World Trade Organization - Organisation Mondiale du Commerce

WT/WGTI/2

World Trade Organization WT/WGTI/2

8 December 1998 (98-4920)

REPORT (1998) OF THE WORKING GROUP ON THE RELATIONSHIP BETWEEN TRADE AND INVESTMENT TO THE GENERAL COUNCIL

TABLE OF CONTENTS

Paragraph

A. INTRODUCTION ……………………………………………………………………….. 1-4

B. PROCEDURAL INFORMATION ON THE ACTIVITIES OF THE WORKING

GROUP …………………………………………………………………………………… 5-16

(a) Sources and materials used in the work of the Working Group ……………………………… 5

(b) Cooperation with other intergovernmental organizations ……………………………………. 6-7

(c) Meetings held to date …………………………………………………………………………….. 8-15

(d) Cooperation with the Working Group on the Interaction Between Trade and

Competition Policy ………………………………………………………………………………… 16

C. SUBSTANTIVE WORK DONE IN THE GROUP …………………………………… 17-225

I. IMPLICATIONS OF THE RELATIONSHIP BETWEEN TRADE AND

INVESTMENT FOR DEVELOPMENT AND ECONOMIC GROWTH ……………….. 18-44

II. THE ECONOMIC RELATIONSHIP BETWEEN TRADE AND INVESTMENT ……… 45-119

(a) The degree of correlation between trade and investment flows; (b) the determinations

of the relationship between trade and investment; (c) the impact of business strategies,

practices and decision-making on trade and investment, including through case

studies ………………………………………………………………………………………………... 47-56

(d) The relationship between the mobility of capital and the mobility of labour ………………. 57-58

(e) The impact of trade policies and measures on investment flows, including the effect of

the growing number of bilateral and regional arrangements ………………………………... 59-62

(f) The impact of investment policies and measures on trade ……………………………………. 63-68

(g) Country experiences regarding national investment policies, including investment

incentives and disincentives ………………………………………………………………………. 69-100

(h) The relationship between foreign investment and competition policy ………………………. 101-119

III. EXISTING INTERNATIONAL INSTRUMENTS AND ACTIVITIES REGARDING

TRADE AND INVESTMENT ……………………………………………………………. 120-161

(a) Existing WTO provisions ………………………………………………………………………….. 122-132

(b) Bilateral, regional, plurilateral and multilateral agreements and initiatives;

(c) implications for trade and investment flows of existing international instruments

instruments …………………………………………………………………………………………. 133-161

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IV. ITEM IV OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY …………. 162-225

(a) Identification of common features and differences, including overlaps and possible

conflicts, as well as possible gaps in existing international instruments ………………… 164-185

(b) Advantages and disadvantages of entering into bilateral, regional and multilateral

rules on investment, including from a development perspective; (c) the rights and

obligations of home and host countries and of investors and host countries; (d) the

relationship between existing and possible future international cooperation on

investment policy and existing and possible future international cooperation on

competition policy ……………………………………………………………………………… 186-225

D. RECOMMENDATION ……………………………………………………………… 226-227

ANNEX 1 CHECKLIST OF ISSUES SUGGESTED FOR STUDY

ANNEX 2 Summary of contributions received in the Working Group on

the Relationship between Trade and Investment

A. INTRODUCTION

1. The Working Group on the Relationship between Trade and Investment ("the Working Group") was established by a decision taken at the WTO Ministerial Conference held Singapore in December 1996. The relevant paragraph (paragraph 20) of the Singapore Ministerial Declaration (WT/MIN(96)DEC) reads as follows:

"20. Having regard to the existing WTO provisions on matters related to investment and competition policy and the built-in agenda in these areas, including under the TRIMs Agreement, and on the understanding that the work undertaken shall not prejudge whether negotiations will be initiated in the future, we also agree to:

° establish a working group to examine the relationship between trade and investment; and

° establish a working group to study issues raised by Members relating to the interaction between trade and competition policy, including anti-competitive practices, in order to identify any areas that may merit further consideration in the WTO framework.

These groups shall draw upon each other's work if necessary and also draw upon and be without prejudice to the work in UNCTAD and other appropriate intergovernmental fora. As regards UNCTAD, we welcome the work under way as provided for in the Midrand Declaration and the contribution it can make to the understanding of issues. In the conduct of the work of the working groups, we encourage cooperation with the above organizations to make the best use of available resources and to ensure that the development dimension is taken fully into account. The General Council will keep the work of each body under review, and will determine after two years how the work of each body should proceed. It is clearly understood that future negotiations, if any, regarding multilateral disciplines in these areas, will take place only after an explicit consensus decision is taken among WTO Members regarding such negotiations."

2. At its meeting of 24 April 1997, the General Council appointed Ambassador Krirk-Krai Jirapaet (Thailand) as Chairman of the Working Group. See document WT/L/215.

3. The present report provides an overview of the work done to date in the Working Group. It is submitted by the Working Group to the General Council in the light of the provision in paragraph 20 of the Singapore Ministerial Declaration that the General Council will keep the work of this Working Group under review and will determine after two years how its work should proceed.

4. The report is organized as follows: Part B provides a procedural summary of the activities of the Working Group to date. Part C provides an overview of the substantive work done in the Working Group to date. Following the approach taken in the Working Group, the description in that part is organized according to the elements of a Checklist of Issues Suggested for Study Reproduced in Annex 1 of this report. which the Working Group used to structure its substantive work. Part D provides a recommendation to the General Council.

B. PROCEDURAL INFORMATION ON THE ACTIVITIES OF THE WORKING GROUP

(a) Sources and materials used in the work of the Working Group

5. The work of the Working Group has been based on written contributions (a total of 43 to date), oral statements, and questions and answers by Members. This material has been supplemented by information received from observer intergovernmental organizations and by notes prepared by the Secretariat. An index of written contributions is attached as Annex 2.

(b) Cooperation with other intergovernmental organizations

6. The Singapore Ministerial Declaration (paragraph 20) encouraged the Working Group to undertake its work in cooperation with UNCTAD and other appropriate intergovernmental fora in order to make the best use of available resources and to ensure that the development dimension is taken fully into account. In this regard, the IMF and the World Bank attended the Working Group's meetings in an observer capacity, pursuant to the cooperation agreements concluded between the WTO and these organizations. UNCTAD, the OECD and the UNIDO also attended the meetings as observers, on the basis of an invitation from the Working Group. At the request of the Working Group, UNCTAD, the OECD and the World Bank made written and oral presentations on the work of their respective Organizations at the first meeting of the Working Group. At subsequent meetings, they kept the Working Group updated on relevant activities of their respective Organizations and contributed to the debate. The Working Group was also kept informed of relevant work under way in various regional contexts, such as the APEC. The Working Group is highly appreciative of the valuable contribution to its work made by the observers.

7. A number of regional organizations also requested observer status in the Working Group. A decision on requests for attendance by regional organizations was subsequently put on hold pending the outcome of more general consultations on the issue of observer status in the context of the General Council.

(c ) Meetings held to date

8. To date, the Working Group has held seven formal meetings. The dates of these meetings were: 2 and 3 June 1997; 6 and 7 October 1997; 8 December 1997; 30 and 31 March 1998, 16 and 17 June 1998; 1 and 2 October 1998; and 25 and 26 November 1998. The dates of these meetings were determined in the light of the instruction in paragraph 22 of the Singapore Ministerial Declaration that careful attention be given to coordinating meetings with those of relevant UNCTAD bodies. Reports on the first six meetings have been circulated in documents WT/WGTI/M/1-6. A report on the seventh meeting will be circulated shortly as document WT/WGTI/M/7.

9. At its meeting of 2 and 3 June 1997, Members made general statements on the nature of the work to be pursued under the mandate contained in the Singapore Ministerial Declaration and identified specific issues for study in the Working Group. Three written contributions were received from Members. Representatives of the UNCTAD, the OECD and the World Bank made statements on their activities relevant to the Working Group. The Working Group also discussed WTO provisions on matters related to investment, using as a basis an informal Note prepared by the Secretariat (Job No. 2988), and considered an informal Note by the Secretariat (Job No. 2843) on relevant activities and initiatives in other international fora. The Working Group took note of a Checklist of Issues Suggested for Study, prepared by the Chairman, in the light of the suggestions made by Members, as a basis for the organization of the future work of the Group

10. At its meeting of 6 and 7 October 1997, the Working Group started its substantive discussion on the first three main areas identified in the Checklist of Issues Suggested for Study: (I) implications of the relationship between trade and investment for development and economic growth; (II) the economic relationship between trade and investment; and (III) stocktaking and analysis of existing international instruments and activities regarding trade and investment. Four written contributions were received from Members. On the first Item, the Working Group also had before it contributions by five international intergovernmental organizations (OECD, UNCTAD, World Bank, IMF and UNIDO) which had been requested at the meeting in June 1997 to provide a summary of work done in these organizations on this matter. Discussion of the second item was based on a Secretariat Note on the relationship between trade and foreign direct investment. On the third Item, the Working Group continued its examination of WTO provisions on matters related to investment and took note of a supplementary Note by the Secretariat on developments regarding activities and initiatives in other fora (Job No. 5279). The Working Group also received a written contribution from the APEC Investment Experts Group on ongoing work on investment in the context of APEC.

11. At its meeting of 8 December 1997, the Working Group continued its work on Items I-III of the Checklist of Issues Suggested for Study. Six new written contributions were received from Members. The Working Group also decided on the organization of its work under Item IV of the Checklist and agreed to hold meetings in March, June, October and November 1998.

12. At its meeting of 30 and 31 March 1998, the Working Group continued its consideration of Items I-III of the Checklist of Issues Suggested for Study and started work on Item IV of the Checklist by discussing the factual aspects of the first indent of that Item. In addition to nine written contributions received from Members, contributions were received from the UNCTAD and the OECD. The Working Group also had before it Notes by the Secretariat on bilateral, regional, plurilateral and multilateral agreements, the availability of statistics on foreign direct investment and outward foreign direct investment from developing countries.

13. At its meeting of 16 and 17 June 1998, the Working Group considered Items I-IV of the Checklist of Issues Suggested for Study. Seven written contributions were received from Members. In addition, in relation to Item I of the Checklist the Working Group had before it a synthesis paper prepared by the Secretariat on the information made available to the Working Group on the relationship between FDI and development. In connection with Item IV, the Working Group also received a contribution from the OECD on the OECD Guidelines for Multinational Enterprises and heard a statement by the observer from UNCTAD on UNCTAD's work on criteria for evaluating investment agreements from a development perspective.

14. At its meeting of 1 and 2 October 1998, the Working Group considered Items I-IV of the Checklist of Issues Suggested for Study. Eight written contributions were received from Members. In addition, the Working Group had before it an informal Note by the Secretariat on the relationship between FDI and development (Job No. 5229), a Note by the Secretariat on the effects of investment incentives and performance requirements, and several written contributions from UNCTAD.

15. At its meeting of 25 and 26 November 1998, the Working Group considered Items I-IV of the Checklist of Issues Suggested for Study. Four written contributions were received from Members. In addition, the Working Group had before it a Note by the Secretariat on the relationship between foreign direct investment ("FDI") and development and a written contribution from the IMF. The Working Group adopted the descriptive part of its report to the General Council. It also agreed ad referendum on the text of a recommendation to the General Council concerning the extension of the Group's mandate. This recommendation was formally adopted by the Working Group on 7 December.

(d) Cooperation with the Working Group on the Interaction Between Trade and Competition Policy

16. The Singapore Ministerial Declaration provides that the Working Group on the Interaction between Trade and Competition Policy and the Working Group on the Relationship between Trade and Investment shall draw upon each other's work, if necessary. In this regard, the Chairmen of the two Working Groups kept in close contact with a view to coordinating the work of the two Groups on relevant issues. In order to benefit from the work of the Working Group on the Interaction between Trade and Competition Policy, the Working Group agreed at the initial stage of its work that it would take up the issue of the relationship between investment and competition policy, referred to in the last indent of Item II of the Checklist, after this subject had been discussed in the Working Group on the Interaction between Trade and Competition Policy. Accordingly, the Working Group started its discussion of this matter at its meeting of 1 and 2 October 1998, when it heard a presentation by the Chairman of the Working Group on the Interaction between Trade and Competition Policy on the discussion that had taken place on this subject in that Working Group.

C. SUBSTANTIVE WORK DONE IN THE GROUP

17. This part of the report provides an overview of the substantive work done in the Working Group, pursuant to the mandate given in paragraph 20 of the Singapore Ministerial Declaration. By its very nature, such an overview cannot reflect everything that was said and capture all nuances, such as can be found in the detailed records of the individual meetings of the Working Group (WT/WGTI/M/1-7) and in the written contributions of Members (see Annex 2). The work undertaken was structured on the basis of the Checklist of Issues Suggested for Study (Annex I) which the Group took note of at its meeting on 2 and 3 June 1997. This summary uses the same structure.

I. IMPLICATIONS OF THE RELATIONSHIP BETWEEN TRADE AND INVESTMENT FOR DEVELOPMENT AND ECONOMIC GROWTH

18. The matter of the implications of the relationship between trade and investment for development and economic growth was considered at each meeting of the Working Group subsequent to its first meeting held in June 1997. At that meeting, the Working Group decided to start its work under this Item by inviting relevant international intergovernmental organizations to prepare summaries of work done in their organizations on this matter. In response to this invitation, contributions were submitted by the OECD, UNCTAD, World Bank, IMF and UNIDO (W/8 and Addenda 1-4). In this part of the report, documents issued in the series WT/WGTI/W are referred to as "W/_". Documents in the series WT/WGTI/M/_ are referred to as "M/_". In addition, written contributions on this Item were provided and were introduced orally by Japan (W/11 and 18), Poland (W/13), Korea (W/16), the United States (W/14 and 27), Hong Kong, China (W/10) and Costa Rica (W/31). A written contribution was also provided by Bolivia (W/20). Oral statements were also made by Switzerland, Australia, India, Indonesia and the Philippines on behalf of ASEAN WTO Members, Egypt, Pakistan, Tanzania, Uganda, Canada, Brazil, Mexico, Argentina and Norway.

19. The contributions by the international intergovernmental Organizations in documents W/8 addressed recent trends in the volume and geographical pattern of international investment, particularly FDI; the relationship between recent developments in FDI flows and the process of increasing global economic integration; the effects of FDI on development and economic growth in regard to capital formation, technological and managerial know-how, access to export markets, domestic entrepreneurship and forward and backward linkages, competition, employment, balance-of-payments and macroeconomic stability; and policies toward FDI.

20. Several key themes emerging from these contributions were highlighted in introductory remarks by the observers from these Organizations:

It was stated that the past 15 years had witnessed a remarkable convergence of views among OECD member countries in favour of FDI as a result of changes in economic policies to reduce the rôle of governments and to rely more on the free play of market forces and of institutional factors, such as regional trade and investment agreements. Restrictions on FDI in manufacturing activities in OECD member countries had almost disappeared and the previously widespread restriction of foreign activity in the financial sector had been largely dismantled. There was, however, residual sensitivity to foreign ownership in certain sectors, such as the exploitation of natural resources, transport and communications and cultural industries. Moreover, several countries still maintained screening systems, but these now applied to only a limited range of investments and operated with minimum bureaucratic support. There was also reticence about sharing funding for research and development with foreign-owned firms. While OECD countries recognized that every individual FDI project would not necessarily contribute positively to economic welfare in a directly measurable way, they considered that it might not be possible to assess at the time of the investment whether the effects would be positive or not, that there was a high cost to government intervention in individual investment decisions; and that, to the extent that regulation was needed, for example in the field of competition, the best approach was through non-discriminatory policies that applied equally to domestic and foreign investors. M/2, paragraph 4.

