COMMISSION OF THE EUROPEAN COMMUNITIES 
COM(95) 42 final 
Brussels, 01.03.1995 
COMMUNICATION FROM THE COMMISSION 
A LEVEL PLAYING FIELD FOR DIRECT INVESTMENT WORLD-WIDE 
A LEVEL PLAYING FIELD FOR DIRECT INVESTMENT WORLD-WIDE 
Introduction 
Investment, environment, competition, social and other issues were identified at the end of 
the Marrakech Ministerial as possible themes for the WTO. The European Union will very 
shortly have to develop an overall strategy on these themes. The present paper deals with 
one subject, because it is not only a potential WTO theme, but also a subject for decision 
at the OECD Ministerial meeting this May. 
1. What is at stake 
The surge of global Foreign Direct Investment (FDI) 1 since the beginning of 1980s has 
transformed the old text-book model of trade, in which manufacturers made all their 
goods in one country and shipped them abroad. In their modern production strategies, 
firms ship components from all over the world to their world-wide network of assembly 
plants. In services, entering a foreign market more often than not comprises commercial 
presence in the market by setting up a subsidiary abroad. 
Accordingly the Commission's White Paper on Growth, Competitiveness and Employment 
points out that world economic relations are no longer limited to international trade in 
goods and services. In the world economy, the Community and all major partners are 
interdependent: Community policies must reflect and build on this reality. 2 
Foreign Direct Investment has become an essential element in today's complex corporate 
investment and production strategies. The development of global instantaneous 
communications and data transfer has resulted in the creation of a near global market 
place. Modern economic operators are involved in a continuous process identifying 
shifting comparative advantages which today stem from such factors as knowledge base, 
innovation capacity and the quality of human capital. The world-wide trend towards 
deregulation and privatisation has given a further boost to this phenomenon. 
The creation of a truly global system of markets and production is reflected by 11 per cent 
compound growth in the last 30 years: stocks world-wide have risen from USD 68 billion 
in 1960 to 1650 billion in 1993. Annual flows in FDI have grown from USD 60 billion in 
the mid 1980s to USD 140 billion in 1993. The spectacular raise in FDI has 
complemented and created trade, not substituted it. Conservative OECD estimates show 
that at least 40 per cent of world trade is intra firm trade, so exports can be said 
increasingly to follow investments. 
l The OECD definition of FDI comprises investments for the purpose of establishing lasting economic 
relations with an undertaking, such as, in particular, investments which give the possibility of 
exercising an effective influence of the management thereof. 
European Commission: Growth, Competitiveness, Employment; The Challenges and Ways forward 
into the 21st Century; White Paper; Parts A and B; Brussels/Luxemburg, 1994; p. 121. (See also for a 
more detailed analysis of Europe's position in the world economy). 
The US, the Community and Japan (in that order) remain the most important sources of 
FDI with the non-OECD countries playing a minor but increasingly important role, in 
particular the more dynamic ones (NICs, some countries in Latin America). 
However, dramatic changes are taking place as far as the major host countries are 
concerned. The share of inward investment flows towards the US and the Community, 
stable during the 1980s at about 60 per cent, has declined markedly to around 30 per cent 
in 1993 3. On the other hand, the vigorous expansion of investment flows towards non-
OEÇD countries is the most notable feature of recent FDI development: in 199-3 these 
countries were attracting USD 80 billion worth of direct investment from abroad or nearly 
55 per cent of total inward FDI. We can expect this trend to continue. 4 
Foreign Direct Investment today takes many forms. Besides the traditional green field 
investments or take-overs, modern operators more and more resort to forms of businesss 
cooperation, e.g. in joint ventures, strategic alliances or pooling of research and 
development resources. 
These developments underline that the general attitude towards FDI has changed. While 
in the seventies, the debate was largely dominated by the concern that globally operating 
MNEs would interfere with the independent development of the states, today it is now 
almost generally accepted that FDI is a beneficial phenomenon - not only for the host-, but 
also for the source country and will contribute to securing our energy supplies among 
other things (the European Union is increasingly dependent on imported energy). 
The OECD lists the injection of extra investment capital into the economy, the 
contribution towards a healthy external balance, increased productivity, additional 
employment, stimulation of competition and rationalisation of the production as well as 
significant transfer of technical and managerial know-how as positive effects for the host 
economy. Recognising this, the developing countries have given up much of their 
restrictive attitude against the inflow of FDI. They are often willing to allow free transfers 
without restrictions for balance of payments reasons, have proven to accept global 
disciplines on trade distorting investment matters in the Uruguay Round and are even 
generally starting to compete for investment from abroad. Since the dramatic change in 
East-West relations it has become more evident that foreign investment is a scarce 
resource which no one can afford penalising. 
Outward FDI sometimes is still perceived as associated with the loss of jobs 
("délocalisation"). However, empirical studies have not come to uniform conclusions on 
the impact of outward FDI on employment. The assumption of overall positive 
employment effects is based on the fact that all investment, including outward FDI, 
generates secondary flows such as exports of machinery and other capital goods, demand 
for manufactured production inputs or provision of know-how, which are usually 
provided by the source country; This creates jobs in secondary sectors, often higher 
qualified and paid than those that might have been lost. In addition, investment abroad will 
generate inward flows of profits and dividends which, in turn, increase incomes and hence 
demand in the source country. Agam this has beneficial effects on overall growth and 
3 Excluding intra-Community FDI flows. 
4 For more statistical information see Annex I. 
employment levels. To these can be added the longer term development effect of FDI on 
the host economy which, in time, expands the local market and creates demand for 
imports, which will, in part at least, be met by producers in the country from which the 
investment originated. The discussion on the employment effects of outward FDI should 
also take into account the motivation to invest abroad: studies show that investments by 
multinational companies are host-market driven, either to buy into a market or to improve 
servicing the market. In general, access to "cheap labour" does not play an overriding role 
to invest abroad. 
