationship between foreign
investment and competition policy
W/58 UNCTAD M/6, Para. 54 Agreed Conclusions of the Third
Session of the UNCTADCommission on Investment,Technology and Related Financial
Issues; 14 September 1998
W/59 Japan M/6, Para. 29 The relationship between foreign
investment and competition policy
W/60 Costa Rica M/6, Para. 86 Definition of investment
W/61 IMF M/6, Para. 93 Definition of investment
W/62 Korea M/6. Para. 10 Investment incentivesWT/WGTI/2
Page 68
Symbol
(WT/WGTI/W/-)Member / Other
sourceWhere introduced
(Reference in Minutes)Topic
W/63 European
Community and
member StatesThe relationship between foreign
investment and competition policy
W/64 Mexico Investment incentives
W/65 The Effects of Foreign Direct
Investment on Development:Technology and other Know-howTransfers and Spillovers - Note bythe Secretariat
W/66 International Intergovernmental
Organizations – Observer Status in
the Working Group on theRelationship between Trade andInvestment
W/67 Japan The differences between
multilateral and bilateralagreements on investment rule-
making
W/68 Costa Rica Treatment of Investment and
Investors:  National Treatment andMost-Favoured-Nation Treatment
__________