In regard to the analysis in one of these contributions of the effects of FDI on development that arose from the linkages of FDI with trade, the point was made that the conventional analysis of the relationship between FDI and trade in terms of whether FDI and trade were complements or substitutes was becoming less relevant in a globalizing economy in which trade and investment were determined simultaneously by decisions of multinational enterprises regarding the location of their production facilities. M/2, paragraph 5. The point was also made that the impact of FDI on development was best understood by viewing FDI as involving a package of tangible and intangible assets (technology, innovation, organizational and managerial practices and skills, human resource development, access to markets and forward and backward linkage with domestic enterprises) and that the relative importance attached by host countries to the intangible assets associated with FDI had increased. M/2, paragraph 5. Similarly, in regard to the recent experience of OECD member countries, it was stated that the shift toward a more favourable attitude toward FDI in these countries over the last 15 years had been accompanied by greater emphasis on the contribution of FDI to technology and innovation, its stimulus to competition and increased efficiency, and in its rôle in promoting integration in the world economy, as compared to the contribution of FDI to capital formation, tax revenue and the balance-of-payments. M/2, paragraph 4.

Reference was made to the conclusions drawn in one of the contributions that (i) the expansion of cross-border production by multinational enterprises and closely associated firms provided developing countries with opportunities to enhance the benefits they drew from greater integration with the world economy, and that (ii) the maintenance of a high level of competition, a stable political and macroeconomic climate, open trade and investment policies, adequate transport and communications infrastructure and the maintenance of a predictable and effective institutional environment were important conditions for attracting foreign investment and enhancing its benefits. M/2, paragraph 6.

It was stated that there was growing concern that globalization of the world economy posed not only an opportunity but also a potential threat to developing countries because these countries would have to face mounting international competition in both their export and domestic markets. The risk was particularly serious for sub-Saharan African countries and the least-developed countries elsewhere. Furthermore, industrial competitiveness was increasingly determined by technological prowess or capability and the rate of technological change was accelerating in an unprecedented way. The result of these developments was that an entirely new competitive environment had emerged for industrial enterprises world-wide, leading to the establishment of global production networks and new organizational structures of enterprises. In order to respond effectively to these challenges, developing countries needed to focus increasingly on the issue of competitiveness in formulating and implementing their industrialization strategies. M/2, paragraph 8.

It was stated that FDI was not a panacea and not the most important factor in development, but that on balance it could make an important contribution to industrialization, industrial restructuring and development generally. The rôle of national policies in enhancing this contribution of FDI to the development process was twofold. First, much attention at a national level focused on attracting FDI through the adoption of more liberal investment régimes. Second, national policies were important in encouraging FDI in priority areas for the economic development of individual countries, reducing the possible negative effects of FDI with regard to, for example, transfer pricing and restrictive business practices and fostering backward and forward linkages with domestic enterprises. M/2, paragraph 5.

The point was made that there was a close interrelationship between the trade and FDI decisions of firms and the importance of a sound and sustainable macroeconomic and financial environment in order for a country to be able to attract continuing flows of FDI. Sustained FDI inflows were in particular dependant upon the existence of an open trade and payments system. M/2, paragraph 7.

21. In Members' comments on these contributions, the point was made that that they converged in respect of their assessment of the positive contribution of FDI to economic development and growth. In this connection, particular points emerging from these contributions were highlighted as follows: the shift in attitudes of many developing countries toward a recognition of the positive contribution of FDI; the increasing rôle of factors such as technological capability, human skills, quality of infrastructure as determinants of the location of FDI, as compared with access to natural resources and cheap labour; the growing importance of FDI to host economies as a vehicle for the transfer of intangible assets, such as technology and managerial skills; the complementary relationship between trade and FDI, and the rôle of open trade policies in contributing to the attractiveness of countries as locations for FDI. M/2, paragraph 12. The point was made that the work of the Working Group should be viewed in the context of the growing competition among governments to attract FDI and of the globalization of the world economy, which were a challenge for all countries. M/2, paragraph 11. It was also stated that, while the effects of FDI for development were on the whole positive, as shown by the empirical evidence of the positive correlation between economic growth and FDI inflows and of the importance of FDI as a vehicle for the transfer of technology, there could also be negative effects, for example with respect to the balance of payments. M/2, paragraph 12.

22. The point was made that there was a need for more emphasis on the development implications of FDI and for a balanced approach regarding possible negative effects of FDI. The relationship between FDI and economic development was a complex and multifaceted one, of which the trade dimension was only one aspect. Other relevant aspects included the implications of FDI for domestic savings and consumption patterns, finance and technology, ownership of productive and financial assets, the balance of holdings between domestic and foreign investors and within various communities in a country, strategic and development policies at the sectoral level, macroeconomic implications and sustainability of the development process. A number of specific suggestions were made on themes to be pursued in the Working Group in order to give more prominence to the development dimension: the relationship between investment and trade liberalization and stages of development, and, in particular the experience of countries, including the present industrialized countries, in this connection; the rôle of FDI in transferring intangible assets, notably in the fields of technology and human resource development and the implications of this for development; the relationship between different types of FDI and the development process; and the experience with sectoral targeting and the rôle of industrial policy. The need for more attention to be paid to the situation of the least developed countries was stressed. M/2, paragraph 14. In regard to the suggestion for further work on issues relating to the transfer of technology, it was proposed that the Working Group also examine the relationship between the transfer of technology and strong and effective protection of intellectual property. M/2, paragraph 16.

23. Information was presented and statements were made on the experiences of individual Members regarding the implications of the relationship between trade and investment for development and economic growth: It should be noted that information on experiences of individual Members regarding the rôle of FDI in their economies, the relationship between trade and investment and policies toward FDI was also presented in a number of contributions made in relation to Item II of the Checklist.

- The rôle of FDI in the recent growth and transformation of one Member's economy from a centrally-planned to a free market economy was discussed, in which connection attention was drawn to the recent increase of FDI inflows to this Member resulting from the liberalization of its regulatory framework for FDI and the impact of FDI on the competitiveness and export performance of the Member's economy. M/2, paragraph 13.

With respect to the experience of one Member in whose economy FDI had played a rather limited rôle until the early 1980s but which had recently liberalized its policies toward FDI, M/2, paragraph 13. empirical evidence was provided which showed that FDI had contributed significantly to the economic development of this Member through its effects on employment, technology advancement, economic growth and competition. M/3, paragraph 4.

- It was stated that the experience of one Member with FDI echoed the positive experience of several other Members in terms of the effects of FDI on economic development, and that the Member's success as an international trading, financial and manufacturing centre could largely be ascribed to the presence of multinational enterprises which played a vital rôle in improving its competitive edge through the transfer of technology, improved service standards, and enhanced skills and management expertise to local companies. M/3, paragraph 6.

- Evidence was provided on the positive contribution of foreign affiliates to science and technology development of one Member. M/4, paragraph 6.

- Mention was made of the recent significant increase in FDI inflows to one Member, the substantial economic contribution of foreign firms, especially in technology-intensive industries, and the important rôle of inward FDI in creating employment and in encouraging capital formation. It was also stated that outward FDI, which had recently increased significantly, had resulted in economic benefits. Both inward and outward FDI stimulated economic growth and job creation through several mechanisms: increasing capital formation, enhancing trade flows, enhancing technology flows, improving the competitiveness of the Member's firms in international markets, raising incomes through direct investment abroad and increasing competition in markets. M/4, paragraph 14 and M/3, paragraph 6.

- With regard to the experience of one Member, the point was made that it had for many decades pursued an open policy towards FDI. During the 1970s, when it was a major host country for FDI, it had experienced rates of economic growth of 8-11 per cent annually. In the 1980s, economic growth had slowed as a result of the debt crisis and macroeconomic difficulties but the Member had maintained its position among the top ten recipients of FDI in the developing world due, inter alia, to debt equity conversion schemes and reinvestments by established foreign investors. Since 1994, debt rescheduling and the implementation of an inflation control programme had led to a significant increase of FDI. It was expected that a substantial proportion of future FDI inflows would be related to privatization programmes. M/3, paragraph 6.

- In relation to the experience of another Member, the point was made that there had been a considerable increase in inflows of FDI in recent years, that there was a positive relationship between FDI and indicators of human development (which reflected the importance of the level of development of human resources as a determinant of FDI), and that FDI had contributed to employment creation and growth of industrial exports. The main features of this Member's open policy toward FDI were also described. M/4, paragraph 5.

- Attention was drawn to the important rôle which FDI had historically played in the economic development of one Member, in particular in regard to the development of natural resources. M/4, paragraph 15.

24. Experiences of individual countries were also addressed in connection with a contribution which the Working Group received from the OECD (W/26), which contained an analysis of the relationship between FDI and development through case studies of six countries. Several points emerging from this analysis were identified as particularly relevant: the contribution of FDI to economic restructuring, export growth and diversification; the rôle of FDI in improving the capacity of host countries to respond to opportunities offered by global economic integration; the important rôle of FDI in the context of privatization, notably in infrastructure sectors; and the beneficial effect of FDI liberalization in financial services in promoting the efficiency and stability of the financial sector of host countries. M/4, paragraph 9.

25. It was argued that FDI on the whole played an important positive rôle in transferring intangible assets to recipient countries, especially developing countries, but that developing countries had sometimes also been confronted with negative effects of FDI. Examples of these negative effects were: restrictions on the activities of foreign affiliates imposed by parents in the context of technology transfer agreements; the risk facing some developing countries of becoming locations for simple assembly operations; instability of the trade balance and of the balance of payments on account of FDI, as illustrated by the recent experience of some countries in South East Asia; the exercise of undue political influence by foreign firms; and the negative impact of foreign affiliates on domestically available financing and competition in the domestic market, including on small- and medium-sized enterprises. Thus, whether FDI had positive effects on the whole was not at issue in the Working Group, as shown by the efforts of all Members to attract FDI. Rather, the key question was how host countries could minimize possible negative effects and maximize positive effects of FDI through appropriate policies. M/4, paragraphs 18 and 20.

26. Regarding the point raised on the need to take account of the possible negative effects of FDI, reference was made to the experience of certain Members which had not faced any negative effects of FDI liberalization, including from a development perspective. In this regard, the point was made, with reference to the experience of one Member which at the initial stage of its development had relied heavily on foreign public and commercial loans rather than FDI, that the more liberal FDI policy pursued since the early 1980s had contributed to rectifying the structural problems the Member's economy had faced over the past decades and that a more active and aggressive FDI liberalization policy would have contributed even more to this restructuring process. M/4, paragraphs 11 and 12.

27. Regarding the reference made to possible negative effects of FDI arising from anti-competitive practices of foreign affiliates or from arrangements between parents and foreign affiliates, as in the case of restrictions on transfer of technology, the question was raised whether there was specific empirical evidence to substantiate these concerns. It was stated in this regard that the experience of one Member suggested that restrictive practices were not a typical feature of foreign firms and were adequately dealt with through a non-discriminatory application of competition law. The presence of foreign firms enhanced competition in domestic markets and was an important factor to be taken into consideration in the application of competition law. M/4, paragraph 22. It was also said to be unlikely that there was empirical support for the argument that FDI could have negative balance-of-payments consequences, and it was noted that such an argument contradicted evidence contained in the OECD contribution in W/26. WT/WGTI/M/4, paragraph 9.

28. The view was expressed that developing countries had encountered problems in regard to the rôle of FDI as a channel for the transfer of technology and for enhancing organizational, managerial and marketing skills. This issue needed to be viewed from the perspective of the dependence of developing countries on modern industrial technology and the ownership by multinational enterprises of critical technology which provided them with superior competitive power with which they could enter into a bargain over technology with recipients. The monopoly acquired by multinational enterprises on account of owning critical technology in fact allowed them to restrict the effective transfer of technology to developing countries. In this context, reference was made to studies which cast doubt on the extent to which transfer and diffusion of technology to developing countries had occurred in practice, and to empirical evidence on the excessive direct and indirect costs of technology imports in developing countries. In light of the fact developing countries' experience with technology transfer through FDI had sometimes been disappointing, there was a need to study possible disciplines for ensuring the effective transfer of technology along with FDI and for suggesting ways in which domestic capacity could be built up through FDI. With reference to an issue raised in another WTO body regarding transfer of technology on non-commercial, preferential terms for achieving the global objective of sustainable development, it was stated that, at least in cases where high technology was specifically mandated under national, international or multilateral régimes, transfer of technology on fair and favourable terms needed to be ensured. With the gradual reduction of overseas development assistance and the increased reliance on corporate flows, it was even more important for technologies to be made available to developing countries at prices that were affordable, in a way that was commercially viable and in such a manner as to be effective in building domestic capacity. M/5, paragraphs 4 and 5.

29. Given that the work of the Group under this Item of the Checklist focused on the effects of FDI, the view was expressed that the implications of portfolio investment for development and a country's balance of payments merited more thorough examination. M/5, paragraph 8. Reference was also made to a recent study by UNCTAD on the Asian financial crisis, which confirmed that FDI was a more stable source of financing than portfolio flows and commercial lending. M/4, paragraph 23.

30. Another important dimension of the Group's discussions under Item I of the Checklist pertained to policies toward FDI. One theme discussed in this regard concerned the importance of the overall regulatory framework of host countries in maximizing the benefits from FDI and the special importance of trade policy in this respect. In this connection, it was argued, inter alia, with reference to the contribution from the OECD in W/26, that liberalization of FDI policies needed to be an integral part of comprehensive economic reforms and that trade liberalization played a key rôle in attracting FDI and enhancing the contribution of FDI to economic development. Policies pursued in the past by some countries with large domestic markets to attract FDI on the basis of a protected home market had lost their effectiveness as they had run into market saturation and foreign investors had shifted to more dynamic countries and markets. Recent evidence showed that trade liberalization had a positive effect on the volume of FDI inflows for the following reasons: first, it made domestic markets more dynamic, leading to higher growth and an expansion of demand in host countries; second, a reduction of trade barriers meant that multinational enterprises could import better or lower-cost inputs which made export-oriented production in the host country viable; and, third, regional or multilateral agreements implied that these exports would face fewer barriers abroad. Trade liberalization had perhaps an even more important effect on the quality of FDI. Several studies had shown that FDI in a highly protected environment could have a negative effect on host countries. Trade protection created economic rents which could be captured by foreign investors and transferred abroad. In addition, since the lack of competition in host country markets made it unnecessary for a parent firm to transfer the most advanced technology to its affiliate, trade protection also dampened the transfer of technology. M/4, paragraphs 8 and 9.

31. It was also stated that, while there was ample evidence to confirm that openness was a determinant for the attraction of investment and that greater investment encouraged further openness, account should also be taken of restrictive features of particular business practices and strategies. In the case of FDI which targeted the domestic market of host countries, foreign affiliates sometimes ended up dominating the domestic market, especially during the early stages of product and market development. In other cases, foreign affiliates attempted to secure tariff and other forms of protection. Sometimes they were subject to export restrictions imposed by their parent firms. Thus, business strategies and practices, by themselves, had an equally important, if not determinative rôle in the flow of investments. Therefore, the view that trade and investment went hand in hand, reinforcing one another, and that they were largely determined by a host country's degree of openness, needed to be qualified. M/4, paragraph 18.

32. Comments were made on certain themes emerging from the experiences of individual Members. In regard to the historical evolution of FDI policies of one Member, the point was made that in a globalizing economy restrictive policies such as those implemented by this Member in the immediate post-World War II period were likely to have negative effects on economic growth and trade. M/3, paragraph 4. With reference to the experience of another Member, the point was made that an active FDI liberalization policy contributed to economic development but that strong economic fundamentals as well as effective management of macroeconomic policies were essential for investment liberalization to produce the expected outcome, and that in order to maximize the positive effects of FDI, liberalization policies should be tailored to meet the needs and priorities of each country's economic development policy. M/4, paragraph 12. In respect of the rôle of FDI in the development of natural resources of one Member, it was observed that national control had always been and remained a hotly debated issue but that it had become clear that, in general, national control was not enhanced by discrimination between domestic and foreign economic actors. M/4, paragraph 15.