The increasing role of small and medium-sized enterprises (SMEs) in international 
investment activities is of particular importance for the Community. While the majority of 
foreign investment continues to originate from large multinational companies, the role of 
SMEs is growing and the United Nations Centre on Transnational Corporations 
(UNCTC) has identified more than 3700 SMEs world-wide which have invested abroad, 
representing about one tenth of international investments. UNCTC concludes in a study 
that these companies offer greater opportunities for training, transfer more technology and 
are more likely to reinvest profits and to use local production inputs, than investments by 
the large ones. 
Europe should be able to profit fully from the world-wide trend of liberalising FDI 
European firms, including SMEs, have usually widespread familiarity in investing away 
from home as a result of intra-Community experience where little restrictions on FDI 
remain. Thus, the European firms are in a good starting position when it comes to making 
use of investment opportunities. In addition, the Community has at its disposal several 
instruments that inform about investment opportunities and support the activities of its 
firms abroad (BC-Net, Euro Info Centres, BRE, PHARE, TACIS, JOPP, MED-Invest, 
AL-Invest and EC-Investment Partners Programmes). 
To make use of their good starting position European companies would greatly profit 
from a sound world-wide regulatory framework for FDI in which the right to invest and 
fair treatment of FDI once it has entered the host country are firmly established. However, 
currently no multilateral level playing field for FDI does exist. 
2. The current multilateral rules for FDI 
Since no single comprehensive set of rules exists, numerous bilateral and a number of 
regional and multilateral agreements produce a fragmented, non-transparent picture for 
FDI. Growing awareness of the present shortcomings have led to attempts to remedy this 
situation. 
In the framework of the Uruguay Round the first small steps have been made to address 
trade related investment issues, but the motivation was to avoid trade distortion, not 
liberalising investment flows. The GATS sets standards for the commercial presence of a 
service provider in another GATS Member State and therefore covers a substantial part of 
FDI. The results in key service sectors are, however, not yet satisfactory. Here as well, the 
issue is addressed from a trade perspective and important elements of the promotion and 
protection of investments are missing. 
The OECD Codes of liberalisation and the non-binding OECD National Treatment 
Instrument relate directly to some investment matters, but the OECD instruments apply to 
the limited number of OECD Members and lack stringent dispute settlement procedures. 
The Energy Charter Treaty provides binding national treatment in the post-investment 
phase, with stringent dispute settlement procedures. For the present, only non-binding 
provisions apply to the pre-investment phase. 
In the recent past regional and sectoral arrangements, such as the rules on investment in 
NAFTA as well as the APEC investment code have been concluded. Also in the 
framework of the intended Free Trade Area of the Americas it is foreseen to eliminate 
progressively barriers to investment. But this is not the appropriate solution to the 
problem created by the lack of liberalisation and transparency. Regional arrangements can 
easily lead to discrimination for European operators, as the example of the preferential 
treatment for establishing US and Canadian banks in Mexico under the NAFTA shows, 
and therefore are potentially dangerous for Community interests. 
In addition, there are more than 600 bilateral investment treaties, mostly between 
developed and developing countries. Since these agreements tend to be adapted to the 
particularities of the bilateral relations and the national interests involved they are without 
any uniformity between them and add to the risks of discrimination and lack of 
transparency. 
This patchwork of rules 5 is unsatisfactory and is being increasingly seen as a very 
inefficient and non-transparent way of liberalising investment regimes and protecting 
investments abroad. Treatment accorded to European investments in different countries 
varies greatly. A third country may also discriminate between investtnents from different 
sources and even among investors from different Member States. As an example, a 
company established in a Member State with an affiliate established in another Member 
State may face different treatment for their investments in a third country outside the 
Community, if only one of the Member States has concluded a bilateral investment treaty 
with the third country or if both Member States have a bilateral treaty with a different 
level of protection. US and Japanese companies might again be treated differently, often 
better than the Europeans. 
Nor is the present system able to preserve the liberalisation that has been achieved. There 
are tendencies, in particular in some OÈCD countries, to withdraw even from the existing 
level of liberalisation, as various calls for "conditional" national treatment in US legislation 
shows. 
The present situation is particularly unsatisfactory for SMEs which do not have the means 
to monitor and adapt to the ever-changing conditions for FDI in the host countries They 
are not able to defend themselves against government intervention or other adverse 
measures. They often will not take the risk to go to arbitration. It is arguable that the 
SMEs have the most to gain from clear and stringent multilateral investment rules. 
Replacing the present system of bilateral investment treaties, régional arrangements and 
the OECD instruments by a transparent, multilateral agreement would assure that the rules 
of the game are the same for everyone. As a consequence, in its White Paper on Growth, 
An overview of provisions affecting investment in existing multilateral instruments (WTO 
Agreements, OECD instruments, NAFTA, APEC, European Energy Charter Treaty, Lomé 
Convention) is given in Annex II. Details on provisions relating to investments in Europe 
Agreements and in Partnership and Cooperation Agreements are given in Annex III. 
Competitiveness and Employment6 the Commission considers the elimination of unequal 
conditions for direct investment an essential part of its strategy for an open world 
economy. 
Therefore, it is the Commission's view that it is of vital interest to the Community and its 
Member States to actively pursue the establishment of multilateral rules for FDI. 
Consequently, it should develop a coherent approach to formulate the rules Community 
operators need and actively work for the implementation of these rules in the international 
context. 
