WORLD TRADE
ORGANIZATIONWT/WGTI/W/99
13 March 2001
(01-1207)
Working Group on the Relationship
between Trade and InvestmentOriginal:  English
COMMUNICATION FROM SINGAPORE
Reproduced hereunder is a statement delivered by the representative of the Permanent
Mission of Singapore at the 7 and 8 March meeting of the Working Group on the Relationshipbetween Trade and Investment.
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AGENDA ITEM B:  THE ECONOMIC RELATIONSHIP BETWEEN TRADE AND
INVESTMENT
Investment Promotion and Incentives
A. INTRODUCTION
1. Thank you, Mr. Chairman,  for the introduction to this item.  We, too, recall that a proposal
has been made at previous meetings for the Secretariat to prepare a study on the applicability of the
Agreement on Subsidies and Countervailing Measures to investment incentives and it was agreed that
the Working Group would revisit this issue.  Our delegation has given further thoughts to the proposal
and like some other delegations, we remain unconvinced that the study should be carried out.
2. As have been noted by others, the Agreement on SCM already applies to investment
incentives to the extent that incentives were subs idies within the meaning of the Agreement.  We do
not think there is any ambiguity to this and we question whether a factual study by the Secretariat
would indeed shed further light on the disciplines applicable to investment incentives under the
Agreement on SCM.  We also doubt whether the c oncepts in the Agreement on SCM, i.e. prohibited,
actionable, non-actionable and non-specific subsidies could apply to investment incentives that werenot considered subsidies within the meaning of the Agreement.  In our minds, the broader questions in
relation to investment incentives are the objectives of such incentives and the role they play in
economic development.
3. Some Members have referred to the economic distortions, i.e. inefficient allocation of
resources and adverse impact on trade and investment flows, associated with the use of investmentincentives.  We do not believe that this is the complete picture.  As Members would know, arguments
on the pros and cons of investment incentives have never been conclusive and are unlikely to ever be
so.  This is because of the varied experience that countries have had with the use of incentives.  There
have been some spectacular successes as well as notable failures.  What is readily apparent, however,
is that the use of incentives does not, in its own right, determine the results of the economic strategy
deploying them.  Success or failure rides on the interaction of a host of complex factors.
4. Development experience clearly points to a co mplementary relationship between incentives
and economic fundamentals.  Incentives can and often do augment the fundamentals that make aWT/WGTI/W/99
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country an attractive FDI destination.  The rationale that investment incentives can help correct
market failures was expounded as far back as the 1920s by Prof A. Pigou in his classic Welfare
Economics.
B. MAIN TEXT
5. Much has already been said and written about the role of incentives.  We would like to focus
on three particular aspects, namely:
(a) the risk premium function of incentives;
(b) the role of incentives as a directional tool; and finally
(c) the relationship between incentives and long term competitiveness.
It is our contention that incentives remain an important policy variable in the development strategies
of governments.  A consideration of these three particular dimensions of incentives will help
substantiate our claim.
C. RISK PREMIUM FUNCTION
6. Capital importers are fully cognisant of the bottom-line need of investors for acceptable
returns.  Countries compete to provide these returns through a range of economic instruments that
facilitate an investment friendly environment such  as lower tariffs, skilled workforce, advanced
communications and transport infrastructures.  A failure or inability to provide for such an economicenvironment could place countries at a severe disadvantage in the competition for FDI.
7. Incentives in this context represent country-risk premiums, providing a partial counterweight
to poor economic fundamentals such as lack of infrastructure.  By compensating investors for their
perceived country specific risks, they provide a reason for investors to go ahead with a project which
otherwise would have not been viable at the normal rate of return.  A virtuous cycle of wealth, income
and employment is then sparked off – which in turn will create and facilitate the means to augment
the economic fundamentals.
D. DIRECTIONAL TOOL
8. There is a role for incentives even when countries have got the fundamentals right and FDI is
forthcoming.  Many policy makers would attest to the effectiveness of incentives in directing inwardFDI to meeting particular development or regional objectives.  Two examples readily come to mind:
firstly, the use of incentives to promote FDI flows towards particular industrial sector or sub-national
region, and secondly, the use of incentives to promote the type and nature of the FDI received.
9. The idea that governments can adopt domestic policies promoting the development of
particular industries or sectors is not new.  Indeed it is an idea that underpins much of the way in
which countries formulate their industrial policies.  Incentives remain an integral instrument of such
targeting.  In addition to channelling FDI to the prior ity industries or sectors, incentives in this context
represent a vital signalling mechanism for government s.  They provide the private sector with the best
clues to the industrial strategies and priorities of governments.
10. Incentives also provide an important tool through which countries can promote the type and
nature of the FDI they receive.  Incentives may help curtail the activities of “fly-by-night” investors.
For instance, the granting of incentives could be ti ed to a commitment to sequential investment in the
form of additional production capacity, modernisation, upgrading or diversification into relatedWT/WGTI/W/99
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products.  Such sequential investments also provide a positive demonstration effect for potential new
investors.
E. LONG-TERM COMPETITIVENESS
11. More importantly, the use of incentives will help to enhance a country’s long term
competitiveness.  Much of the economic analysis of the impact of incentives tends to be of the static
variety.  However, in the context of growth in  the long run, incentives can help countries secure
various dynamic benefits which help improve the long term competitiveness of countries.  Two
examples in particular are worth mentioning.  It is  well known that FDI involves not only a flow of
capital, but the transfer of technology, managerial know-how, skills, network access as well as a ready
made market overseas.  Countries can tap these assets by learning-by-doing over time.  Incentives
help capture precisely the sort of FDI that facilitates this transfer of intangible assets.  The second
type of dynamic gains are economies of scale.  Once investment proceeds and production expands,efficiency gains are realised.  These could enable a country to secure a comparative advantage in the
industry concerned.
F. C
ONCLUSION
12. All of this is not to make trivial the problems associated with the use and administration of
incentives.  Although incentives can be extremely useful policy tools, their deployment does,however, require the host countries to be prepared to address the caveats that go along with their use.
Firstly, incentives are more likely to produce positive results in the context of a well thought out
macroeconomic strategy.  The latter cannot be overemphasised.  It provides vital markers againstwhich incentive schemes can be assessed. Secondly, the effective implementation and monitoring of
incentive schemes requires a concomitant administrative capacity to do.  The capacity to apply
incentives varies widely among countries.
13. Finally, just to reiterate. Arguments on the pros and cons of investment incentives have never
been conclusive and are unlikely ever to be so.  Rather than focusing on instituting more WTO
disciplines on investment incentives, it may be more productive for us to focus efforts on addressing
some of the problems associated with the use and administration of incentives.
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