33. More generally, there was debate on the issue of whether or not certain policies pursued in the past were still relevant in the present circumstances. It was argued that the issue of FDI régimes and the effects of FDI must be seen in a different light now than in the past and that restrictive policies like those applied in the past by certain countries would be counterproductive in the present environment of increasing global economic integration and accelerating technological change. M/3, paragraph 5 and M/4, paragraphs 16 and 22. Reference was also made in this context to the findings of the OECD contribution (W/26) regarding the declining rationale for and rising costs of FDI restrictions and performance requirements in an environment of trade liberalization and an increasing orientation of FDI toward production for export to regional or global markets, and the counter-productive effects of certain policies pursued by host countries in the past aimed at augmenting the transfer of technology, for example through mandatory joint ventures or technology transfer requirements. However, with reference to the assertion that certain FDI policies were unlikely to be effective in the present context, it was also stated that this notion required further qualification and analysis in order to determine in detail which specific policies had been effective in the past and would no longer be relevant in the present context. M/4, paragraph 20. Different views were expressed on whether the Working Group would benefit from conducting an historical analysis of the evolution of FDI policies in individual countries. M/3, paragraphs 7 and 8.

34. Another point giving rise to discussion was the view that, in the face of possible negative consequences of FDI, industrial policy, including sectoral targeting, was a necessary element of national investment régimes in order to optimize the benefits from, and to minimize, if not eliminate, the negative effects of FDI and as an exercise of the sovereign right of each country to pursue development policies in accordance with its domestic needs and priorities. It was stated that sectoral targeting had proved its effectiveness in addressing not only national but also regional or locational and sector-specific objectives, and that a sectoral targeting policy should be pursued in a complementary relationship with a policy of general openness toward FDI. M/4, paragraph 18.

35. In this connection, the argument was advanced that restrictive FDI policies based on infant-industry protection grounds would, in the current context, seriously impede technological innovation, given the rapid pace of technological change in today's world, and that contributions presented to the Working Group and experiences of certain Members called into question the effectiveness of sectoral targeting and protective policies. M/4, paragraphs 19 and 22. In response, it was stated that sectoral targeting should be distinguished from the concept of infant-industry protection, which was not a basis for sound policies. M/4, paragraph 21.

36. Regarding technology transfer, it was argued that, despite the point that various measures (such as joint venture requirements, mandatory transfer of technology, compulsory licensing and local content requirements adopted by host governments to augment the transfer of technology) might have had the opposite effect, it had to be recognized that joint ventures and investment policies involving training of local employees were more beneficial for the effective transfer of technology to host countries. M/5, paragraph 5. In response, it was stated that several contributions had made the point that import substitution policies might enable multinational enterprises to undertake market-seeking investment which would fail to incorporate state-of-the-art technologies, whereas export-oriented policies, under which production had to be internationally competitive, were more likely to encourage the introduction into the host country of the most advanced technology. M/5, paragraph 6.

37. While support was expressed for the point in the the OECD's contribution (W/26) that the presence of a screening mechanism was the most important barrier to FDI, it was also argued that a properly administered screening mechanism, which provided for an expeditious assessment of an investment proposal on the basis of transparent criteria, was not a hindrance to investment flows. WT/WGTI/M/4, paragraph 10.

38. The relationship between FDI restrictions and fiscal policies designed to offset such restrictions and other disincentives was raised as a matter for further study. M/5, paragraph 8.

39. The Working Group considered a Note by the Secretariat (W/38), prepared at the request of the Working Group, which contained a synthesis of the information made available by Members and international intergovernmental organizations on the links between FDI and development, both historically and in the present situation. It was stated that this Note was an accurate, balanced and comprehensive reflection of the information provided and the discussions that had taken place so far on the relationship between FDI and development, and that it showed that the information presented to the Working Group indicated that the effects of FDI on development were on the whole beneficial. The view was also expressed that, though the Secretariat Note provided a good factual presentation of information submitted and views expressed thus far in the Working Group, it did not obviate the need for studies on the historical evolution of FDI policies, especially those of developed countries, and on the possible negative effects of FDI. It was also stated that the Secretariat Note did not represent an adequate, balanced treatment of the issues arising in regard to the effects of FDI on development because it was largely based on written contributions, which tended to endorse a certain point of view, and did not take sufficient account of the concerns that were not always expressed in written contributions. In this connection, the Working Group agreed that the Secretariat would conduct in a balanced manner a study of the effects of FDI on development and economic growth, with inputs from Members, if they so desired, and that the Secretariat would also conduct a study of the historical evolution of FDI policies. M/5, paragraphs 8, 9 and 12. The first part of the study on the effects of FDI on development was submitted to the Working Group at its meeting of 1 and 2 October 1998 in an informal Note by the Secretariat (Job No. 5229). A revised, expanded version of this Note was submitted to the Working Group at its meeting of 25 and 26 November 1988 (document W/65).

40. Support was expressed for the point in the informal Note in Job No 5229 that the indirect effects of FDI on development which arose from the diffusion of technology and other know-how were more important than the direct effects of FDI, and that one should consider not only the actual transfer of technology but also the spread of better managerial practices and the contribution of FDI to enhancing competition in host country markets. The emphasis on the technology-related spillover effects of FDI was warranted in the light of the fact that most FDI originated from a small number of developed countries which played a dominant rôle in the production of technology and that multinational enterprises from these countries dominated the demand and use of technology. In addition, formal technology transfer agreements had been shown not to be a significant channel for the dissemination of modern and advanced technology. The overall positive effect of FDI in respect of technology was undeniable, whether these effects occurred through actual transfers, licensing or through spillover, "contagion" or demonstration effects. In regard to the point made in the informal Note on the importance of the level of development of a host country, the level of local technological capabilities and the degree of competition in host country markets in harnessing spillovers, it was said that this was an important issue for future consideration of the development implications of FDI. It was proposed that there be further study of the issue of how technology spillovers occurred in developing countries in which domestic firms were sometimes unable to respond to the innovation and competitive challenges introduced by multinational enterprises. This would also allow the Working Group to explore means by which linkages between multinational enterprises and domestic firms could be strengthened, inter alia through the upgrading of human resources so as to enhance the capacity of domestic firms to absorb the various spillover effects of FDI.

41. With reference to the conclusions drawn in the informal Note that the positive effects of FDI through technology spillovers varied depending upon the characteristics and policies of host countries, and that the existence of a competitive environment and local technological capabilities was especially important in this regard, it was stated that this confirmed that the best way to maximize the benefits of FDI was through the adoption of measures of a generic nature aimed at improving the overall regulatory and economic environment by enhancing competition and improving human skills and technological capacity. If the overall framework for economic activity was sound, FDI enhanced competition in domestic markets of host countries and contributed to the dissemination of technology and the upgrading of human skills. Thus, there existed a close complementarity between the indirect effects of FDI and the characteristics and policies of host countries in their contribution to technological development. The conclusions drawn in this Note were consistent with the view which had been expressed in the Working Group that there was a mutually supportive relationship between liberalization of FDI policies and the application of competition policies.

42. The point was made that there was a need for further study of the relationship between mechanisms for the transfer and diffusion of technology and the rôle of certain types of performance requirements and incentives, and that this relationship should be viewed in the light of the imperfections of markets for technology. It was stated, in this regard, that experience had shown that multinational enterprises were perfectly capable of operating in an environment where market-friendly performance requirements were used to maximize technology spillover effects, in particular where such measures did not relate to their core process technology. Thus, the view was expressed that the rationale of the prohibition contained in several existing investment agreements and in the draft Multilateral Agreement on Investment of performance requirements related to the transfer of technology and the promotion of research and development activities in host countries was questionable. The experience of a number of countries had demonstrated that it was possible to promote the transfer of technology by using perfomance requirements and incentives which were market-oriented and which did not in any way involve expropriation of technology. In order to understand the key rôle of this type of performance requirements and incentives, it was essential to take into account the fact that markets for technology did not correspond to the model of perfect competition, but were typically characterized by the existence of oligopolistic equilibrium and the existence of barriers to entry by small- and medium-sized enterprises. This necessitated the application of measures to level the playing field so as to enable such enterprises to negotiate on equitable terms technology transfer agreements or to become part of alliances with other enterprises. Investments by multinational enterprises were not only motivated by the objective of profit maximization in regard to a particular investment, but also by strategic considerations concerning the maximization of profit from a more global perspective. This strategic behaviour was illustrated by the fact that, even where it was possible for a multinational enterprise to purchase inputs in a local market, it often preferred to use inputs produced in production facilities which it owned in other markets to protect its dominant market position. The existence of this type of strategic behaviour in a context of oligoplictic equilibrium required the application of market-oriented measures to promote the creation of linkages with domestic suppliers and to transfer technology.

43. The comment was made that, if there was a propensity of multinational enterprises to retain control over core process technology, this was because they were concerned that transfer of this technology might negatively affect their competitive position. It was therefore difficult to see how the application of performance requirements and incentives could alter this. On the other hand, if the transfer of other types of technology was commercially rational, the application of such measures was unnecessary.

44. In response to this observation, it was stated that, while it was not possible to demonstrate ex ante under what circumstances there was a need to apply incentives or performance requirements to promote the transfer of technology, it was possible to demonstrate that these measures were not market distorting in an oligopolistic environment. The identification of market-oriented policies to promote technology transfer was an important area where the Working Group could make a pragmatic contribution to finding common ground between developed and developing countries and would address many of the concerns raised in the Group regarding the development implications of FDI.

II. THE ECONOMIC RELATIONSHIP BETWEEN TRADE AND INVESTMENT

45. The matter of the economic relationship between trade and investment was considered at each meeting of the Working Group after its first meeting in June 1997. At the second meeting, the Working Group focused on four indents of Item II of the Checklist, The degree of correlation between trade and investment flows, the determinants of the relationship between trade and investment, the impact of trade policies and measures on investment flows, including the effect of the growing number of bilateral and regional arrangements, and the impact of investment policies and measures on trade. while at subsequent meetings it also discussed three additional indents. The impact of business strategies, practices and decision-making on trade and investment, including through case studies, the relationship between the mobility of capital and the mobility of labour, and country experiences regarding national investment policies, including investment incentives and disincentives. However, the last indent, concerning the relationship between foreign investment and competition policy, was discussed at the meetings of 1 and 2 October and 25 and 26 November 1998, in the light of a decision taken by the Working Group at its second meeting that it would take this matter up only after it had been considered in the Working Group on the Interaction between Trade and Competition Policy.

46. Written contributions on this Item of the Checklist were made by Hong Kong, China (W/10), the European Community and its member States (W/12 and 63), Japan (W/11 and 59), Cuba (W/17 and 35), Colombia (W/15), Korea (W/16, 57, and 62), the United States (W/14 and 55), Turkey (W/37), India (W/39), ASEAN WTO Members (W/41), and Mexico (W/64). Oral statements were also made by Costa Rica, Norway, Australia, Switzerland, Egypt, Malaysia, Morocco, New Zealand, the Dominican Republic, Canada, Venezuela and El Salvador. The Secretariat submitted Notes on "The Relationship between Trade and Foreign Direct Investment" (W/7 and Corr.1), "Availability of Statistics on Foreign Direct Investment and on the Activities of Foreign Affiliates" (W/24), "The Relationship between Trade and Foreign Direct Investment: Foreign Direct Investment Originating In Developing Countries" (W/25) This report does not include issues raised in questions of a factual and technical nature posed in regard to these notes to which the Secretariat responded at the meetings of the Working Group. , and on "The Impact of Investment Incentives and Performance Requirements on International Trade" (W/56).

(a) The degree of correlation between trade and investment flows; (b) the determinants of the relationship between trade and investment; (c) the impact of business strategies, practices and decision-making on trade and investment, including through case studies

47. In the discussion of these three issues, reference was made to the survey of theory and empirical research on the economics of FDI and on the relationship between trade and investment, as found in the Note by the Secretariat in document W/7. In addition, empirical studies on the experiences of individual Members regarding the determinants of investment decisions and the relationship between trade and investment were presented in contributions made by a number of Members.

48. In the light of the findings in the Note by the Secretariat in document W/7 that most empirical studies had concluded that there was a complementary relationship between home country exports and FDI and that empirical studies also had established an overall positive correlation between host country exports and inward FDI, the significance of the Note in providing empirical support for the complementary nature of trade and FDI for both home and host countries was emphasized. M/2, paragraph 27. Reference was also made to empirical studies presented in the contributions by a number of Members which confirmed the complementary relationship between outward FDI and home-country exports and studies which showed that the trade effects of FDI were positive for both home and host countries. M/2, paragraph 31 and M/3, paragraph 14.

49. The point was made that there was increasing overlap of the determinants of investment and trade as firms determined simultaneously where to invest and from where to export. M/2, paragraph 31.

50. The view was expressed that there was a tendency to place too much emphasis on the complementarity between trade and FDI and that the point made in the Secretariat Note in W/7 that an initial complementary relationship between outward FDI and exports could eventually turn into a net substitutive relationship, demonstrated the complexity of the issue. The need for a more disaggregated analysis of the relationship between trade and investment in specific industries and service sectors was also emphasized in this regard. M/3, paragraph 17. In response to the point made on the emphasis on the complementarity between trade and investment, it was stated that this emphasis was a logical result of a changed economic environment in which import substitution policies were no longer as prevalent as in the past. M/3, paragraph 19.

51. Regarding the analysis in several contributions of the effects of FDI on trade balances, caution was expressed against undue focus on the trade balance. In response, it was stated that the analysis was not intended to suggest that the trade balance was important per se but simply to make the point that empirical evidence showed that FDI had no negative effects on the trade balance. M/3, paragraph 21.

52. A point of a more general nature was that it could not be assumed that increased trade as a result of FDI was beneficial per se and that trade should not be used as the sole parameter for evaluating the impact of FDI. Rather, it was also necessary to look at the effects of FDI on efficiency, employment and economic development. M/3, paragraph 3.

53. In regard to a study referred to in a contribution by one Member, which had found that outward investment strategies of firms in different sectors differed with respect to whether outward FDI was preceded by exports, M/2, paragraph 31. the comment was made that it was interesting that the study had found that firms sometimes invested abroad without exporting first because of the existence of legislation which prevented market access through exports. This underscored the point that in examining the relationship between trade and investment, it was necessary to take into account the effects of restrictive trade policy measures. Related to this was the point made in this contribution that cost factors were less important in explaining FDI decisions than considerations relating to market access. M/3, paragraph 22.

54. In respect of the Secretariat Note on the relationship between trade and FDI in the context of outward FDI from developing countries (W/25), support was expressed for the conclusion drawn therein that outward FDI from developing countries was driven by the same factors as outward FDI from developed countries. In this connection, attention was drawn to the rôle of cost and efficiency factors in explaining vertical outward FDI and the rôle of trade barriers, such as anti-dumping and voluntary export restraints, in explaining horizontal outward FDI. The conclusion drawn in this Note that there was a positive relationship between trade and outward FDI from developing countries was also stressed. While the view was expressed that this required further examination in relation to horizontal, "tariff-jumping FDI", it was stated that there was empirical evidence which showed that, in the case of one Member, the export inducement effect of that Member's horizontal outward FDI exceeded the import inducement effect. M/4, paragraph 33. Interest was expressed in further study on the differences between the patterns of outward FDI from the economies studied in the Secretariat Note, the impact of currency appreciation on outward FDI, and the distortive effect of non-tariff barriers in developed countries in diverting investment from developing countries. M/4, paragraph 34.

55. In regard to the issue of the experiences of developing countries as outward investors, reference was also made to the experience of one Member whose firms had engaged in outward FDI in a range of sectors, in many cases driven by the need to establish channels for the distribution of exports. In this regard, mention was made of the impact of an embargo applied by another Member to trade with this Member and concern was expressed about possible future action against the operations of firms of this Member in third countries. M/4, paragraph 29.