3. What multilateral rules on FDI 
3.1. The principal rules of the game 
Investment flows, like trade flows, will bring most benefits to the world economy when 
they can grow within a transparent and predictable system of accepted rules. The efforts 
will have to concentrate on three aspects : 
• generally free access for investors and investments; 
• national treatment for investors and their investment; 
• accompanying measures to uphold and enforce commitments made to foreign 
investors. 
a) Access for investors and investments (right of entry and establishment) : 
World-wide there remains a host of barriers that prevent foreign investors to enter the 
host countries freely. Some examples, governments may only allow a foreign investor to 
set up a subsidiary or take over a local enterprise after a specific authorisation has been 
given. Foreign investors may only be allowed to start operations in the form of joint 
ventures together with local companies. Joint ventures sometimes cannot be majority-
owned or controlled by foreigners. 7 Foreigners can be excluded from participating in 
privatisations or barred access to government concessions. Performance requirements, 
such as export or local purchase requirements, can be made a condition for establishment. 
Complete sectors of the economy like transport, energy or financial services can be closed 
for foreign investors. 
These barriers clearly are costly - not only to the investor who is prevented from entering 
freely, but also to the host economy in terms of preventing additional employment, 
competition, transfer of technical and managerial know-how and a better integration in the 
rapidly changing world economy. However, completely unrestricted market access for 
FDI does not seem likely to be achievable in the real world. Just as under the GATT there 
is no completely free world trade, completely free investment flows will not be possible. 
7 European Commission: Growth, Competitiveness, Employment; The Challenges and Ways forward 
into the 21st Century; White Paper, Parts A and B; Brussels/Luxemburg, 1994; p. 13 
The restrictions on joint ventures or other forms of business cooperation are especially harmful for 
SMEs, who more often than not need a local partner for technology, production or distribution in 
foreign markets. 
Even the most liberal OECD countries maintain some restrictions for national security 
reasons or in traditionally closed or monopolised sectors, such as transport, energy, 
financial services or telecommunications. The reasoning for this, as long as it is not a 
cover for protectionist policies, can be sound. For example, a country should have the 
possibility to control the ownership of a strategically vital defence industry. 
There are, however, a number of essential principles thatshould apply world-wide: 
• A general commitment to grant the legal right for foreigners to invest and operate 
competitively in all sectors of economy. 
• Only transparent, narrowly defined and well justified exceptions from the general right 
of entry for FDI are permissible. National security restrictions or public order 
considerations might not develop into a pretext for protectionism. 
• Most favoured nation treatment (non discrimination). Host governments should not be 
in a position to accord preferential treatment for investors from certain countries and 
thus discriminate against others. 
• A standstill commitment not to introduce new restrictions. Besides lowering the level 
of liberalisation and creating uncertainty among investors, the introduction of new 
restrictions would discriminate against potential new investors (for whom access to a 
market formerly open is closed) vis-à-vis investors already present. 
• A "roll-back" commitment to gradually eliminate measures that run counter to 
liberalisation and to open up closed sectors. 
b) National treatment for established investments : 
Once the right of entry and establishment has been assured, the foreign investor might find 
the operation of his firm hampered by discriminating measures. Typical restrictions include 
a prohibition to own real estate, limited or no access to government aids and subsidies 
(the most important example is the participation in R&D programmes), discriminatory tax 
provisions or an exclusion from bidding for government contracts. 
While most of these restrictions discriminate against foreign investors and should be 
outlawed, not all can be regarded that way In the important case of access to R&D 
subsidies, for example, governments have an interest to ensure that they are getting "value 
for money". Restrictive conditions attached to the access to such funds can therefore be 
accepted, but the nationality of the investor should not be the decisive criteria. Also, 
narrowly defined public order and national security exceptions should be possible. 
In general, however, the host country should treat the foreign investor and his investment 
operating in its territory in the same way as a domestic investor or firm. The national 
treatment principle will have to be complemented by the most favoured nation standard in 
cases where host countries grant to foreign investors specific favourable conditions that 
are not available to national investors. This avoids discrimination between investors from 
different foreign countries. 
c) Accompanying measures : 
The right of entry and national treatment alone are not enough to create the favourable 
conditions which FDI needs. One basic requirement is an effective mechanism to settle 
disputes between source and host country. Another important element is the freedom to 
make financial transfers. Equally important is that expropriation of a foreign investment is 
only possible in exceptional, internationally recognised cases and that it is accompanied by 
prompt, adequate and effective compensation. 
Host countries will also have to assure that their domestic regulations are transparent and 
that international obligations are honoured by sub-federal and local authorities. 
The formulation of rules on international investment will also have to consider informal 
and structural barriers which are not directly linked to FDI, but can have considerable 
consequences for investment flows. Merger control and anti-trust legislation effectively 
can prevent the making of an investment. Private practices, such as ownership restrictions 
in company by-laws could discriminate against foreigners. Exaggerated investment 
incentives can distort the flow of investments or lead to an unintended "race to the 
bottom" between countries or regions. A multilateral investment instrument might even 
address taxation, labour or environment policies, as these can considerably influence the 
climate and conditions for FDI. 
3.2. Defining objectives 
Pursuing the establishment and implementation of these rules world-wide would be the 
cornerstone of a Community FDI approach, guaranteeing a high uniform standard of 
liberal rules governing FDI combined with its effective protection. Judging from the 
present level of restrictions, these rules will mainly benefit actual and potential Community 
investors abroad. Indeed, such rules on FDI represent an essential condition for the 
implementation of bilateral industrial cooperation agreements, which are increasingly 
becoming a key basis for international activity by Community firms, particularly SMEs. 
