FOREIGN INVESTMENTLaws, Codes, Regulation,

Securities

Foreign Investment Laws and CodesInvestment Laws

Investment Codes – Including Bilateral Investment Treaties

Joint Ventures

National Investment Policy

Regional Investment Policy

Investment Applications

Investment Regulation – In General

• Single Owner Investment (includes individuals and entities of 10% or more control in an enterprise not located in one’s home country

• Regulation of Investment commonly set out in investment laws and investment codes

• Joint Ventures – Some socialist countries allow investments only in joint ventures – the regulations are called joint venture laws

• A few states do not have general investment laws but instead put restrictions on investment in specific sectors of the economy, such as agriculture, technology, media, tourism and so on

• Some states have complex system of laws controlling investment, providing incentives, governing technology, transfers, and limiting foreign exchange

Bilateral Investment Treaties (BITs)

• Sometimes laws are put into a “collection” and are made part of a treaty with another state

• These treaties are most often arrangements between a developed state and that state’sfavored developing states

• Sometimes these treaties are between developing states themselves

• For the most part the provisions in BITs are the same as those in the more progressive municipal codes and laws

MORE ABOUT BILATERAL INVESTMENT TREATIES

• BITs constitute the most important protection of international foreign investment to date

• BITs usually defined foreign investment in the conditions under which investors from one state can invest in the other state – this usually means that state parties to BITswill allow national and most-favored-nation status, and will agree to fair and equitable treatment clauses as well as compensation guarantees for expropriation

• Many of the BITs designate the World Bank’s International Centerfor the Settlement of Investment Disputes (ICSID) as the arbitral body

NATIONAL FOREIGN INVESTMENT POLICIES

• The form that foreign investment policies take varies from country to country

• The underlying purposes of the regulations are generally the same worldwide – these include (1) promoting local productivity and technological development, (2) encouraging local participation, and (3) minimizing foreign competition in economic areas already well served by local businesses

• To achieve these purposes, investment laws establish basic policies for screening and regulating foreign investment applications – these fall into three categories: (1) encouraging investments through incentives and minimal regulation; (2) use investment incentives but also require local participation quotas; (3) allow foreign investment subject to local screening and supervision

REGIONAL INVESTMENT POLICIES

• Nations in a particular geographic region may collaborate on and agreed to general standards for investment in the region region – the ASEAN(Association of South East Asian Nations) is one such region

• An example of incentives in this regional investment policy can be viewed in Exhibit 5-3 on page 228-229 of the Text

• The United States, Canada, and Mexico not only created an investment alliance or packed, but entered into a formal trade agreement ( NAFTA) the North American Free Trade Agreement

SCREENING FOREIGN INVESTMENT APPLICATIONS

• Most (but not all) countries require foreign investors to: (1) register with the government and (2) obtain governmental approval of their proposed venture.

• Commonly, foreign investors register and file proposals with a single central agency set up specifically to facilitate foreign investments– not all countries use such an agency

• The central agency may itself conduct the screening or it may simply coordinate the process

PROPOSALS REQUIRING SCREENING

• The criteria for determining which proposals need screening vary greatly from country to country.

• A few states may subject all foreign investment to some form of screening

• Others limit their reviews to proposals seeking investment incentives, to those that involve a certain percentage of foreign investment, or to those whose projected investment exceeds a certain amount of capital

PROPOSALS REQUIRING SPECIAL SCREENING

• In many countries, certain kinds of foreign investment proposals require the approval of specialized agencies

• Commonly, investments in natural resource-based industries (e.g., hydrocarbons, minerals, and for a street) need the approval of agencies that formulate special criteria tailored to the specific requirements of the industries involved

TYPICAL INFORMATION TO BE INCLUDED WITH INVESTMENT REGISTRATION

• (1) The industry to be established in the nature of the product to be produced

• (2) A financial plan, showing the amount of investment in external and local capital