56. The question was raised as to how the findings of studies discussed in a contribution on determinants of FDI and problems facing investors in developing countries supported the conclusion drawn in that contribution that a multilateral legal framework for investment was necessary. In this connection, it was argued that the problem identified in these studies of lack of transparency of host country legislation could be addressed in many ways and was therefore insufficient as an explanation of the need for a multilateral framework. In response, the view was expressed that international rules in general, and a multilateral framework in particular, were important to secure a transparent and predictable investment climate. M/3, paragraph 23. In response to a question as to how a multilateral agreement would contribute to the promotion of investment flows to developing countries, it was stated that, while bilateral investment treaties concentrated on the protection of investment, a multilateral framework could promote investment by contributing to greater transparency and predictability. Another view expressed was that the objective of investment promotion did not provide a rationale for a multilateral framework as this matter was inherently difficult to address in any international agreement. M/3, paragraph 24.

(d) The relationship between the mobility of capital and the mobility of labour

57. The point was made that there was a basic complementarity between capital and labour as production factors and between capital mobility and labour mobility as delivery modes for trade and investment in goods and services. Although this complementary relationship between capital and labour called for a liberal, integrated approach to the mobility of labour as part of the free global flow of capital, goods and services, in reality mobility of capital and mobility of labour had been treated quite differently. The GATS showed an inadequate treatment of labour mobility insofar as the "Mode Four" provisions on the supply of services through the movement of natural persons applied only to narrowly circumscribed categories of persons. An examination by the Working Group of the limitations on market access and national treatment commitments made under the GATS could help elucidate the different barriers to the mobility of capital and the mobility of labour. The failure to ensure mobility of labour more comprehensively as a complementary and critical factor to the mobility of capital had far-reaching adverse economic consequences, particularly by creating labour shortages which prevented the efficient use of capital. It was important for the Working Group to hold discussions to explore the nature and extent of issues in labour resources faced by different sectors. In considering ways to overcome the labour crunch and improve the productivity of capital by enhancing the mobility of labour, it would be useful to focus on selected categories of labour apart from the higher categories of personnel for which most Members had already undertaken commitments under the GATS. In this context, the Working Group could suggest ways for such selected categories of labour to move from surplus regions to deficit regions. M/4, paragraph 36.

58. In response to a question about the treatment of labour from neighbouring countries, it was further stated that what should be addressed in the Working Group was not the movement of labour per se but the movement of labour in the context of a demand for free movement of capital. Another comment made was, given that restrictions on movement of labour inside the European Community had largely been abolished, it might be interesting for the Working Group to study the experience of the Community regarding the relationship between investment and movement of labour. M/5, paragraph 17.

(e) The impact of trade policies and measures on investment flows, including the effect of the growing number of bilateral and regional arrangements

59. In regard to the impact of trade policies and measures on investment, the importance of the findings in the Secretariat Note in W/7 on the different effects of open and protective trade policies on the type and size of FDI inflows was emphasized. At the same time, it was suggested that there was a need for an elaboration of the point made in the Note that countries with an open trade régime seemed to attract more FDI than countries with a closed régime, especially in light of the fact that FDI responded not only to the trade régime but to the overall conditions of an economy. It was also argued, however, that the question of the different effects of open and protective trade policies on FDI was becoming less relevant as most countries were liberalizing their trade policies. In addition, account had to be taken of the specific characteristics of the services sector in which investment was often the only means of gaining effective market access because of the nature of impediments to trade in services. M/2, paragraph 28 and M/3, paragraphs 17 and 19.

60. The point was made that long-term trade protection, temporary trade remedies and discriminatory regional trade arrangements could distort investment flows, in which connection it was proposed that the Working Group undertake an examination of the impact on FDI of the relevant WTO provisions M/2, paragraph 28 and 31..

61. In respect of the impact of regional arrangements on investment, the point was made that there was a trend toward more integrated treatment of trade and investment in regional arrangements. Another comment was that, in explaining the evolution of FDI flows between a number of Members which were parties to a particular regional economic integration agreement, it was necessary to take into account not only the existence of free trade between those Members but also the existence of specific rules on investment. Interest was also expressed in exploring the issue of the relationship between rules of origin and FDI in the context of regional trading arrangements. M/2, paragraph 30.

62. The Working Group agreed to request the Secretariat to supplement its analysis in its Note on the relationship between trade and FDI (W/7) with further analysis of the effects of trade measures on investment.

(f) The impact of investment policies and measures on trade Points made and issues raised in regard to the broader policy aspects investment incentives are recorded below in the section on country experiences regarding national investment policies, including investment incentives and disincentives.

63. With reference to the Secretariat Note on the relationship between trade and FDI (W/7), the view was expressed that various types of investment measures could have a trade-distorting effect. M/2, paragraph 29. Performance requirements and investment incentives were mentioned in particular in this respect. The Working Group requested the Secretariat to supplement its analysis in the Note with further analysis of the trade effects of investment incentives and performance requirements. M/4, paragraph 43. In response, the Secretariat prepared a Note which was circulated in document W/56.

64. In regard to performance requirements, it was stated that in addition to the trade effects, it was also important to examine how, if at all, performance requirements had contributed to the development process of developing countries, whether they had a negative impact on source countries of FDI and the compatibility of the treatment of performance requirements in the WTO with the treatment of such measures in other arrangements. In the latter regard, the question was raised as to the economic rationale of the more lenient treatment of performance requirements in other arrangements, as compared to the strict prohibition under the TRIMs Agreement. M/4, paragraphs 39 and 40.

65. It was observed that the Secretariat Note in document W/56 could have taken a more dynamic approach in its analysis by considering that performance requirements were made known a priori to the investor and/or the home country. Thus, if an investor decided to proceed with an investment project knowing that there were performance requirements attached to the project, this meant that the project was viable despite the performance requirements. It was also stated that, like investment incentives, performance requirements were an important development tool for developing countries within the parameters of present WTO rules.

66. The point was made that, when analysing the issue of performance requirements in this Working Group, one should be careful to recognize commitments already acknowledged by Members, for example in Article III of the GATT and the TRIMs Agreement.

67. It was argued that performance requirements deprived enterprises from the flexibility needed to adapt to changing economic circumstances. Performance requirements and incentives created distortions not only in international markets but also in domestic markets of host countries insofar as competition between different investors was distorted when investments made at different times were subject to different requirements and incentives.

68. The view was expressed that certain types of performance requirements, such as those related to transfer of technology and the promotion of research and development, had been demonstrated to be an effective instrument of the development policies of host countries. See also infra, paragraph 99.

(g) Country experiences regarding national investment policies, including investment incentives and disincentives

69. Information was provided on the legislative framework of one Member regarding joint ventures and their economic impact. Concern was expressed in this connection that the interests of this Member might be adversely affected by developments in the context a bilateral understanding reached between two other Members and in the context of an ongoing negotiation on a Multilateral Agreement on Investment. M/3, paragraph 12.

70. In regard to the experience of one Member, a contribution was made which described the significant recent increase of FDI inflows, the beneficial effects of FDI on its economy, the influence of trade policy on the amount and types of FDI, and the evolution of this Member's legal framework for FDI. M/3, paragraph 13.

71. With regard to another Member, a contribution was made which highlighted the liberalization of its FDI régime that had occurred in the early 1980s as part of the change in its economic policies from an import substitution-oriented approach to an outward looking development strategy. This contribution also discussed this Member's current domestic legal framework for FDI, relevant international agreements to which it was a party, the potential for further increases in FDI inflows, the effects of FDI on trade and employment and the need to develop a better understanding of how national trade policies and investment policies could be made mutually supportive. M/4, paragraph 28.

72. The point was made that it was perhaps too easily assumed that there was a similarity between trade liberalization and investment liberalization. Investment liberalization raised more complex issues than trade liberalization, especially in light of the multifaceted nature of the effects of investment on economic development. M/3, paragraph 23. It was also stated that various contributions had acknowledged that FDI could also have negative effects and that it would be useful to study what particular policy tools had been effective in different countries to address such effects. M/3, paragraph 16. In response, it was stated that the contributions in question had concluded that FDI on the whole had positive effects on development and that if there were negative effects of FDI they needed to be identified with more precision than had been the case so far in the Working Group's discussions. M/3, paragraph 20. Divergent views were expressed on the merits of an examination of the relationship between investment liberalization and economic development based on historical analysis of the evolution of investment policies in individual countries. M/3, paragraphs 17 and 20. However, as noted above, the Working Group agreed at its meeting of 16 and 17 June to request the Secretariat to prepare a study on the evolution of FDI policies in individual countries.

73. A prominent theme of debate was the issue of the experience of Members concerning the effectiveness and costs and benefits of investment incentives.

74. With reference to the Secretariat Note on the relationship between trade and FDI (W/7), the point was made that, although the Note stated that incentives and tax breaks were less important as factors determining the location of investment than other fundamental factors such as market size, production cost and availability of natural resources, the experience of a number of Members suggested that investment incentives played an equally important rôle in attracting FDI and that the long-term benefits resulting from attracting FDI through the use of incentives often exceeded the short term-costs. M/2, paragraph 29.

75. With reference to a recent UNCTAD study on investment incentives, it was stated that in theory incentives made sense to the extent they covered the difference between the private gains for the firms involved and the social gains for the countries involved. However, it was very difficult to measure precisely this gap between private and social gains, especially when long-term effects were taken into account. For example, while it might make sense to attract a firm at great expense if that firm generated sequential investments, it was difficult to know whether this would happen and whether enterprises paid much attention to incentives when they made their investment decisions. Empirical evidence suggested that firms typically based their investment decisions on the long-term rationale of a particular investment location, with incentives typically playing only a marginal rôle. Thus, the assessment of the costs and benefits of investment incentives in a given case required a very careful and complex analysis. A second theme of the UNCTAD study concerned the type of investment incentives used. A distinction could be made between fiscal incentives, financial incentives and other incentives, such as the provision of infrastructure. It might make more sense, especially for developing countries with limited resources, to focus on other incentives which also benefited domestic firms or on fiscal incentives which only came into play once an investment project became profitable, as opposed to financial incentives, which were typically granted up front. Regarding the issue of competition between countries in the use of investment incentives, transparency and information exchange could perhaps help to avoid the most serious negative implications of this competition. UNCTAD's experience indicated, however, that policy makers considered incentives as a tool that they were not easily prepared to give up but instead tried to use as efficiently as possible. M/5, paragraph 20.

76. It was stated that, although some of the UNCTAD studies seemed to suggest that incentives were not as important as some other factors, some developing countries believed that incentives did play an essential rôle in attracting FDI. M/5, paragraph 21.

77. The point was made that, notwithstanding arguments advanced in recent academic literature, investment incentives remained a useful policy instrument in the pursuit of development strategies. The argument that incentives were nothing more than a transfer of income from countries to firms and that the more intense the competition among potential hosts, the greater was the proportion of potential gains that was transferred to multinational enterprises, failed to give due recognition to the fact that incentives were not intended to support enterprises that were not viable. Rather, they were geared towards attracting growth, income and employment-creating investment. The part transfer of income through incentives would not be politically feasible if not for this wealth-creating impact of FDI. Three particular aspects of the positive rôle of investment incentives could be distinguished. First, investment incentives could be considered to fulfil a "risk premium" function insofar as they provided a partial counterweight to poor economic fundamentals, for example in the field of infrastructure. By compensating investors for their perceived country-specific risks, they provided a reason for investors to go ahead with a project which otherwise would not have been viable at the normal rate of return. Second, even in a situation where the economic fundamentals were sound, investment incentives had an essential rôle to play as tools by which investment could be directed to meeting particular development or regional objectives. This was illustrated by the rôle of incentives to direct FDI to particular industrial sectors and the use of incentives to regulate the type and nature of FDI received. For example, the granting of incentives could be tied to a commitment to sequential investment in the form of additional production capacity, modernization, upgrading or diversification into related products. Third, investment incentives also contributed to long-term competitiveness in that they could help countries to secure dynamic gains from economies of scale and learning by doing. M/5, paragraph 18.

78. It was also argued, however, that while investment incentives were widely regarded by countries at all levels of development as important policy instruments, a comprehensive and balanced consideration of this subject should include not only the issue of the effectiveness of incentives in attracting FDI and the benefits derived from the investment attracted with incentives but also the negative implications of the increasing competition between countries to attract FDI by granting incentives. M/5, paragraph 19.

79. In regard to one Member's experience with tax incentives, three factors were mentioned to explain the gradual scaling down of tax incentives granted by this Member since the 1960s. First, liberalization of this Member's FDI policy meant that incentives could no longer be justified on the grounds that they were necessary to compensate for the effects of discrimination against foreign investment. As a result of increasing concern that tax incentives gave a disproportionate advantage to foreign enterprises over domestic enterprises, the Member had decided to link FDI liberalization to the reduction of tax incentives for foreign enterprises. However, tax incentives to foreign enterprises conditional on the introduction of advanced technology had increased as part of the Member's structural reform policies. Second, it was agreed that tax incentives granted by this Member had generally failed to achieve their desired effects because the level of taxation was only a minor consideration in investment decisions of firms and because the tax incentives were insufficient compensation for the Member's relatively high factor costs. Third, the effects of tax benefits had been partially nullified as a result of taxation of repatriated profits by home countries of the foreign enterprises. M/6, paragraph 10.

80. It was suggested that three key themes emerged from the experience of this Member. First, FDI liberalization implied that there was less rationale for the granting of investment incentives. Second, while incentives had an important positive rôle to play in correcting market failures, it was also likely that competition among countries to attract FDI would become so fierce that they might end up offering incentives whose costs outweighed their benefits. This situation resembled a prisoner's dilemma in which only cooperation among participants provided a mutually beneficial solution. Third, the relationship of incentives to bilateral taxation agreements deserved further consideration. M/6, paragraph 11.

81. It was also stated that studies by international organizations had demonstrated that investment incentives were not a major determinant in location decisions, but that they could influence the choice of location where all other circumstances were equal between two sites. In the last decade the use of incentives had increased and the types of incentives used had become more diversified. This had engendered a harmful competition between countries to attract FDI. The indiscriminate use of incentives could result in a distortion of investment flows in favour of countries that could afford to finance incentives but, in the long run, the use of incentives implied losses for all countries involved in such competition, ultimately leading to a transfer of resources to foreign investors. Competition for FDI through incentives not only resulted in a loss of resources but also diverted resources from uses that were more productive for development, such as the improvement of physical infrastructure, which was a more important determinant of investment decisions. Moreover, incentives could distort international trade flows by artificially favouring production in certain countries to the detriment of countries that were not able to grant incentives, especially when production was destined for export. Empirical studies had also shown that investment incentives could distort the productive structure in host countries by favouring production in certain sectors. In addition, investment incentives entailed high administrative costs, were difficult to administer, and were often granted in a non-transparent manner. In this connection, it was proposed that, as part of the future work of the Working Group, a more thorough study be undertaken of the implications of fiscal investment incentives and their distortionary effects on investment and trade flows. M/6, paragraph 12.

82. The point was made that the experience of a number of Members regarding the use of investment incentives at sub-federal levels of government confirmed that such incentives only had a marginal impact on investment decisions and often failed to produce the expected results. M/6, paragraph 13.

83. Reference was made to the possible negative implications of investment incentives in terms of erosion of the tax base. It was also suggested that further work be done to examine the possible distorting impact of tax havens on investment flows. M/5, paragraph 19.

84. The point was also made that where the alleged rationale for the granting of an investment incentive was to correct for a regulatory distortion, the first-best solution was to eliminate both the distortion and the incentive. In response to this argument, it was stated, however, that in an imperfect world this approach was not always feasible. M/4, paragraph 22 .