However, in this context, it should be kept in mind that the Community is also a large 
gross capital importer, competing for a relatively finite and scarce pool of world-wide 
available capital. This also means that in order to advance its overall interests, the 
Community will have to analyse the necessity to preserve measures by which its own and 
Member States' practice falls short of the principles cited above. Such practices to be 
examined could include authorisation regimes or capital movement restrictions still 
applicable in some Member States. Investment limitations on access to certain subsidies or 
R&D funds, restrictions in the interest of national security or economic need may also fall 
under this category. Although some existing restrictions could be justified as legitimate 
exceptions, the Community should be ready to discuss all these issues existing restrictions 
on inward FDI at the international level with the aim of achieving balanced results. 
In any case it is in the Community's interest to retain under any international agreement on 
investment the right to advance its internal integration without necessarily being forced to 
extend de jure such mutual liberalisation measures to third countries. Any dilution of this 
possibility, as actually covered by OECD, GATS and the Energy Charter Treaty rules, 
should be resisted. 
4. How to develop multilateral rules on FDI 
The strategic interest of the Community in achieving liberal and predictable multilateral 
rules on FDI implies that the Community takes the initiative and actively participates in all 
credible attempts at a multilateral level to elaborate and establish such rules. 
At the present stage useful work on FDI has been or is undertaken in the framework of 
the WTO and OECD. Each forum presents its particular (dis)advantages in relation to this 
work. 
a) The role of the World Trade Organisation (WTO) 
The interest of the Community and its Member States is to arrive at a multilateral 
agreement with the broadest possible participation. This is why, at this stage, the WTO 
seems to be the most logical and adequate forum for future negotiations on such an 
agreement. 
Chances of a positive outcome of talks in the WTO within a reasonable time-frame are 
better than ever, since the issue of foreign investment has, in fact, been largely divested of 
its ideological overtones. A successful multilateral negotiation on the matter seems now a 
realistic proposition. Indeed, it is more likely to yield the desired ultimate result through 
the WTO, than through the alternative route which consists in a regional OECD 
agreement others have to sign up to over time 
It should be recognised that WTO in the context of the GATS and TRIMs already covers 
issues directly and indirectly related to FDI. Given the very strong and wide-ranging 
linkages between trade and investment the subject would also be compatible with the 
Organisation's mandate. The TRIMs agreement calls for a review of its operation not later 
than 1 January 2000, with a view of a broader discussion on provisions on investment 
policy. 
The fact that WTO will not immediately take up investment issues should not be seen as a 
major impediment to this approach. The Community and its Member States should 
actively work for accelerating the timetable laid down in the TRIMs Agreement and push 
for starting work in the framework of the WTO on multilateral investment rules at an 
early stage, with a view to securing agreement at the first WTO Ministerial Conference in 
December 1996 that FDI should be on the agenda for active negotiations. The dramatic 
rise in FDI-flows to the developing countries will support these efforts. 
b) The OECD efforts 
OECD is currently studying the feasibility and possible content of a multilateral investment 
rules. The June 1994 OECD Council of Ministers decided that "OECD will ( ) 
contribute to strengthening the multilateral system by entering a new phase of work aimed 
at elaborating a multilateral investment agreement with a report to ministers in 1995". As 
a consequence, the OECD Secretariat and the OECD Committees working on investment 
issues intensified work in view of a possible ministerial mandate for actual negotiations to 
start between OECD members in 1995. The analytical work undertaken by the OECD 
experts provides valuable insights in the issues that dominate the international FDI 
discussion. The Commission and the Member States actively take part in the ongoing 
work. 
A considerable number of OECD members have shown inclination for negotiations on a 
Multilateral Investment Agreement (MIA) open for accession by third countries in the 
OECD framework. However, one can question whether the OECD is ultimately the best 
forum for the negotiations on future rules governing world-wide FDI. 
The argument in favour of an OECD approach is that most FDI activity occurs within the 
group of OECD countries and that it will be easier to elaborate an agreement of very high 
standards, in a reasonable time frame, among "like-minded" countries. Non-OECD 
members were therefore to be excluded from the negotiation, but could join the 
instrument once it is established. However, most of the OECD countries already have 
relatively liberal investment rules, while non-OECD countries and in particular the New 
Industrialised Countries have considerably less liberal and transparent investment regimes. 
In addition, the latter group of countries is attracting a growing share of world outward 
investment (50 per cent of world total in 1992, 55 per cent in 1993) and the most dynamic 
are themselves emerging as increasingly important sources of FDI. Recently a growing 
number of non-OECD economies have unilaterally begun to liberalise their investment 
regimes. Yet foreign investors still stumble against significant difficulties in many of these 
countries. As business operators in the Community increasingly recognise, it is of critical 
importance for the EU to ensure a permanent presence through direct investment in the 
new fast growing markets of Asia, Latin America, Eastern Europe and, in the more distant 
future, in Africa. Bringing the countries of such fast growing regions into a system of 
uniformly applied, multilateral rules on investment is the only effective way of assuring 
that all business enterprises, irrespective of origin, are able to compete on an equal 
footing. 
Limiting a negotiation on multilateral investment rules to OECD members would exclude 
important actors, such as China, Korea, Brazil and South Africa, and also the countries of 
ASEAN and Central and Eastern Europe. With respect to the latter, the Community has a 
specific interest in associating them to the process in the light of the pre-accession strategy 
and our commitments embodied in the Partnership and Cooperation agreements. 
To present these countries with the result of an exclusive OECD negotiation contains 
certain risks. Not only would it be politically difficult for many countries to accept such a 
procedure, they might well have sound economic grounds for not doing so if the OECD 
agreement, negotiated without their participation, did not adequately reflect their 
concerns. Consequently, an initiative for the elaboration of foreign investment rules should 
involve the countries of Central and Eastern Europe and the CIS Republics, the New 
Industrialised Countries and developing countries from the start. A world-wide 
phenomenon as FDI should be discussed with broad multilateral participation, if broad 
acceptance is to be achieved. 
