The CTC case study exchange transactions. The foreign exchange regime regulates a wide range of important economic activities, such as portfolio investment and the foreign exchange operations of commercial banks, but CTC measures transactions most relevant for FDI in manufacturing. The relative importance of restrictions on certain foreign exchange transactions may vary across sectors; FDI in mining may rely more on large-scale inflows and outflows, for example, while FDI in tourism may rely more on smaller but more frequent current payments abroad. CTC’s focus on manufacturing avoids sectors in which there may be stronger justification for regulation of FDI, such as the financial sector.<sup>viii</sup> CTC gathered data about the laws and practices that would affect a locally registered subsidiary of a multinational firm engaged in manufacturing with an initial investment of US$ 5 million in equity and a US$ 5 million long-term foreign loan. Restrictions are measured on these capital flows and on standard cross-border transactions associated with manufacturing and trading basic consumer products, assuming the firm does not operate in a special zone or benefit from non-automatic incentives.

Restrictions on converting and transferring currency identified on a transaction covered by CTC are classified into five types, as presented in Figure 1. A transaction is considered ‘unrestricted’ if there are no restrictions other than notification or documentation requirements following established practices for statistical or anti-money laundering purposes. ‘Administrative requirements’ cover procedural regulations that may serve as important monitoring mechanisms, but may also cause undue delays if not implemented efficiently. ‘Moderate restrictions’ are identified when a government authorization or certification is required or when a substantive timing or quantitative limit is placed on a transaction. Heavy and extreme restrictions cover progressively more restrictive regulations, such as if there is no rules-based mechanism in place to reduce discretion in approval processes or if a transaction is not allowed at all. Additional details on the classification of restrictions are provided in Annex 1.

Quantitative scores are assigned to each transaction based on its classification (Figure 1). An additional deduction of 10 points is applied if the time required to complete the transaction exceeds a threshold (for some transactions for which time data were gathered). Indicator scores are calculated by averaging across the transactions comprising each indicator (see Annex 1 for details), and average indicator scores are also calculated at the economy level to enable comparison of the relative degree of restrictiveness. Data on restrictions identified across transactions and indicator scores at the economy and regional level are presented in Annex 2. The data were gathered and reviewed from late 2011 through mid-2012; subsequent reforms to the foreign exchange regime are not captured by the CTC indicators.

Figure 1: Overview of CTC indicator development and scoring methodology

|CTC restriction<br>classifications|Nature of restrictions|Score|
|---|---|---|
|Unrestricted|No restrictions are placed on the transaction at all, other than notification<br>requirements for statistical purposes or documentation requirements<br>followingbestpractices to show the legitimacyof the transaction.|100|
|Administrative<br>requirements|Requirements such as procedural steps or documentation for all transactions<br>that are not substantive restrictions but may represent an unnecessary cost<br>to doingbusiness.|75|
|Moderate<br>restrictions|Substantive limits on the nature of a transaction, such as timing restrictions<br>on when payments may be made; or if government authorization is required,<br>but isgranted for all legitimate requests.|50|
|Heavy restrictions|Government authority over whether a transaction is allowed, such as an<br>approval requirement with no rules-based mechanism to remove discretion,<br>or no indication that all legitimate requests aregranted.|25|
|Extreme restrictions|The transaction or operation is not allowed by law, or does not occur at all in<br>practice due to excessive regulations.|0|

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