85. It was argued that non-discrimination in the application of incentives was important to avoid distortions of competition that could result from the granting of incentives only to foreign enterprises. Similarly, from a competition perspective, it was also essential that incentives should not take the form of monopoly rights to enterprises. M/5, paragraph 19 and M/6, paragraph 10.

86. The view was expressed that there was a need to explore possibilities for enhanced international cooperation to address harmful effects of the use of investment incentives. It was stated in this regard that, as governments were faced with a prisoner's dilemma, restraint on the use of incentives was difficult to achieve in a unilateral or bilateral context. It was suggested that a balance should be struck between recognising the benefits of incentives as domestic policy tools, on the one hand, and limiting their harmful effects in the context of increasing competition between countries to attract FDI, on the other, and that existing WTO rules on subsidies illustrated how such a balance could be achieved. An important feature of these rules was that the mere fact that a subsidy was aimed at achieving an important policy objective did not by itself obviate the need for disciplines to control its possible trade-distorting effects. The issue of investment incentives should be considered from a similar perspective. M/6, paragraphs 12,13 and 15.

87. In response to some arguments on the negative effects of the use of incentives, the point was made that, while the argument was sometimes advanced that the granting of investment incentives could lead to rent-seeking behaviour, this problem was not unique to incentives. Rent-seeking and other directly unproductive activities were possible outcomes of any market intervention by governments. The question that should be posed was how governments should deal with such directly unproductive activities. Experience showed that the more stringent the institutions of governments were the less likely they were to be captured by vested interests. The appropriate response was therefore to strengthen the institutional and administrative capacity of governments to administer incentives effectively rather than to prohibit incentives. In regard to the argument that it was very difficult to determine exactly the value and size of the positive externalities associated with a project and that competition through incentives could lead to overbidding, it was stated that the capacity to apply incentives effectively varied widely among countries. Nevertheless, this did not constitute an argument against incentives per se. The point was also made that some views expressed on the issue of incentives seemed to be internally contradictory in that it was argued, on the one hand that investment incentives often resulted in distortions of investment and trade and, on the other, that incentives did not play a major rôle in location decisions. M/6, paragraph 14.

88. The view was expressed that, while incentives were not a major factor in determining the location of investment, more attention should be paid to the rôle of incentives in promoting development objectives. Reference was made to positive experience of one Member with the granting of incentives to stimulate enterprise development, for example by improving productivity through encouraging the creation of linkages between foreign enterprises and domestic small- and medium-sized firms. It was also stated that further discussion of the benefits of investment incentives for small developing countries was warranted. While it might be true that in some cases incentives had failed to produce the expected positive results, it was necessary to guard against generalisations, bearing in mind the different levels of development, objectives and needs of countries. At least in some countries incentives had been shown to be a useful instrument, for example for the creation of employment, the attainment of regional development objectives and the spread of technology and know-how. M/6, paragraph 16.

89. With reference to the experience of a number of Members in the context of a process of regional economic integration, the point was made that the implementation of policies removing barriers to the right of establishment and the free movement of capital necessitated the adoption of measures to avoid distortions of investment flows as a result of incentives and disincentives. The instruments used for this purpose allowed for a consideration of regional development objectives. M/3, paragraph 25.

90. It was stated that, although it was often argued that fiscal investment incentives were useful to promote the competitiveness of host countries, to promote regional development, to correct market failures and to realize positive externalities associated with FDI, in most cases the use of fiscal incentives represented a second best solution as there existed more efficient alternatives to attain the desired objectives. For example, regional development objectives were more efficiently attained by increasing spending on physical and human capital in a particular region. Where incentives were granted to compensate for regulatory distortions, the first best solution obviously was to reform the relevant regulations. The use of incentives aimed at achieving positive externalities of foreign investment raised the difficulty of calculating the externalities and the appropriate level of incentives and entailed a risk that the costs of incentives exceeded their benefits, especially where various countries competed to attract a particular investment project. In sum, in most cases the use of fiscal incentives was not justified on the basis of efficiency and equity criteria, and the preferable course of action was to correct, rather than to compensate for, structural or regulatory failures. On the other hand, fiscal incentives entailed significant costs and distortions. Since empirical studies had shown that investment decisions were often made irrespective of the availability of fiscal incentives, the granting of such incentives involved an unnecessary cost. In addition, to the extent that fiscal incentives did play a rôle, there was the risk that investors enjoying temporary incentives would attempt to obtain them on a permanent basis. Likewise, if there was positive discrimination in the granting of fiscal incentives to foreign investors, domestic firms would attempt to obtain similar benefits. Other important negative effects of fiscal incentives arose from the erosion of the tax base resulting from fiscal competition between countries and between different levels of government within countries, the distortions of economic activity due to the fact that the granting of fiscal incentives to certain sectors amounted to a tax on other sectors, and the distortions of international trade. In the latter regard, it was argued that there was both an indirect and a direct distortionary effect of fiscal incentives on international trade. The indirect effect arose from the impact of fiscal incentives on FDI flows. Given the close relationship between trade and investment, fiscal incentives which resulted in an inefficient allocation of investment, also resulted in a distortion of international trade. Since not all countries had the financial resources to compete for FDI, the use of fiscal incentives resulted in a diversion of investment and trade in favour of countries which could afford to grant such incentives. Fiscal incentives could also have a direct impact on international trade, such as when they were geared to influencing certain operational margins, for example fiscal incentives linked to production for export. The trade effects of such fiscal incentives were similar to the trade effects of performance requirements, with which they were often used in conjunction.

91. The observation was made that the issue of the use of investment incentives needed to be analyzed within a proper historical perspective, which was particularly relevant to the development implications of incentives. Thus, for example, while reference had been made to the Agreement on Subsidies and Countervailing Measures and the TRIMs agreement as relevant WTO instruments, this matter should also be viewed in the light of the rights of developing country Members under the provisions of Part IV of the GATT. The historical perspective was essential to understand the positive rôle which incentives could play in the process of economic diversification in developing countries where colonization had often engendered a specialization on a narrow range of commodities. In this regard, reference was made to the positive experience of one Member with the granting of investment incentives in the context of free zones, which had resulted in substantial growth and diversification of exports and the creation of employment. The important rôle of incentives was demonstrated not only by their widespread use in developing countries but also by the fact that many developed countries had actually developed as a result of successful incentive policies, and that these countries continued to use incentives, for example in the context of local and regional development programmes. Document W/56 provided ample evidence of this rôle as an effective development policy instrument, which had allowed countries to diversify their export capability and integrate more effectively into international markets. Given the value of incentives as a market oriented instrument of development policy, a cautious approach was warranted in regard to possible initiatives in the WTO.

92. The view was expressed that the unrestrained use of investment incentives to attract foreign investment posed problems in terms of economic efficiency for several reasons. First, the offer of incentives was usually selective and discretionary, and different foreign investors might be given different treatment. Second, the use of incentives might cause distortions in international trade and investment flows and in allocation of resources. Third, incentives were often offered as compensation for inadequacies in the investment environment, for example, limited market access, performance requirements and insufficient infrastructure. The prevalence of incentives would slow down the liberalization and improvement of the investment régime concerned. However, some investment incentives might only affect the distribution of benefits rather than the existence of benefits. Besides, some Members would continue to use, rightly or wrongly, investment incentives as a policy tool to meet their development needs. It therefore did not appear possible to call for the prohibition of all investment incentives in the WTO context at this stage. A more appropriate approach might be to explore ways to discourage Members from engaging in unhealthy competition in the use of investment incentives and to minimize the distortive effects of investment incentives. It would also be useful to explore the criteria to differentiate objectionable and non-objectionable investment incentives. In this connection, WTO Members' experience in classifying actionable and non-actionable subsidies under the Agreement on Subsidies and Countervailing Measures might be relevant. The suggestion was made that two broad principles could help minimize the distortive effects of investment incentives. First, the application of investment incentives should be based on the principle of non-discrimination so as to minimize distortions arising from favouritism towards foreign or domestic enterprises. Second, it was necessary to ensure maximum transparency in the dissemination of information of interest to investors including the forms and amount of incentives which had been or would be awarded and the criteria for the award. With adequate knowledge of the investment incentives granted, prospective investors would be able to better assess the real costs and benefits of the investment projects.

93. It was stated that, although measures to resolve structural economic problems were essential to attract FDI, this often required time and involved difficult political decisions. Another view was that the use of incentives entailed a risk of delaying the necessary structural reforms. It was also stated, with reference to the point in the Secretariat Note in document W/65 that incentives and performance requirements might divert attention from general policy reforms which would improve the investment climate, that the overriding policy objective of most, if not all, governments was to improve the investment climate precisely through policy reforms. In this sense, incentives and performance requirements played a very useful but only compensatory rôle where necessary and were not used to avoid necessary policy reforms.

94. With respect to incentives aimed at regional development objectives, it was argued that the first best policy was to strengthen the general regulatory and economic infrastructure in particular regions, but that it had to be acknowledged that this was not always realizable in the short term. While it was therefore understandable that governments often decided to subsidise the location of firms in particular regions, it was necessary to bear in mind that this was a second best solution and that, notwithstanding the important social objectives which might be served by the granting of such incentives, their use inevitably involved a cost in terms of economic efficiency. Another comment made was that it should be acknowledged that the issue of regional development incentives was delicate, in which connection mention was made of the special provisions on regional development subsidies in the Agreement on Subsidies and Countervailing Measures. More generally, an important theme for further work was the question of whether certain types of incentives warranted different treatment.

95. It was stated that the arguments put forth against the use of investment incentives did not detract from their usefulness as developmental policy instruments and that the fact remained that incentives could help attract growth, income and employment-creating investment. In support of this view, mention was made of an empirical study which showed that in the case of one Member the capital inflows associated with foreign investment by enterprises which had been granted investment incentives was 27 times larger than the amount of the incentives granted. Other countries had experienced benefits of roughly similar magnitudes. It was further argued that many of the problems which were alleged to arise from the use of incentives could be adequately addressed through a strengthening of the administrative capabilities of host countries. The point was reiterated that some views expressed on investment incentives seemed to be internally contradictory in that it was argued, on the one hand, that investment incentives often resulted in distortions of investment and trade and, on the other, that incentives did not play a major rôle in location decisions. With reference to the Secretariat Note in document W/56, attention was drawn to the point that, because of severe data problems, not much systematic evidence existed on the impact of incentives and performance requirements on international trade and that interview studies were obviously inferior to systematic statistical analysis. In light of these significant limitations, it was observed that there was nothing doctrinal that could be concluded on this issue.

96. It was also observed, with reference to the Secretariat Note in document W/56, that dissimilarities between investment promotion strategies of individual countries mainly concerned the choice of incentives. Developing countries mainly used fiscal instruments, such as tax holidays, while developed countries mainly used financial incentives, including cash grants. As pointed out in this Note, this reflected differences in wealth, as the developed countries could afford to use up-front subsidies to pay for some investment whereas developing countries could at best afford to ease the tax burden ex post. These dissimilarities as regards the type of incentives granted were an important element in any consideration of the development dimension. It was also emphasized that attention should be paid to the use of incentives at all levels of government, including regional and local governments.

97. It was stated that the argument that a strengthening of institutional capabilities would address most of the negative problems associated with incentives did not address the problem of the distortions created by the granting of investment incentives in a context of competition between governments to attract investment. This required a broader, international perspective. In regard to the argument that there was a contradiction between the assertion that incentives distorted investment and trade and the argument that they were not a major factor in location decisions, it was stated that incentives were not a fundamental factor in investment decisions but played a secondary rôle which came into play in a marginal context where all other circumstances were equal between potential investment sites. However, to the extent that they influenced the location of investment, they also disrupted trade flows. Another observation on this issue was that investments could benefit from incentives even where the availability of the incentives was not a factor in the choice of the location of the investment. In such a situation, a trade distortion resulted from the fact that the goods produced by the investment had benefitted from an artificial competitive advantage.

98. The view was expressed that, in analyzing the rationale of investment incentives and performance requirements it was necessary to distinguish between specific policy objectives. Investment policy could be aimed at simply attracting investment or at economic modernization, the creation of linkages and the increase of an economy's competitiveness through a process of technological innovation. The use of investment incentives to attract investment without significant spillover effects, such as investment in the exploitation of natural resources, was generally not a sound policy. By contrast, the use of investment incentives aimed at attracting investment in a particular stage of the production chain so as to create linkages with other sectors had been demonstrated to have positive effects. Likewise, while trade-related performance requirements, such as local content measures, had been demonstrated not to have positive effects, performance requirements relating to transfer of technology, the promotion of research and development and the promotion of alliances between foreign and domestic firms generally had been shown to have positive effects. If applied in a market-friendly manner, performance requirements with regard to the transfer of technology and the conduct of research and development could also be viewed as indirectly contributing to the attainment of objectives of competition policy, insofar as they facilitated access to technology by firms, including small- and medium-sized firms, and to economic diversification. To illustrate these points regarding the beneficial impact of certain types of investment incentives and performance requirements, reference was made to one Member's experience with the use of incentive-related performance requirements with a view to promoting alliances between international firms and domestic firms in the oil industry, which had resulted in a significant increase in the capacity of the domestic firms to export services and capital goods. Mention was also made of developments in this Member's automobile industry where incentive-related performance requirements were proving successful in promoting the development of domestic subassembly facilities through the creation of linkages with foreign investors. In sum, market-friendly performance requirements related to incentives aimed at facilitating transfer of technology and research were an effective and legitimate instrument to ensure the benefits of FDI for technological capacity building of host developing countries.

99. It was stated that incentives acted to redirect economic activity either within an economy or between economies. As a result, while investment incentives were often used in an attempt to stimulate job creation, attract investment to a particular region or encourage the development of specific industries, such redirection of economic activity was likely to be at the expense of economic growth in other areas of the economy. Incentives therefore represented a subsidy to the recipient and an implicit tax on other activities in the economy. The implications of this were that, where the disruptions to investment decisions created by incentives caused investment to flow to inefficient sectors, both national and global welfare was reduced. In this connection, reference was made to the experience of one Member which had maintained a range of tax incentives up to the mid-1980s. These appeared to have the desired effect in boosting investment in general and in particular sectors. Yet economic growth had languished. The quantity of investment might have been high, but that had not always been the case with the quality. There had also been a high fiscal cost associated with the provision of incentives. In the mid-1980s, this Member had begun removing incentives and reforming the tax system to reduce tax-induced behaviour. These reforms had made a significant contribution and the level of investment in this Member, both domestic and foreign, was high. The point was made that competition in the provision of incentives might result in more negative impacts for all countries than would be the case if incentives were absent. This was well illustrated in the "prisoners dilemma" examples that had been given in some contributions. This suggested that, despite the welfare gains from unilateral removal of distortionary incentives, addressing the issue through a multilateral body might make it easier for individual countries to take that action. While the Agreement on Subsidies and Countervailing Measures contained disciplines on subsidies at the point of production (i.e., those distorting outputs) incentives, which were effectively subsidies which distorted inputs, currently fell outside the framework of multilateral disciplines. It would seem appropriate therefore for one element of further work in this area to be an examination of the way in which the multilateral system had sought to discipline output subsidies under the Agreement on Subsidies and Countervailing Measures.

100. The observation was made that the fact that some Members had pointed to positive experiences with the granting of incentives, while others had had negative experiences with incentives, underscored the need for further study of the costs and benefits of incentives. Regarding the point that incentives aimed at specific policy objectives might be beneficial, attention was drawn to the concept of specificity which was a key criterion for the applicability of WTO rules on subsidies. It was also said that the point that certain types of incentives were perhaps less distortionary than others indicated the need for a more detailed study of different kinds of incentives.

(h) The relationship between foreign investment and competition policy The Working Group was informed by the Chairman of the Working Group on the Interaction between Trade and Competition Policy of the discussion which had taken place in that Group on the relationship between investment and competition policy.