Recognising OECD's expertise and the important work on FDI already undertaken by the 
Organisation, the Community and its Member States should continue their active support 
of the analytical work now undertaken in OECD in view of elaborating multilateral rules 
for FDI and thus contributing to the strengthening of the multilateral system. 
Consequently, the OECD approach has to properly reflect the possible later participation 
of non-OECD members in such an agreement. Furthermore it has to be assured that the 
rules will present no obstacles to subsequent exercises on a broader geographical scale, in 
particular at WTO. The example of the GATS where OECD input provided the 
cornerstone of the Agreement is a good example of the positive role OECD can play on 
the way to international rules with the broadest possible participation. 
10 
c) Bilateral agreements 
The long-term multilateral objectives of the Community in WTO and OECD could be 
supported by addressing problems on investment bilaterally through the conclusion of 
bilateral EC-third country investment treaties, in order to avoid discrimination against 
European enterprises (for example that which results from some third countries placing 
increasingly unacceptable conditions on National Treatment) and to secure the promotion 
and protection of investments of Community enterprises abroad. 
d) A focus on developing countries^ Central and Eastern Europe 
and emerging economies 
Future discussions and action concerning FDI will need to pay particular attention to the 
developing countries, the countries of Central and Eastern Europe, the CIS countries and 
the New Industrialised countries. As pointed out above, the percentage of world-wide 
FDI destined to non-OECD countries is nearing the 50 per cent mark, as opposed to an 
average of around 20 per cent in the 1980s. More than one third of total capital flows 
from OECD to non-OECD countries now are FDI, and FDI has in large parts replaced 
concessional aid and commercial bank lending as the most important source of capital. 
Thus, it has become the principal financing mechanism for the modernisation and 
expansion of the economies in the emerging markets of Asia, Latin America and the 
Caribbean, and Eastern Europe. 
This shows that FDI has an enormous potential for the benefit of international economic 
development. The dramatic surge in FDI to the developing countries and countries in 
transition has been helped by the gradual opening of these countries, but investment 
opportunities in general are still hampered by bureaucracy and ad hoc state interference, 
balance of payments restrictions, imposition of TRIMs, low protection for intellectual 
property rights and opaque authorisation and screening procedures. In this connection one 
should mention the catalytic role investment insurance schemes (such as the Multilateral 
Investment Guarantee Agency (MIGA), the investment insurance agency affiliated with 
the World Bank, but also national and private schemes) can play, in order to manage the 
investment risks associated with currency transfers, expropriation, war and breach of 
contact. 
It is obvious that the elimination of these obstacles and stringent uniform international 
rules on open access for investment as well as effective national treatment protection 
could further increase the flow of FDI to the developing countries and Central and 
Eastern Europe. A major step in that direction was made by the Community in 
formulating investment principles with regard to the ACP states in the Lomé IV 
Convention (see Annex H). 
Central and Eastern Europe 
In the case of Central and Eastern Europe the benefits of FDI are of particular 
importance. It is generally accepted that the restructuring of these economies vitally 
depends on the attractiveness ofthese countries for foreign investment. The transfer 
of capital, technical and managerial know-how is a key element in making markets 
function. Multilateral rules on investment that are accepted by the Eastern partners 
11 
of the Community will greatly increase the confidence of Western investors and 
contribute to the implementation of the Community's pre-accession strategy for 
Eastern Europe and the Partnership Agreements. 
Developing countries 
Particular attention should be given also to the concerns of developing countries. 
These countries have a special interest that FDI contributes to human resource 
development and that MNE accept a social responsibility when acting in the host 
country. They in particular want to avoid that FDI inflows are motivated by low 
environmental or social standards, or that these standards are even lowered further 
to attract FDI. The Community therefore should accept discussing complementary 
safeguards, such as codes of conducts for good corporate citizenship for MNEs, to 
meet these concerns as an accompanying element to the general principles assuring 
the free flow and the protection of investments. 
Liberalisation of international direct investment flows can imply the liberalisation of 
other forms of capital movements. It has to be noted that other forms of capital 
flows to these countries, in particular portfolio investment, have grown in the past 
few years even faster: FDI to developing countries has quadrupeld between 1986 
and 1992, whereas portfolio investment grew 50 times in the same period having 
already reached almost the same level as FDI. The Community has unilaterally 
liberalised its capital movement regime with third countries. Thus, in the medium-
term, rules on world-wide investment and investment protection should be extended 
to all sorts of capital movements. In the future, IMF could also become active in this 
area. 
The Community is aware that some of its partners, mainly in the developing world and 
Eastern Europe, are interested in assuring that in a first stage only capital movements in 
the form of FDI will be covered by an international consensus to liberalise for reasons 
related to money laundering, destabilising currency speculation and capital flight. 
Although the Community's capital movement regime is almost completely liberalised, it 
could be envisaged that the international rules for FDI ensure that the FDI link of capital 
movements covered are obvious. 
5. Organising the Community approach 
The implementation of the approach outlined in §§ 3 and 4 calls for further study on the 
effects of international direct investment and other forms of capital movement in a 
changing world economy. In this context, the Commission has recently published a 
discussion paper on trade and investment.8 
There is a substantial change in Community law with regard to capital movement 
operations including investments from the regime which existed up to 1 January 1994 
which basically only contained a "best endeavours" liberalisation requirement: the third-
country regime of Member States on capital movements and with it the issue of market 
access for investments (pre-investment) has - with the beginning of the second stage of the 
European Commission, Directorate-General for External Economic Relations. Trade and Investment 
Discussion Paper, Brussels/Luxemburg 1995. 