• (3) a production scheme showing the annual volume and value of the production

• (4) a services scheme showing what services will be created and their volume and value

• (5) the owners, the management structure, and the relative share of local and foreign control

• (6) machinery and equipment needed, and their sources and cost

• (7) and import and export scheme showing the expected volume of imports and exports

• (8) the extent that local inputs (including raw materials) will be used and an estimate of the local value added

• (9) and employment scheme, including a program for training nationals to operate and manage the enterprise

• (10) a marketing study of the domestic and export market

• (11) product pricing and projected profits and rate of return

• (12) the proposed location of the industry

EVALUATION CRITERIA

• Impact on the balance of payment• The number of jobs created• The impact of technical know• -how and the training program for indigenous employeesThe impact on the local

market• (including any possible negative consequences for already established national

enterprises)The contribution to the development of law less economically developed zones or regions

• The ratio between foreign and national capital contribution

• The export diversification and stimulation, and import substitution• The use of national inputs and components in the manufacture of the productThe

effect on price levels and the quality of the product

FORMAL AND INFORMAL APPLICATION PROCESSES

The investment application must demonstrate two things to the local regulatory Authority: (1) that the proposed investment fits the guidelines of the investment law; (2) that the investment agrees with the investment philosophy of the host country

APPROVAL OF FOREIGN INVESTMENT APPLICATIONS

• When the screening process is complete the host state will either approve or disapprove a foreign investors proposal

• If the proposal did not ask for the host to grant any incentives, and if the host does not insist upon any concessions from the investor, the approval will often be in the form of a letter from the appropriate agency

• If the host state grants and incentive or the investor agrees to some concession, the arrangement will be set out in a formal investment agreement – this agreement will be governed by the host states contract laws, and any disputes will be resolved in that states courts unless the parties agree otherwise

LIMITATIONS ON FOREIGN EQUITY

• Foreign investment laws frequently forbid or limit the percentage of equity that foreigners may own in local businesses (e.g., in India, foreign ownership is generally limited to 40% and in Mexico to 49%)• Notwithstanding these general restrictions,

exceptions are occasionally made for the purpose of attracting capital to selected industries and sometimes as a matter of administrative discretion

SECTORAL LIMITATIONS

• Foreign investment is commonly restricted by economic sect orRegulations typically: (1) reserve certain sectors of the economy exclusively to the state or its nationals, (2) permit a limited percentage of foreign capital participation in certain sectors, or (3) define certain sectors in which full or majority foreign ownership is allowed or encouraged

TYPICAL “CLOSED” SECTORS

• Public utilities

• Vital or strategic industries

• Industries that are sufficiently developed

• Medium or small-scale industries that can be developed by domestic entrepreneurs

RESTRICTED SECTORS

• Many countries limit the percentage of foreign investment allowed in certain economic sectors – this is done to limit the influence that foreigners have been domestic political, social, and economic affairs

• Examples: Australia limits foreign investment in its radio and television companies to 20%; Canada restricts the amount of equity ownership that foreigners may have and television broadcasting; local and trust companies; fishing; newspapers; bank; and federal oil, gas, and mining leases

FOREIGN PRIORITY SECTORS

• Foreigners are often encouraged to invest in sectors where local development resources are limited, where foreign investment will increase the number of local jobs, and where the foreign export trade will grow.

• Developing countries, especially, allow foreign capital participation in pioneerindustries and in industries that are capital intensive.e, use advanced technology, increase employment, our export oriented, and have products that have a high degree of local value added

GEOGRAPHIC LIMITATIONS

• A few countries limit the geographic areas in which foreign investors may conduct business or own land (as an example Argentina, restricts foreign ownership of land and businesses adjacent to its land and ocean front tears; Chile does not allow foreigners to participate in coastal trade, except for very small vessels)

• Some countries at times for bid foreign investment in their entire territories – the right of the country to restrict foreign investment in particular geographic areas is respected by other states as an expression of the state’s sovereign authority.