101. Views were expressed on the mutually reinforcing nature of open policies towards FDI and a properly constituted and functioning competition policy. M/6, paragraphs 23-28. The point was made that, on the one hand, a liberal FDI régime could increase competition in the market and, on the other, a well-functioning competition policy could help remove obstacles to inward FDI resulting from the behaviour of incumbents, contribute towards providing an attractive legal framework for foreign investors, and enhance the benefits of inward FDI.

102. With regard to the contribution of FDI to competition, the point was made that an open FDI regime increased the prospects for new entry and thus competition in specific markets. By facilitating entry of new competitors, liberal investment rules could challenge domestic oligopolies, mitigate or eliminate local distribution bottlenecks and reduce the likelihood od cartels and monopolies. M/6, paragraph 23. It was also stated that open investment policies could increase pressure on incumbents to behave more competitively even in the absence of actual increased FDI flows, by making the markets more contestable. M/6, paragraph 24. Attention was also drawn to the rôle that open FDI policies could play in enhancing the competitiveness of domestic firms, not only by reinforcing market pressures on them to behave competitively, but also through technological and other spillovers from foreign investors. M/6, paragraph 26.

103. In regard to the contribution that a well-formulated and operated competition policy could make to promoting inward FDI, it was said that sound competition policies and laws could assist investors by preventing local cartels or monopolies from abusing new entrants or driving them out. M/6, paragraphs 23,24 and 27. As barriers to inward FDI were reduced, incumbents should be prevented from negating the impact of such policies by establishing alternative barriers to entry, in the form of vertical and horizontal restraints or abuses of a dominant position. M/6, paragraphs 24 and 27. In this connection, the point was made that a sound competition policy and law could contribute to providing an attractive environment for FDI. M/6, paragraphs 27 and 28. In addition, reference was made to several studies which had confirmed the importance of ensuring effective domestic competition to reap the full benefits of inward FDI. M/6, paragraph 23. The point was also made that competition policies that were not implemented in a transparent, stable, neutral and non-discriminatory (with regard to nationality) way, could constitute a deterrent to inward investment. M/6, paragraphs 24 and 26.

104. The rôle of competition policy and law in safeguarding against possible abuses of market power by foreign investors was also discussed. M/6, paragraphs 25-26 and 29. It was stated in this connection that the entry of highly competitive foreign companies might lead to the displacement of local competitors and that the liberalization of FDI might entail restrictive business practices by foreign investors. M/6, paragraphs 26 and 32. The point was made that, provided a liberal investment environment and an effective competition policy was maintained, any resulting market power could be expected, as a general rule, to be offset by the actual or potential entry of other multinational companies as well as possible local start-ups. M/6, paragraph 26 and 32. The application of competition law and policy to mergers, acquisitions and joint ventures was viewed as a particularly important aspect of the interface between investment and competition policy. M/6, paragraph 25.

105. The view was expressed that many of the concerns that had been voiced in the Working Group from the perspective of host countries appeared to have as an underlying common theme a concern about abuse of market power by foreign investors, and that this was addressed more appropriately through the application of competition law to specific cases than through the application of general restrictions on FDI. M/6, paragraph 29. It was also stated that, though the use of screening of FDI had often been rationalized asa means of maintain a competitive environment, in reality the opposite had often occurred, as screening in many cases protected established competitors. M/6, paragraph 23. .

106. The view was expressed that, though in general competition would lead to greater economic efficiency and ultimately to economic growth and development, there could be reasons for some developing countries to limit the pursuit of efficiency as an immediate objective. This arose from the need to take into account competing objectives, including, in particular, development objectives and the promotion of small and medium-sized-enterprises, and from the difficulty of pursuing such objectives through measures that would not distort competition or reduce efficiency. Identifying and pursing policies and measures designed to achieve long-term economic development objectives, while ensuring the positive benefits of increased contestability and competition through FDI liberalization was a very complex challenge for many developing countries. M/6, paragraph 32.

107. It was stated that, if the existence of an effective competition policy was a necessary condition to benefit fully from FDI liberalization, this logically implied that FDI liberalization should be implemented gradually and perhaps be phased in sequence with the progressive implementation of competition policy. It was also argued, however, that, as demonstrated by the experience of some Members, delaying the liberalization of investment policies and the implementation of competition policies, made the process of adjustment to a more competitive external environment more difficult. M/6, paragraphs 33 and 34.

108. The point was made that in considering the relationship between competition policy and investment policy, the rôle of trade policy should also be taken into account. It was suggested that, at the risk of some over-simplification, trade policy could be regarded as determining the relevant market for the purposes of the application of competition policy and investment policy as determining the relevant players in that market. M/6, paragraph 24. Another point was that it was increasingly difficult to separate those aspects of the condition of international competition that related to trade in goods and services from those relating to movement of factors of production. M/6, paragraph 28.

109. The point was made that the interlinkages between trade, investment and competition were already recognized in a number of WTO instruments, such as the GATS and the TRIMs and TRIPS Agreements. M/6, paragraph 28. Reference was also made to regional arrangements where the same interlinkage was evident. M/6, paragraph 31. The view was expressed that, apart from providing for cooperation and consultation procedures and paving the way for possibly more detailed rules, the existing WTO instruments fell short of preventing restrictive business practices or limiting regulatory abuses in the field of competition policy; the challenge was to remove the inadequacies of existing WTO rules and to increase the synergies between investment and competition policies in a more systemic manner. M/6, paragraph 28. It was also stated that since existing bilateral investment treaties did not directly address issues related to competition policy, there was a gap in existing international rules in respect of the relationship between investment and competition. M/6, paragraph 31. It was suggested that the mutually supportive relationship between investment and competition policy could be reinforced through the establishment in a multilateral context of rules providing for the application of non-discrimination standards in these two areas. M/6, paragraph 30.

110. In support of the view that liberal trade and investment policies and deregulation policies needed to be supported by the establishment of a domestic competition policy and competition authority, it was stated that an effective domestic competition policy ensured the existence of competition in sectors not affected by trade and investment liberalization, that the success of demonopolization depended upon the existence of sound competition in the demonopolized sectors, and that a stable framework of domestic competition policy was a key element in creating confidence on the part of foreign investors in the regulatory framework of host countries. Competition policy was a more efficient policy instrument than ex ante mechanisms for screening of foreign investment, which had often entailed significant costs and had deterred foreign investment and technology transfer. Since the impact of foreign investment on the level of competition in host country markets could vary, a case by case examination under competition law was necessary. The existence of an effective competition law was also necessary to address anti-competitive practices on the part of domestic firms which could form obstacles to foreign investment. In sum, a domestic competition policy structure enabled countries to increase the benefits to be derived from FDI, and the benefits of implementing a competition policy clearly outweighed its costs. It was also observed in this regard that the complementarity between trade and investment liberalization and competition policy had found expression in the GATS and a number of other international agreements. The development of a multilateral framework on both investment and competition policy would contribute to enhancing coherence, predictability and convergence and would reinforce the multilateral trading system.

111. With reference to the experience of one Member, it was stated that the existence of a stable and transparent non-discriminatory competition framework for business did not necessarily require the existence of a domestic competition law. In this connection, it was argued that the best approach was to refrain from subjecting investment to inefficient and administratively burdensome screening mechanisms.

112. In response, it was stated that competition policy should indeed not be seen as another administrative procedure which could be used for purposes of screening of foreign investment. Rather, competition policy was more efficient and less administratively burdensome than screening mechanisms in addressing risks of negative effects of FDI on competition, which was often mentioned as a rationale for screening mechanisms.

113. The view was expressed that, while competition policy was a very useful instrument in dealing with competition problems created by FDI, this did not provide an argument in favour of removing screening mechanisms. As shown by the significant inflows of FDI experienced by one Member, it was the method of application of a screening mechanism, not the existence of such a mechanism per se, which under certain circumstances could constitute a barrier to FDI. If applied in a transparent manner, a screening mechanism did not constitute an impediment to FDI. Thus, it was important to view a particular screening mechanism in the policy context in which it was operated. Reference was made in this connection to the experiences of a number of Members which used screening mechanisms in the context of liberal FDI policies. Another view expressed was that the use of a screening procedure was incompatible with the need to provide non-discriminatory treatment to foreign investors.

114. It was also stated that there was no substitutability between competition policy and the use of screening mechanisms because, in addition to competition-related objectives, the screening of investment often served a range of purposes, including sectoral, locational and development objectives. In response, it was stated that to the extent the alleged rationale for the use of a screening mechanism was the need to address competition-related problems, the use of competition law was more efficient.

115. The point was made that one Member had used screening of foreign investment inter alia for environmental reasons at a time when its administrative capacity to ensure compliance with environmental regulations was not yet sufficiently developed. The variety of purposes for which screening procedures could be used underscored the need for further study on this subject in the Working Group. It was also suggested that further work be done to clarify the meaning of the concept of screening.

116. The observation was made that privatization and deregulation in a number of countries had failed to produce the expected benefits as a result of the lack of a competition policy to prevent abuse of market power by privatized firms with dominant market positions.

117. It was stated that the provisions in the GATS on competition policy needed to be strengthened. While specific provisions had been developed in the context of basic telecommunications, the prevalence of anti-competitive practices in many service sectors, for example tourism, meant that the absence of adequate competition rules of a horizontal nature would pose problems in future negotiations under the GATS. It was also stated, however, that the existing provisions of the GATS on competition were sufficient.

118. The view was expressed that whether investment policies should be complemented by competition policy was a question which could not be answered in general terms. Rather, the need for the introduction of competition laws needed to be assessed by each country individually in the light of its circumstances.

119. The point was made that the existence of a domestic competition law was not a necessary condition for the negotiation of a multilateral set of rules on competition. The TRIPs Agreement was mentioned as an example of a multilateral agreement which had been concluded at a time when many countries did not have relevant domestic legislation. It was also observed that, in considering the relationship between investment and competition policy, account should be taken of certain trade measures which could distort investment, such as rules or origin and quantitative restrictions on textiles, and which were not covered by competition laws.

III. EXISTING INTERNATIONAL INSTRUMENTS AND ACTIVITIES REGARDING TRADE AND INVESTMENT

120. At its first meeting, the Working Group discussed WTO provisions on matters related to investment and activities and initiatives in other fora. Subsequently, these issues were taken up at each meeting of the Working Group as part of its consideration of existing international instruments and activities regarding trade and investment. Discussion on bilateral, regional, plurilateral and multilateral agreements was initiated at the meeting held in December 1997, while discussion on the implications for trade and investment flows of existing international instruments was started at the meeting held in March 1998.

121. Written contributions on this Item of the Checklist were provided and introduced orally by Japan (W/18 and 34), Australia (W/23), Canada (W/19), the United States (W/29), Switzerland (W/28), Korea (W/42), Peru (W/47), Cuba (W/45), Niger (W/48), Turkey (W/51). Oral statements were also made by India, Costa Rica, the European Community, Argentina, Hong Kong China, Egypt, Malaysia, Mexico, Norway, Pakistan, Brazil, Venezuela and the Philippines on behalf of ASEAN WTO Members. The Secretariat submitted Notes on "Information on other International Activities and Initiatives" (Job Nos. 2843 and 5279), "WTO Provisions on Matters Related to Investment" (Job No. 2988) and "Bilateral, Regional, Plurilateral and Multilateral Agreements" (W/22). Written contributions were also submitted by the APEC Investment Experts Group and by UNCTAD (W/21, 46, 50, 53 and 58).

(a) Existing WTO provisions

122. In regard to the Note by the Secretariat on WTO provisions on matters related to investment, the comment was made that it went beyond a factual description of relevant WTO provisions by making certain interpretative observations and that it did not include references to provisions on developing countries in the GATS and the TRIPS Agreement. M/1, paragraph 6.

123. The view was expressed that existing WTO provisions on matters related to investment lacked coherence and were limited in scope and that a major task of the Working Group was to identify and assess deficiencies in the coverage of current WTO provisions related to investment in the light of provisions on investment in other international agreements. M/2, paragraph 36. It was also stated that in examining WTO provisions from this perspective, account should be taken of the development dimension. M/2, paragraph 37.

124. The point was made that there was a disparity in the treatment of investment matters between, on the one hand, the WTO rules in the area of services and intellectual property and, on the other, WTO rules in the area of trade in goods. M/1, paragraph 6. Specifically, mention was made of the disparity in the treatment of goods and services under the GATS and the TRIMs Agreement and, related to this, of the absence of provisions on performance requirements in the GATS. M/2, paragraph 36. The point was made that, whereas WTO provisions related to investment differentiated between goods and services, national investment policies did not make such a distinction. M/3, paragraph 30. Reference was made to the 1994 Agreement on Government Procurement as an example of trade disciplines which had initially focused on cross-border trade in goods but which now also dealt with services and the treatment of foreign affiliates in domestic markets. M/3, paragraph 30.

125. As examples of what were perceived by a number of Members to be limitations of existing WTO provisions on matters related to investment, mention was made of the absence of rules on investment protection, the limited scope of the TRIMs Agreement as compared with the wide range of measures that had been under consideration in the Uruguay Round negotiations on TRIMs, the limited effectiveness of the trade-oriented disciplines of the Agreement on Subsidies and Countervailing Measures with regard to investment incentives, and the difference between WTO and international investment agreements in respect of the coverage of portfolio investment. M/2, paragraph 36, M/3, paragraphs 31, 32 and 34 and M/6, paragraph 37.

126. While the absence of provisions on investment protection in the WTO agreements was mentioned, the point was also made that the TRIPS Agreement was relevant to the protection of investment. M/3, paragraph 32.

127. In relation to a suggestion that the Working Group examine how portfolio investment was treated in the context of definitions of the term "investment" in international investment agreements, the view was expressed that portfolio investment was less related to trade than direct investment and that there was therefore no need to examine in detail in the Working Group how different agreements dealt with portfolio investment. It was also suggested that it would be useful to clarify to what extent portfolio investments were already covered by the GATS as a consequence of footnote 8 to Article XVI of GATS. M/3, paragraph 34.

128. Interest was also expressed in comparing the "positive list" approach used in the GATS context with the "negative list" approach used in some investment agreements and envisaged in the negotiations on a Multilateral Agreement on Investment. M/2, paragraph 36.

129. It was stated in this connection that both negative list and positive list approaches had their advantages in certain circumstances. While a negative list approach promoted transparency and permitted the identification of measures that might be amenable to gradual liberalization, positive lists had their use when confidence-building measures were required. A generalized judgement as to the superiority of either approach was not possible. It was noted that the GATS combined the two approaches. It was also stated that this issue should be considered not only in relation to the GATS but also in the context of the WTO agreements as a whole in order to take account of instruments, for example in the field of intellectual property and tariff bindings, which had a different structure from that of the GATS. M/3, paragraph 33.

130. With reference to negotiations on a Multilateral Agreement on Investment, the question was raised whether this envisaged agreement could be construed as an economic integration agreement within the meaning of Article V of the GATS. M/1, paragraph 6.

131. While it was stated that a number of WTO agreements had been identified in the work of the Working Group dealing with investment issues but only in an incomplete and partial manner, it was also stated that further discussion was necessary on the extent to which WTO provisions that had been referred to by some Members were indeed relevant to investment. M/6, paragraph 38.

132. It was proposed that the Working Group undertake work aimed at identifying the effects of trade policy measures on FDI, focusing on the following six areas: high tariffs and tariff escalation as determinants of investment flows; the effects on inward FDI of the invocation of the WTO balance-of-payments provisions; the relationship between protection of intellectual property and transfer of technology; the impact of preferential rules of origin on FDI; the investment implications of actions by firms to escape the application of anti-dumping measures; and the impact of subsidies on trade and investment flows. The impact on investment of regional trade agreements was also mentioned as an area for further examination. In response to a comment that these issues were best addressed in the context of the work under the second Item of the Checklist, the point was made that further work in relation to WTO provisions under Item III should include both a comparison of WTO provisions with provisions of international investment agreements and an analysis of the potential effects on investment of the implementation of WTO provisions. M/2, paragraph 9. It was also suggested that the Working Group examine the issue of the transfer of technology, limitations on commitments with respect to investment, as revealed by schedules of specific commitments under the GATS, and the treatment accorded under the GATS to the movement of natural persons. M/2, paragraph 37.