12 
EMU - come under the Treaty (Article 73b to 73h). Existing restrictions on the movement 
of capital between Member States and third countries in some forms, including direct 
investment, may continue to be applied under the grandfather clause of Art. 73c (1) 
subject to their elimination or modification under the powers given by Art. 73c (2) to the 
Community. 
In the operational field, the implementation of this approach implies a strengthening of the 
efforts of coordination between the Community and its Member States. Given the shared 
competence that exists for a very broad range of issues arising in the field of FDI, neither 
the Community nor the Member States can act on their own in a comprehensive 
negotiation on FDI issues. The essential objective will be to ensure full and effective 
Community participation in the discussions ahead. Close coordination will be necessary to 
ensure that the Community and its Member States speak with one voice. 
The Community should also take up the dialogue with the European business community 
and trade unions with a view of identifying their preferences and concerns. The 
Commission is preparing initiatives in this direction. 
6. Conclusions 
The Commission requests the Council to take note of this Communication and suggests 
the Council to conclude along the following lines: 
• to recognise the vital interest for the Community and its Member States to actively 
pursue the establishment of transparent, coherent and liberal multilateral rules on 
Foreign Direct Investment (FDI), while preserving its capacity for further internal 
Community integration. This will ensure the presence of Community operators in 
important and emerging markets and will provide the necessary confidence to its 
investors to take the investment decisions which will consolidate Europe's competitive 
position in the world economy. Multilateral rules on investment will prevent 
discrimination which may derive from the establishment of regional investment 
regimes and will discipline countries which still apply a number of TRIMs. Such rules 
will also enhance the attractiveness of the Community as a host for FDI for its 
partners, thus creating directly and indirectly employment and boosting growth and 
competitiveness; 
• to recognise the important role of FDI for the restructuring'-of the economics in 
Central and Eastern Europe and for the economic progress in the developing world; 
• to endorse the objective that these international rules on FDI should guarantee 
generally free entry and establishment for foreign investors, full national treatment for 
established investments and high standards of investment protection; 
• to call for negotiations on international rules on FDI with the broadest possible 
participation the result of which should be incorporated into the WTO system; 
• to request OECD, as a contribution to strengthening the multilateral system, to pursue 
its work aimed at elaborating a multilateral investment agreement; 
• to urge an early start of discussions in the WTO in order to prepare formal 
negotiations which should begin as soon as possible; 
13 
• to invite the Commission to analyse further current problems related to inward and 
outward investment and to come forward with proposals where necessary; 
• to encourage the European business community to contribute to the discussion on 
FDI; 
• to agree to intensify work within the Community on defining common positions on 
FDI with a view to the implementation of these conclusions; 
• to ensure, with the Commission, that the positions of the Community and its Member 
States on FDI be closely coordinated, in order to produce the necessary unity of 
action in OECD and WTO discussions. 
14 
ANNEX I 
Statistical Background on Foreign Direct Investment 
The creation of a truly global system of markets and production is reflected by statistical 
evidence: FDI stocks world-wide have risen from USD 68 billion in 1960 to 
1650 billionl in 1993 (i.e. 11 per cent average annual growth). According to UN and 
Eurostat figures, FDI world-wide has grown faster man GDP and trade by a factor of four 
and three respectively. The number of Multinational Enterprises (MNEs) has increased 
from around 7000 in the late 1960s to 17000 in the early 1990s. As a result of these 
developments, the sales of foreign affiliates have surpassed exports as the principal 
vehicle to deliver goods and services abroad. Firms1 sales through foreign affiliates 
totalled USD 4800 billion in 1991, USD 300 billion more than the world-wide value of 
trade in goods and services 2. Some estimates even put the value of goods and services 
sold by foreign affiliates even as almost twice as high as that of world exports. This alone 
makes FDI one of the most important mechanisms of international economic integration. 
UNCTAD estimates that as much as one third of world output is under common 
governance of MNEs - even if the estimation is too high, there can be little doubt that 
MNEs form the productive core of the globalised world economy. 
The spectacular raise in FDI has probably complemented and created trade, not 
substituted it Conservative OECD estimates show that at least 40 per cent of world trade 
is intra firm trade thus establishing a link between trade and investment according to the 
formula 'exports follow investments'. If compared to trade, FDI flows are still only a 
fraction of international trade flows (around 5 per cent). This comparison is, however, 
misleading insofar as an investment typically involves a larger and long-term 
commitment Its economic and integrative effects surpass the comparatively limited 
effects of trading transactions. 
The Community is by far the most attractive destination for foreign direct investors. Of 
the total FDI stocks of USD 1650 billion in. 1992 about 30 per cent (USD 460 billion) is 
hosted by the Community 3. The US host USD 420 billion, slightly more than the amount 
of all non-OECD countries aggregated (USD 370 billion). Japan remains notoriously 
behind with an FDI stock of below USD 40 billion. The other OECD countries 
(USD 350 billion) host the rest 
The Community is also one of the most important sources of FDI representing about 
30 per cent of world-wide outward FDI (USD 470 billion). The US is the biggest source 
country with an outward FDI of USD 490 billion, while Japan with USD 250 billion is an 
important player. The non-OECD countries play a minor but increasingly important role 
with USD 65 billion. 
1 Source: UN World Investment Report 1994 excluding intra-EU stock (estimated). 
2 Source: UNCTAD World Investment Report 1994. 
3 Community of twelve Member States. 
/f) 
From these figures it emerges that the Community, the US and the other OECD countries 
have a more or less balanced situation in relation to inward and outward FDI stocks, 
while Japan is an important source country and the non-OECD countries are still mainly 
host countries. 
