# _(3) Improving business and investment climates_

The governance structure of GVCs may vary, and offshore production can either be entrusted to independent suppliers (outsourcing) or foreign branches/subsidiaries (see Figure 2). Such crossborder vertical integration, which is necessary to management control within GVCs (whether accompanied by capital transfers (FDI) or not), should be facilitated by the removal of various behind-the-border barriers to trade and investment. Decisions to invest and do business in a foreign country can be driven by cost factors, but they are not the only relevant determinants. Business climate at large, as well as the quality of infrastructure and incentives, might be tipping points for strategic decisions by GVC lead firms.

• _Barriers to investment and protection of foreign assets_ Cross-border vertical integration requires a maximum fluidity in the mobility of production factors, including capital and labor. A number of obstacles to FDI are likely to either exclude a country from major GVCs, or confine them to certain forms of GVC governance that entail minimum benefits (i.e., transfers) and maximum risks (e.g., volatility of demand and exposure to rapid shifts in business strategies).

These behind-the-border barriers to foreign investment and establishment include:

- restrictions on foreign equity, ownership, or forms of partnership;

- restrictions to the movement of key personnel (including intra-corporate transferees or quotas on the employment of foreigners and/or foreign management);

- domestic content rules (that are contrary to the spirit and functioning of GVCs); and

- restrictions on the repatriation of benefits and other forms of currency exchange control.

It is also important to establish a stable and secure environment for foreign investors, including through the promotion of stability clauses in contracts and the participation in major international (including regional) arbitration and dispute settlement mechanisms.

**Table 2. Encouraging and protecting foreign investment: Policy objectives and performance indicators**

||**Policy objectives**|**Performance indicators**|
|---|---|---|
|**Rem**|**oving restrictions to foreign investment**|•<br>GATS commitments (WTO), regional commitments, and domestic<br>laws|
|•<br>•<br>•<br>•|Allowing more foreign equity/ownership/partnership<br>Facilitating the movement and employment of key personnel<br>Relaxing domestic content rules<br>Relaxing rules on foreign exchange and repatriation of benefits|•<br>Services Trade Restrictiveness Indexes (WB, OECD)|
|**Rem**<br>**of fo**|**oving barriers to foreign investment and increasing the protection**<br>**reign assets**|•<br>Arbitration awards (ICSID and other arbitration bodies statistics)<br>•<br>Protecting investors (ADI)|
|•<br>•<br>•|Strengthening investor protection, including rights to challenge<br>domestic regulations/decisions<br>Development of alternative dispute resolution mechanisms<br>available to foreign investors (e.g. recognition of international<br>arbitration, bolstering of domestic arbitration capacities)<br>Adjustment of the laws pertaining to nationalization, expropriation,<br>foreign ownership, stability clauses, etc.||

Source: Authors based on OECD, 2012a • _Level of standards and corporate social responsibility (CSR)_ Although respect for standards might vary depending on the maturity of the GVC’s lead firm and the final market (see Kaplinsky, Terheggen and Tijaja, 2010), it is a key element of the functioning of GVCs: “Today, lead firms rely increasingly on global standards to reduce the complexities of these transactions as they place new demands on the value chain. These standards establish the 21