(b) Bilateral, regional, plurilateral and multilateral agreements and initiatives; (c) implications for trade and investment flows of existing international instruments

133. While the work of the Working Group under this part of Item III involved the examination of key features of existing international investment agreements, issues were also raised regarding the advantages and disadvantages of existing agreements as compared with possible multilateral rules on investment. In this regard, there was overlap between the debate under this part of Item III and the debate under Item IV of the Checklist.

134. Information on existing agreements was provided through contributions by Members regarding agreements to which they were parties, a Note by the Secretariat on bilateral, regional, plurilateral and multilateral agreements (W/22) and a contribution by UNCTAD.

135. In regard to the experience of one Member with bilateral and regional investment agreements, the main differences between the provisions of these agreements and the TRIMs Agreement and the GATS were highlighted and attention was drawn to the merits of agreements which integrated trade and investment, as compared with bilateral investment treaties, which focused only on the treatment of foreign investment. M/3, paragraph 39. With respect to another Member's experience with bilateral investment treaties, the relationship between the conclusion of such treaties and adequate protection of intellectual property rights was stressed. M/4, paragraph 47.

136. It was stated, in regard to one Member which had recently begun to conclude bilateral investment treaties, that there was a close relationship between the significant growth of this Member's outward FDI since the mid-1980s and the conclusion of bilateral investment treaties. The model bilateral investment treaty used by this Member was aimed at providing protection of foreign investment through provisions on fair and equitable treatment, full protection and security, national treatment and MFN treatment, free transfer of funds, and rules on expropriation and dispute settlement. Although this Member's existing bilateral investment treaties did not provide for obligations regarding the admission of investment, a recent development of interest was that the Member had agreed to start negotiations with another Member on a comprehensive bilateral investment treaty covering both the establishment and the post-establishment treatment of investment. M/5, paragraph 27.

137. In regard to another Member, it was pointed out that, in the context of the overall reform of its investment régime initiated in 1990, it had been considered necessary to combine the adoption of legislation on FDI liberalization with the provision of assurances regarding the protection of investment through the conclusion of bilateral investment treaties. The experience of this Member with these treaties showed that they were important as one of many factors influencing investment decisions but that they might not be a determining factor. M/5, paragraph 27.

138. In a discussion of the experience of another Member with bilateral investment treaties, it was stated that this Member had pursued a policy of entering into bilateral investment treaties with a view to providing a predictable climate for inward foreign investment as well as to protect its investments abroad. Typically, the treaties entered into by this Member tried to promote foreign investment by providing protection, i.e., by giving assurances that foreign investments that had been admitted in accordance with the host country's laws, regulations and policies were guaranteed fair and equitable treatment, including national and MFN treatment, full and consistent legal security and dispute resolution through international mechanisms, including for investor-state disputes. The domestic legal system of this Member had built-in provisions for the various elements of bilateral investment treaties. Bilateral investment treaties had found favour with developing countries because they did not place restrictions on host countries in following their own FDI policies in the light of the countries' unique circumstances. Generally, these treaties aimed at the protection and equitable treatment of FDI after the investment had taken place in accordance with the host country's laws and regulations. The increasing number of such treaties was a recognition of the positive rôle that foreign investment could make to economic development. However, as many such treaties had been concluded only in the very recent past, there was little empirical evidence to establish a correlation between the conclusion of such treaties and the growth of investment. Bilateral investment treaties were one of the factors in creating a favourable investment climate, in addition to factors such as size and growth of the market, the quality of infrastructure, manpower skills and political, economic and legal stability. The Member was engaged in improving its investment climate and attracting FDI flows through its own autonomous measures regarding the liberalization of its policy and regulatory framework relating to FDI. M/5, paragraph 28.

139. In respect of several other Members which were parties to a regional arrangement, the point was made that they had individually entered into a number of bilateral investment treaties with both developed and developing countries. These treaties, which normally focused on the promotion and protection of investment, allowed for flexibility for the parties to pursue locational, sectoral and developmental objectives. These Members had also concluded a regional agreement on the promotion and protection of investment, which was broad in coverage by virtue of the definition of investment covering all forms of assets, but which provided for conferring the right to invest or establish on the basis of prevailing law. The Members were also in the process of concluding a regional agreement on the removal of investment barriers. The experience of these Members suggested that bilateral investment treaties and regional agreements added a level of comfort for both the foreign investor and the host country but that they were not by themselves a determining factor in investment decisions. Economic fundamentals remained the prime driving force for both inward and outward FDI. M/6, paragraph 51. The point was also made that the definition of investment should be viewed in the light of the objectives of an investment agreement, and that these Members remained to be convinced that there was a need for investment rules in the WTO. Thus, the fact that they had adopted a broad definition of investment in a regional agreement did not necessarily indicate that they were advocating the use of an equally broad definition in the context of this Working Group.

140. Reference was made to recent developments regarding domestic legislation of one Member and a bilateral understanding among other Members on the issue of expropriated foreign investment, and concern was expressed regarding the possible incorporation of this understanding in the envisaged Multilateral Agreement on Investment. M/5, paragraph 30. The point was also made that the benefits of bilateral investment treaties were sometimes negated by the application of unilateral measures of an extraterritorial nature and that an important subject for consideration in regard to a multilateral approach to investment was how to avoid such measures. M/6, paragraph 42.

141. The Working Group was informed by the observer from UNCTAD of the results of UNCTAD's analytical work on international investment agreements. In regard to bilateral investment treaties, the key themes that emerged from this work were the following: the rapidly increasing number and diversity of countries that had concluded such treaties; the considerable uniformity in the broad principles of bilateral investment treaties along with numerous and important variations in the specific formulations; the lack of detailed information on and analysis of the actual application of bilateral investment treaties; the absence of evidence of a significant influence of such treaties on investment flows, as revealed by analysis of investment flows between parties to bilateral investment treaties; the significance of bilateral investment treaties as evidence of a certain convergence of approaches to the treatment and protection of investment, even though these treaties had not given rise to the formation of new rules of customary international law; and the interaction between bilateral investment treaties and national laws. Regional investment agreements exhibited a greater degree of diversity in their content and purposes than bilateral investment treaties. The main objective typically pursued at the regional level was the liberalization of restrictions to entry and establishment of FDI, followed by the reduction of discriminatory operational restrictions. A pattern that appeared to be emerging in recent regional agreements was to consolidate in one instrument an expanded set of items for liberalization and protection in combination with procedures for the gradual reduction of investment restrictions and for the settlement of investment disputes, including those between investors and host states. In addition to standards of treatment and protection of foreign investment, some regional agreements dealt with the transfer of technology, competition, environmental protection, conflicting requirements and standards of conduct for multinational enterprises in areas such as disclosure of information, and employment and labour relations. Multilateral investment instrumnts mostly related to particular sectors or specific issues, including services, performance requirements, intellectual property rights, investment insurance, dispute settlement, employment and labour relations, consumer and environmental protection and competition. M/4, paragraphs 47 and 48 .

142. Areas of commonality and divergence between existing investment agreements were identified. Thus, the point was made that, although there were important areas of commonality between investment arrangements in regard to matters such as expropriation and compensation, national treatment, most-favoured-nation treatment and dispute settlement, none of these issues was treated in a uniform manner. M/4, paragraph 46. Another view was that existing agreements converged with respect to the principle that foreign investors were to be accorded national treatment, subject to exceptions as provided for in national legislation, and that areas of divergence included dispute settlement, the treatment of balance-of-payments issues, incentives, performance requirements, objectives, coverage and the rôle of the promotion of development. M/4, paragraph 46. It was also stated that existing agreements had many elements in common, for example in regard to the definition of investment, admission, national treatment and MFN treatment, transfer of payments, expropriation and dispute settlement. M/5, paragraph 29. The point was made that, while bilateral investment treaties concluded by certain countries required, in principle, national treatment and most-favoured-nation treatment in regard to both the post- and pre-establishment phases of an investment, in most other bilateral investment treaties these standards applied only to the post-establishment phase. M/4, paragraph 47 and M/5, paragraph 29. Another observation was that, given that international investment agreements had historically evolved autonomously, it was significant that recent agreements showed a tendency towards integrated treatment of trade and investment. M/4, paragraph 46 and M/5, paragraph 29.

143. The view was expressed that there were a number of gaps in existing international investment arrangements, including with respect to the scope of the definition of investment, the lack of an integral approach to development, the lack of provisions on privatization, fiscal havens, technical cooperation, monopolies, state enterprises and concessions, corporate practices and technology development, the social responsibility of states towards marginalized groups, the adverse effects of volatile, short-term capital movements, and the distortive effects of certain kinds of incentives. M/4, paragraph 46 and M/5, paragraph 29.

144. It was suggested that the Working Group undertake a systematic review of international investment arrangements in order to determine their possible value from the perspective of WTO disciplines, and that it analyze the interaction between the various existing international investment agreements, notably in regard to the implications of most-favoured-nation clauses, including Article II of GATS. It was also proposed that there be further analysis of the experiences of Members with the impact on their investment régimes of regional agreements, and that the Working Group examine existing international investment arrangements from the perspective of fundamental WTO principles, such as non-discrimination, most-favoured-nation and national treatment, fair trade, predictability of policies, encouragement of competition, special provisions for developing countries and transparency. M/4, paragraph 49.

145. The point was made that the information presented to the Working Group on the widespread rule-making on investment in bilateral and regional settings showed that Members had chosen to build rules-based investment relations and that the outstanding question was what could be gained by consolidating this activity at the multilateral level. M/5, paragraph 29 and M/6, paragraph 41.

146. One argument advanced in this connection was that, from the viewpoint of transparency and efficiency, multilateral rules on investment were desirable in view of the complexity for governments of administering a growing number of investment agreements and that multilateral rules were also essential in order to ensure the consistency of those agreements with WTO principles of non-discrimination. M/5, paragraph 29.

147. The point was made that the pursuit of developmental objectives in the light of the unique needs and circumstances of individual countries required sufficient freedom and flexibility for countries to pursue their own policies. This meant that there should be freedom to regulate the entry of foreign investment while at the same time providing predictable policies, laws and regulations, once the foreign investment had entered. It was significant in this connection that most of the bilateral investment treaties provided an assurance for investment protection in accordance with host countries' laws, regulations and policies. Any multilateralization or consolidation of bilateral investment treaties might not serve this objective. M/6, paragraph 43.

148. In response to this argument, it was stated that the issue of the development implications of a possible multilateral framework of rules on investment needed to be viewed in the light of the factors that motivated investment decisions of firms. The point was made in this regard that an investment-friendly environment was to a large extent also development-friendly. It was argued that predictability of host country laws and policies was a major factor influencing investment decisions and that a multilateral agreement on investment was a means of enhancing such predictability. M76, paragraph 46. In addition, the view was expressed that, contrary to the assertion that bilateral investment treaties provided an assurance of protection of investment in accordance with the domestic laws of host countries, the purpose of such treaties was to establish an international standard of protection irrespective of host country laws. M/6, paragraph 45.

149. The view that an investment-friendly environment was also development-friendly was contested. The point was also made that, while predictability was positive for investment, it was questionable whether a multilateral agreement was the best guarantor of such predictability. Predictability could also be provided by other arrangements. M/6, paragraph 47. In regard to the issue of the relationship of bilateral investment treaties to domestic law, it was stated that many bilateral investment treaties provided in their national treatment and MFN clauses that these disciplines were subject to national laws. M/6, paragraph 45.

150. In regard to the notion of a consolidation of existing international agreements, the point was also made that, since it appeared that the suggestion for a multilateral approach to investment went beyond investment promotion and protection to include liberalization of investment régimes, it was not productive to debate the possible need for a multilateral framework on investment in terms of investment promotion and protection when, in reality, the intention was to address issues that were far more sensitive for developing countries and that required further study. M/6, paragraph 49.

151. The question was raised whether a case could be made that a multilateral framework would help host countries to attract investment. Reference was made in this regard to the experience with bilateral investment treaties which appeared to indicate that their rôle as determinants of investment decisions was not as important as that of other factors. M/6, paragraph 48. The argument was advanced that since the available evidence suggested that bilateral investment treaties were not a major determinant of investment decisions, there was little to support the view that a multilateral framework based on such treaties would have a significant impact on investment flows. M/6, paragraph 43. It was also argued that, more generally, there was little empirical evidence to suggest that location decisions were greatly influenced by the existence of investment agreements. M/6, paragraph 47. Another point made on this issue was that the argument that multilateral rules were necessary to create a stable, transparent and consistent environment for firms operating in the global market appeared to confine the consideration of benefits to those that would accrue to the source of the FDI. To balance the discussion, it should also be asked whether multilateral rules would indeed translate into more investment flows and consequent net benefits for host countries. In this regard, an important consideration was the fact that, in the current context of closer global economic integration in which the importance of FDI to development was generally recognized, countries were likely to make every effort through legislation or best practices to compete successfully for FDI. M/6, paragraph 51.

152. However, it was also argued that there was no reason to expect an automatic correlation between the existence of bilateral investment treaties and the size of investment flows, given that such treaties were concluded by governments and not by private parties. Governments presumably negotiated such treaties for a variety of reasons, and it was possible to conceive of situations in which governments entered into negotiations on such treaties for long-term benefits without necessarily expecting short term results. Bilateral investment treaties and other investment agreements were valuable in that they put a floor on the ability of governments to add new impediments that would not necessarily be seen at the time by the investor. This was a concept that was very familiar from the WTO context and which enhanced predictability. M/6, paragraph 52.

153. The view was expressed that, while the objective of the WTO was trade liberalization through the establishment of rules on market access, including national treatment and MFN treatment, investment liberalization was conceptually different from market access and therefore required in-depth and broad discussion before it could be taken up in the WTO. M/6, paragraph 43. In a similar vein, the point was made that certain concepts might easily apply to trade in goods or services but not to FDI. In particular, under the WTO the right to trade under free and non-discriminatory conditions was an accepted principle but the right to invest or establish, which more often than not meant production operations taking place in the same country of sale, did not lend itself easily to the same approach. Some countries would probably prefer an approach where the starting-point was not the foreign investor's right to invest or establish, but the host country's permission for it do so. It was also unclear how it could be ensured that all countries would benefit from a multilateral framework on investment when host countries might not have the same capacity or interest to invest abroad as home countries. M/6, paragraph 51. It was also stated that, given that trade relations were affected by governmental measures, while investment involved private parties, the argument in favour of a multilateral approach to trade was perhaps not equally applicable to investment. M/6, paragraph 48. The question was raised as to whether the principle of national treatment, which was well known in the WTO context, was readily transferable to the investment context and whether national treatment would differ depending on whether it was applied to the pre-establishment or post-establishment phase of an investment. The point was made in this context that granting national treatment could not be equated with a liberal investment régime in all circumstances. M/4, paragraph 49.

154. The argument was advanced that a key consideration in favour of a multilateral approach was that a multilateral framework, especially in the WTO context, could build on a body of basic principles, such as non-discrimination, transparency and predictability of policies, which were applicable to a wide range of economic transactions. M/6, paragraph 44. It was stated that a parallel could be drawn between the relationship between trade liberalization and the desirability of a multilateral framework for trade on the one hand, and the relationship between investment liberalization and the desirability of a multilateral framework for investment on the other. Trade and investment were not as different as had been suggested by some Members. Both trade and investment involved private actors. As in the case of trade, the basic question arising in regard to investment was whether governments collectively were prepared to submit themselves to rules that prevented each of them individually from hampering the flows of investment. To the extent that trade and investment were becoming more closely interrelated, the lack of rules on investment reduced the effectiveness of existing rules on trade, as illustrated by the limited effectiveness of the WTO rules on subsidies with respect to investment incentives. As investment flows were becoming more important than trade flows, the need for action by governments to provide a framework of rules on investment became more urgent. The expansion of the network of bilateral investment treaties increased the potential for distortions of investment flows arising from the discrepancies between such treaties. The proliferation of the number of such treaties also indicated that the need for rules to provide stability was generally recognized. While it was true that some investment issues were likely to be more controversial between WTO Members than others, the same applied to trade. However, it was easier to find an accommodation and balance between different interests in a multilateral context than in a bilateral setting. M/6, paragraph 50.