The Group of Industrialised Countries (OECD) remains responsible for the bulk (95%) of 
outward FDI flows, but their share of inward investment flows has declined markedly in 
the last few years from more than 80 per cent in the 80s to 42 per cent in 1993. The 
vigorous expansion of investment flows toward non-OECD countries is the most notable 
feature of recent FDI development In 1993 these countries were attracting 
USD 80 billion worth of direct investment, or nearly 55 per cent of total inward FDI, 
compared to an annual average of 21 per cent in the period 1980-90. More than two 
thirds of this figure was concentrated on 10-15 host countries, mainly in South East Asia 
and Latin America. This trend is expected to continue. 
At the same time, the more dynamic economies of South East Asia and Latin America 
have themselves begun to invest abroad, predominantly but not exclusively in other 
countries of their region, with total FDI outflows of around USD 9 billion in 1992 and 
USD 14 billion in 1993. Four of the ten largest investors in China are East or South East 
Asian countries, and China has emerged as the main recipient of foreign non-OECD 
investments, as well as becoming, itself, an increasingly significant source of outward 
investment FDI from these countries is also directed toward the mature industrial 
economies of Europe and North America. For example, recent investment and proposed 
investment plans toward the EU were proclaimed by PGI (Singapore) and the Korean 
conglomerates DAEWOO and SAMSUNG with the latter announcing a USD 700 million 
investment in a new electronics plant in the UK. 
/it 
ANNEX H 
Provisions in existing multilateral instruments 
with significant impact on FDI 
1) World Trade QrymiMtfimi CWTO) Instmments 
General Agreement on Trade in Services (GATS) 
The GATS covers investments in the form of "commercial presence" for the purpose of 
supplying a service. The benefits of the GATS are granted, La., to "service suppliers" of 
another Member. Investment as such is protected to the extent that the service supplier is 
more than 50 per cent owned or controlled by a natural or legal person of another 
Member. The GATS is the only agreement containing substantial obligations on FDI with 
potential world-wide coverage (over 100 signatories up to now). It covers all service 
sectors and its obligations extend to establishment and subsequent operations of the 
service suppliers of other Members. However, negotiations on important service sectors 
(financial services, basic telecommunications, maritime transport) are still continuing. 
Monopolies, government procurement and subsidies are also covered, but specific 
disciplines still need to be negotiated. 
The central obligations of the GATS are to accord most favoured nation treatment for 
market access (exceptions possible) and national treatment (subject to limitations set out 
m each member's schedule of commitments). 
The GATS extends obligations to sub-national measures, although exceptions regarding 
state or provincial measures can be inscribed in the schedule. The GATS requires 
members to make transparent the measures relating to trade in services. The Agreement 
provides for compensation in case a liberalisation commitment is withdrawn. 
One of the most important features of the GATS is the access to the strong state-to-state 
dispute settlement procedures, including retaliation, agreed upon in the Uruguay Round. 
Agreement on Trade-Related Investment Measures (TRIMS') 
The TRIMs Agreement addresses a number of investment matters from a trade angle, Le. 
TRIMs are subject to disciplines because their application distorts trade flows. 
The TRIMs Agreement outlaws such TRIMs which are violating Art m and XI of the 
General Agreement on Tariffs and Trade 1994. The illustrative list attached to the 
Agreement includes local content and purchase obligations as well as trade balancing 
requirements. Such illegal measures can on condition of proper notification be phased 
out, within two years for developed countries and within up to seven years for least 
developed countries. 
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRJPs) 
The TRIPs Agreement does not address directly FDI issues, but the improved protection 
of intellectual property rights brought about by this Agreement will improve the 
investment climate in the countries concerned. 
2) Organisation for Economic Cooperation and Development (OECD) Instruments 
In 1961, OECD Members have adopted a Code of Liberalisation of Capital Movements 
and a Code of Liberalisation of Current Invisible Transactions, the so-called Codes of 
Liberalisation, and in 1976 a National Treatment Instrument 
The Codes of Liberalisation cover inward direct investment by non-residents from other 
Member States, including establishment in services. The National Treatment Instrument 
comes into play once the foreign direct investment is made and obliges Members, on a 
non-binding basis, to accord foreign investors and investments national treatment The 
OECD members also have adopted non-binding Guidelines for Multinational Enterprises 
which establish the standards of corporate citizenship for Multinational Enterprises 
abroad. 
The sectoral coverage of the Codes of Liberalisation, while comprehensive, is not 
complete. Countries can maintain individual lists of reservations, be it across the board or 
in specific sectors. Important issues, such as government procurement, key personnel, 
subsidies or monopolies are not covered. To certain commitments a standstill applies and 
there is a general obligation to reduce restrictions. 
The OECD holds regular "country examinations" which amount to a close scrutiny by 
OECD Committees of the remaining restrictions on FDI maintained by the country 
concerned. These examinations are to create "peer pressure" aiming at the reduction or 
withdrawal of restrictions affecting FDI. Besides peer pressure, sanctions for alleged 
violation of Codes of Liberalisation obligations can only be obtained by referring the 
issue to the OECD Ministers which could take up the issue in a Council decision in the 
form of a recommendation. This is no real dispute settlement mechanism, and therefore it 
is often said that the OECD instruments lack teeth. 
3) North American Free Trade Agreement (NAFTA) 
The NAFTA contains extensive chapters relating to investment As a general rule, 
investors and investments from other Parties are granted the best of most favoured 
nations treatment and national treatment for their establishment and operation. NAFTA 
Parties are prohibited from applying performance requirements or nationality 
requirements for key personnel. 
It is important to note that these far-reaching basic principles are subject to liberalisation 
commitments and substantial reservations which appear in the Parties' schedules. Each 
country must also specify non-conforming sub-national measures within a certain time 
^l 
after the entry into force. Government procurement and subsidies are excluded from the 
general rule; monopolies and state enterprises remain permissible. Financial services are 
dealt with in a separate chapter. Major exceptions pertain to national security and to 
Canada's cultural industries. 
The NAFTA investment chapter contains a detailed mechanism for the resolution of 
disputes involving the breach of the NAFTA investment rules by a host country. It 
provides for investor-to-state dispute settlement 
4) Asia-Pacific Economic Cooperation (APEC) 
The APEC annual meeting held in November 1994 agreed on a set of non-binding 
principles on investment These "best effort" commitments provide La. for transparency 
of laws and regulations pertaining to investments; non-discrimination for establishment 
and operation of investments from any other economy as well as national treatment, 
minimisation of performance requirements distorting trade and investment; investment 
protection with regard to expropriation, transfers and settlement of disputes. An 
interesting point is that the APEC principles forbid member economics to relax health, 
safety and environmental regulations as an incentive to encourage FDI. 
The rather general APEC principles are only a first step and work within APEC on more 
binding investment rules continues. 
5) Energy Charter Treaty (ECD 
Signed at Lisbon on 17 December 1994 by almost all European countries as well as some 
non European industrialised countries, this most recent multilateral treaty covering La. 
investment is mainly aimed at Eastern Europe and the CIS. The ECT is a sectoral 
agreement covering only activities in the energy sector. Its main goal is to facilitate 
energy related investments in Central and Eastern Europe and to help the restructuring of 
the sector there. It contains comprehensive rules on investment protection and notably 
state of thejart provisions on trade-related investment measures, key personnel, transfer of 
funds, sub-national compliance and an exception clause from the most favoured nations 
obligations for regional integration agreements. It has a refined mechanism for dispute 
settlement On pre-investment (market access, right of establishment) only a best-effort 
commitment for national treatment/most favoured national treatment was agreed, but a 
second phase of negotiations addressing this issue has already started. 
6) ACP-EEC Convention of Lomé (Lomé TV) 
Lomé IV contains a separate extensive chapter on investments with different sections 
dealing with notably promotion, protection, financing, capital flows and payments, as 
well as establishment Lomé IV thus notably contains a MFN provision for establishment 
(unilateral derogations possible) and framework rules for the individual Member States 
and ACP-countries bilateral investment protection treaties. In addition, the Community in 
1992 has elaborated a "Community position on investment protection principles in the 
ACP states." This detailed document sets out the salient principles which should govern 
the protection of foreign direct investment in ACP states. 
7) United Nations Organisation sponsored Agreements 
World Intellectual Property Organisation (WTPftt 
As pointed out above for WTO/TRIPs the numerous conventions in the area of the 
protection of intellectual property concluded under the auspices of WIPO do indirectly 
foster the investment climate in the countries member to these conventions. 
International Labour Organisation (ILO) 
The ILO rules on labour standards and labour relations can also be of some importance 
for international direct investment flows. 
?. 
ANNEX m 
Provisions relating to investments in Europe Agreements and in Partnership and co-operation Agreements 
Provisions 
1. Establishment of enterprises and 
professionals 
2. Operations of enterprises and 
professionals 
3. Capital transfers in respect of 
investments 
4. Protection of intellectual, industrial 
and commercial property Europe Agreements (EA) 
NT reciprocal but to be introduced 
asyrnmetrically 
NT reciprocal but to be introduced 
asymmetrically 
to be liberated including transfer of 
dividends and possible repatriation 
of capital 
CEC to provide same level of 
protection + subscribe to 
international agreements Partnership and co-operation Agreements 
with Russia 
MFN for companies only. For 
financial services, national 
treatment (NT) with 
exceptions. 
EC offers NT (Russia best of 
MFN/NT) for subsidiaries 
with some exceptions. MFN 
for branches. 
Liberalisation of inward 
investment in Russia, 
including transfer abroad of 
investment and profit Russia 
may maintain during a 
transitional period restrictions 
on outward investment. 
similar to EA other 
EC offers MFN. NIS offer best 
of MFN/NT, with some 
exceptions (Bel, Mol, Ukr,) some 
of which are transitional. 
EC offers NT for companies and 
MFN for branches, with some 
exceptions. NIS offer best of 
MFN/NT. 
Liberalisation of capital 
movements for FDI including 
repatriation of assets and profits. 
similar to EA 
Provisions Europe Agreements (EA) Partnership and co-operation Agreements 
with Russia other 
5. Competition rules, including state 
aids similar to Rome Treaty rules disciplines inspired from EEC 
rules, but less strict than EA 
rules Ukr, Bel, Mold: right to consult 
and obtain information; non­
discrimination re. marketing and 
procurement rules within 4 years. 
Kaz, Kyr: right to consult where 
trade affected. 
6. Law in all areas having impact on 
agreements approximate gradual approximation gradual approximation 
7. Industrial standards and certification co-operation (La. PHARE) co-operation co-operation 
8. Investment promotion 
- improve legal framework 
- conclude investment protection 
agreements co-operation (La. PHARE) co-operation co-operation 
9. Access to market free trade in industrial goods MFN for goods and for a list 
of services MFN for trade in goods (and Bel: 
for a list of services) 
Europe Agreements : Poland, Hungary, Czech Republic, Slovakia, Romania, Bulgaria, negotiations with Baltics started and are expected with Slovenia. 
Partnership and co-operation agreements signed with Russia, Ukraine and Moldova; signature expected shortly with Kazakhstan, Kyrgyzstan and 
Belarus CEC = Central European countries 
MFN= Most Favoured Nation treatment 
NT=National Treatment 
ISSN 0254-1475 
COM(95) 42 final 
DOCUMENTS 
EN 08 09 10 11 
Catalogue number : CB-CO-95-081-EN-C 
ISBN 92-77-86285-8 
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