155. In support of the view that a parallel could be drawn between the rationale for multilateral trade rules and the rationale for multilateral investment rules, it was further stated that, while traders did not make membership of the WTO a precondition for trading with non-WTO members, the real question was whether it was in the long-term interest of trades for such countries to be parties to an established body of trade rules. This was where the analogy with investment was quite pertinent. Another aspect of this analogy was that trade rules did not stop governments from taking measures having an effect on trade. Rather, governments had agreed to circumscribe their discretion in a politically and economically rational way. The same concept applied to existing investment agreements and to any future multilateral rules on investment. M/6, paragraph 52.

156. It was also suggested that, since most WTO Members were bound to some type of non-discrimination rules regarding foreign investment, for example in the GATS rules as they related to commercial presence, a multilateral approach including common rules in respect of the pre-establishment phase but with a flexible scope for exceptions would be more transparent and efficient than today's varied legal situation. M/5, paragraph 29.

157. It was argued that, as discussions had not shown clearly the benefits which might emanate from the multilateralization of bilateral treaties, it might be more advisable to continue with the existing trends and arrangements, namely autonomous liberalization of FDI policies and régimes, together with bilateral, regional, and interregional treaties, and to continue discussions on the crucial issues identified by the Working Group. This would enable existing trends and arrangements to evolve and gather further strength and momentum in time for a review once the discussions on the issues before the Working Group had reached a definitive stage. M/6, paragraph 43.

158. The ideas that work in the WTO should be aimed at promoting bilateral investment treaties and that the educative process in the Working Group should be continued for a considerable period of time were contested. Bilateral investment treaties were the most widespread instrument used by countries to provide predictability and stability to investment but there were also important regional agreements on investment with different degrees of strength. It was significant that the countries most in favour of regional and multilateral approaches to investment were those with the largest number of bilateral investment treaties. While the educative process on which the Working Group had embarked was not easily confined within a time constraint, this applied to any subject discussed in the WTO. M/6, paragraph 44.

159. The view was expressed that, in considering the merits of a multilateral framework on investment so far in the debate in the Working Group, insufficient account had been taken of the fact that there could be different kinds of multilateral rules. Further work in the Working Group on this subject would benefit from a greater focus on the various possible options for multilateral rules. M/6, paragraph 46.

160. Another comment on the direction of future work was that many issues would need to be considered before any pronouncement could be made on the advantages and disadvantages of a possible multilateral set of rules on investment. These included definitions, rules on entry, performance requirements, incentives, national treatment, MFN treatment, taxation and other related issues, status of personnel, technology transfer, payments and financial transfers, competition, restrictive business practices, transparency, expropriation and compensation, and dispute settlement. Furthermore, in discussing the advantages and disadvantages of multilateral rules, it was necessary to assess whether the bilateral investment treaties and regional arrangements were working well and serving their purpose, and to consider whether it was necessary to work toward multilateral rules whose value was at best untested. The feasibility of multilateral rules on investment would hinge on whether or not they filled a void that must be filled and, if so, on whether these rules would address in a balanced manner the diverse and evolving interests of all countries. Future discussions, if any, on this matter would require a very pragmatic approach, especially in respect of issues such as the right to invest or establish and other elements relating to the development dimension. M/6, paragraph 51.

161. As part of its work on the issues mentioned in the second and third indents of Item III of the Checklist, the Working Group also considered information on relevant ongoing activities and initiatives in other contexts:

- At its first and second meetings, the Working Group considered an informal Note by the Secretariat (Job No. 2843) which described ongoing activities in other international fora. This Note covered activities in the context of APEC, ASEAN, the Energy Charter Treaty, the Free Trade of the Americas Initiative, the IMF and the United Nations. An Addendum to this Note dealt with activities in the context of the Andean Community, the Asia-Europe Meeting, the Common Market for Eastern and Southern Africa, the European Bank for Reconstruction and Development, the Southern African Development Community, the United Nations Industrial Development Organization and the United Nations Economic Commission for Western Asia.

- At the first meeting, observers from the OECD, the World Bank and UNCTAD made statements on the activities of these organizations relevant to the Working Group (W/4-6).

- Members presented information on developments in the context of APEC (W/9), the Free-Trade Area of the Americas initiative, MERCOSUR, the Asia-Europe Meeting, the Andean Community and ASEAN.

- The observer from UNCTAD informed the Working Group of the relevant work of the UNCTAD Commission on Investment, Technology and Related Financial Issues, expert meetings convened by the Commission, seminars organized by UNCTAD and relevant UNCTAD publications and studies.

- The observer from the OECD provided information on relevant activities of the OECD, in particular regarding the negotiations on a Multilateral Agreement on Investment.

- The Secretariat provided information on recent developments regarding the conclusion of a supplementary treaty in the context of the Energy Charter Treaty.

IV. ITEM IV OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY

162. As agreed at the meeting of 8 December 1997, the Working Group started its work under this Item at the meeting of 30 and 31 March 1998 by considering the factual aspects of the first indent. At the meetings of 16 and 17 June, 1 and 2 October and 25 and 26 November 1998, the Working Group discussed all indents of this Item.

163. Written contributions on this Item of the Checklist were provided and were introduced orally by the European Community and its member States (W/30 and 54), the United States (W/32), Hong Kong China (W/33), Canada (W/36), Japan (W/34 and 43), Korea (W/49) and Costa Rica (W/60). Oral statements were also made by Switzerland, Australia, Malaysia, Pakistan, Hungary, India, Brazil, Colombia, Peru, Venezuela, Egypt, the Philippines on behalf of ASEAN WTO Members, Argentina, New Zealand and Norway. In addition, written contributions were submitted by the OECD (W/49), UNCTAD (W/50) and the IMF (W/60).

(a) Identification of common features and differences, including overlaps and possible conflicts, as well as possible gaps in existing international instruments

164. Views were expressed on the diversity of existing bilateral, regional and multilateral investment agreemens and the absence of a coherent set of rules at the multilateral level; the need for a more integrated treatment of trade and investment in international agreements; the limitations of current WTO provisions related to investment; the potential for conflicts arising from investment agreements that were designed to address the priorities and concerns of the parties involved without proper regard to the potential negative impacts on third parties; and the fact that, although there was a large degree of commonality between existing instruments in terms of basic principles, specific rights and obligations varied. M/4, paragraph 59. It was also stated that gaps in the existing legal framework were particularly evident at the multilateral level and that the majority of multilateral agreements encouraged investment through non-binding principles and guidelines, whereas most plurilateral instruments were legally binding. M/4, paragraph 62.

165. The point was made that possible gaps and conflicts among existing international investment instruments might restrict market contestability, distort investment flows, reduce economic efficiency, and thus frustrate the objective of such instruments. In this respect, several policy questions arose which required further consideration. First, international investment might be distorted by policies involving a denial of national treatment or right of establishment to international investors, failure to provide a certain threshold of investor protection, measures that distorted competition between domestic and foreign firms, and performance requirements and investment incentives. Since substantial economic gains might be derived from further liberalization of these policies, a pertinent question was whether and how such policies should be altered in today's globalized economy. Second, since the disciplines provided for in the WTO Agreement on Subsidies and Countervailing Measures might not be adequate to deal with investment incentives and the coverage of performance requirements in the Agreement on Trade-Related Investment Measures was incomplete, the question should be addressed whether these apparent gaps in the existing WTO instruments pointed to the need for reforming investment-reacted rules at the multilateral level. Third, there was a need to consider to what extent overall economic-related benefits were affected by the markedly different standards in existing investment agreements at various levels and whether global economic welfare would benefit from a comprehensive and coherent framework for investment. M/6, paragraph 63.

166. A number of more specific themes were addressed in the work under this part of Item IV regarding substantive norms and concepts contained in existing international investment instruments, particularly in relation to the issue of the admission of investment and the definition of the term investment.

167. It was suggested that a distinction could be made between three broad categories of existing international investment instruments - bilateral investment treaties; the rules on investment of the EC Treaty, the Agreement on the European Economic Area (EEA) and the Europe Agreements; and other regional and multilateral instruments – and that a basic element common to all instruments in these three categories was the key rôle of the principle of non-discrimination, in combination with a recognition of the right of governments to take measures to attain public policy objectives. None of these instruments provided for an unqualified right of establishment. M/4, paragraph 57. It was also stated that the principle of non-discrimination was well established at national and bilateral levels but that few obligations of a multilateral nature existed in regard to national treatment. M/4, paragraph 62.

168. The view was expressed that a common characteristic of existing international instruments was that there was no right to invest and no guarantee of market access, although agreements like the EC Treaty and the EEA Agreement provided for a right of establishment, and that screening procedures existed in many countries. M/4, paragraph 62. Another comment made on this point was that it was significant that it had emerged clearly from the information presented to the Working Group that no country was presently providing for a free right of investment given that, in discussions on investment prior to the Singapore Ministerial Conference, the achievement of a right of establishment had been proposed as an objective of multilateral work on investment. Also significant as a common element identified by the contributions presented to the Working Group was the fact that national treatment was not provided in regard to the pre-establishment phase of an investment. M/4, paragraph 68.

169. The point was made, however, that the existence of a right to invest and national treatment were central elements of a large number of existing investment agreements, although these standards were sometimes subject to exceptions and limitations. In response, it was stated that the fact that certain agreements provided for a right to investment and national treatment upon establishment, but subject to exceptions and limitations, confirmed that there was no automatic right to invest and no automatic granting of national treatment in the pre-establishment phase. The large number of reservations proposed in the ongoing negotiations on a Multilateral Agreement on Investment highlighted the fact that even developed countries were not in a position to allow for an automatic right to invest. M/4, paragraphs 69 and 70. In connection with the latter observation, the Working Group heard a statement by the representative of the OECD on the scope for exceptions with respect to the establishment of investment envisaged in the negotiations on a Multilateral Agreement on Investment. M/4, paragraph 74 .

170. The point was made that the Working Group should avoid discussing existing investment régimes and international instruments in terms of overly broad generalisations, such as the assertion that resort to screening procedures was widespread, and that more detailed analysis of certain issues was necessary. M/4, paragraph 71. In particular, there was a need for the Working Group to develop a better understanding of the different legal standards and concepts used in existing international investment agreements with respect to the admission of foreign investment.

171. In this regard, it was stated that four approaches could be distinguished. First, while it was possible to conceive of an unconditional right to invest, this was a purely theoretical notion which was not reflected in any existing agreement. Second, a narrower concept was that of "right of establishment", which referred to the setting up of enterprises or the provision of services by a natural person in another country. This concept existed only in a small number of agreements that aimed at far-reaching economic integration in a regional context. Since the standard of right of establishment went beyond a requirement to eliminate measures that were discriminatory against foreign investors, it was to be distinguished from a third approach, which involved the application of non-discrimination standards to the pre-establishment phase. This was the approach most frequently used in international agreements that contained binding rules on the admission of investment. The application of the standards of national treatment and MFN treatment to the admission of investment was typically associated with a "top down" approach that provided for a general application of non-discrimination standards, subject to country-specific exceptions. A fourth approach to the admission of investment, which could be characterized as a "market access, bottom up" approach, was exemplified by the GATS, in which Members had obligations regarding the admission of investment only to the extent that a specific sector had been inscribed in their schedules of commitments, although the GATS also contained some obligations of a general nature, such as MFN. The scope of application of these various standards depended crucially on the definition of the term investment. Each of the above-mentioned approaches to the admission of investment was qualified by various types of exceptions. With regard to the meaning of the concept of non-discrimination, it had been clarified in the context of the existing OECD investment instruments that the standard of "no less favourable treatment" did not necessarily mean "identical treatment" and that in certain circumstances this standard could allow for different treatment, provided that the treatment was equivalent. The GATS showed an interesting further evolution of the non-discrimination standard in the sense that, compared to the more legalistic orientation of the non-discrimination rules found in the OECD instruments, the provisions of the GATS on market access and national treatment reflected a more economic orientation, as evidenced by the emphasis on the removal of numerical restrictions and on equality of competitive opportunities. M/5, paragraph 36.

172. In a further clarification of the distinction between the right of establishment, on the one hand, and the application of national treatment to the pre-establishment phase, on the other, it was stated that the concept of the right of establishment, as applied in one existing international agreement, required the removal of obstacles to the establishment of nationals of other parties to that agreement irrespective of the treatment accorded by a party to its own nationals, whereas the application of national treatment to the pre-establishment phase involved a relative standard which rested on a comparison between the treatment of foreigners and the treatment of nationals. Thus, most international investment agreements which dealt with the admission of investment did not contemplate obligations that were as far reaching as the obligations in agreements based on the principle of the right of establishment. M/5, paragraph 37. As a consequence, the concept of right of establishment and similar concepts were not relevant to the work of the Working Group. M/6, paragraph 59.

173. In connection with the issue of the treatment of admission of investment in international agreements, the argument was also advanced that the relevance of the distinction between the pre-establishment and post-establishment phase of investment depended upon the scope of the definition of investment. This distinction originated in investment agreements that defined investment narrowly in terms of the establishment or acquisition of enterprises and was more relevant in that setting than in more recent agreements which defined investment in terms of a wide range of assets. M/4, paragraph 64 and M/5, paragraph 36.

174. In a comment on this argument that the distinction between pre-establishment and post-establishment treatment was particularly relevant to agreements which used narrow definitions of investment, it was observed that proposals made in the preparation for the Singapore Ministerial Conference for the launch of work on investment in the WTO had specifically focused on FDI. M/4, paragraph 68.

175. The view was also expressed that effective protection of investment in the post-establishment phase could not be dissociated from the treatment of investment in the pre-establishment phase and that, to protect investment adequately, an investment agreement must address the three periods in the life of an investment: entry, operation after establishment, and liquidation of investment. The treatment of investors and their investment should be non-discriminatory in each of these periods. The standard for non-discrimination was appropriately national treatment and MFN treatment. The conditions which applied to and determined entry to a market were often conditions which remained in force throughout the life of an investment because the government could set the terms of the investment's entry and operation at this point and also because, once such conditions had been set, even if later lifted by the government, it was often too costly or impractical then to restructure the investment. In other words, the issue of discrimination and an investor's ability to compete on equal terms with the domestic investor might be moot after establishment because the discrimination that had taken place prior to the establishment of the investment had put the investor at a competitive disadvantage for the life of the investment or precluded the investment altogether. Market access was also a key ingredient of an investment treaty. WTO rules which applied to trade in goods and services necessarily addressed discriminatory treatment of products both at the time a product entered a market and once it had crossed a border. If a product was able to cross a border free of tariffs but could not be sold once it had crossed the border due to an internal restriction, the value of tariff free entry was nullified. Similarly, if a quota prevented entry, non-discriminatory treatment of the product after entry was meaningless. This analogy applied to investment. A commitment not to discriminate was meaningless if the investment was precluded altogether or so handicapped by restrictions and conditions applied during establishment that it was at a competitive disadvantage vis-à-vis its competitors. M/6, paragraph 62.

176. Reference was made to the issue of forced divestiture, whereby some countries that maintained limitations on foreign equity ownership also required investors to reduce their equity interests after the passage of a certain amount of time. The view was expressed that this practice was inconsistent with an open and fair investment régime, ran counter to the fundamental objectives of the WTO, and discouraged investment and hindered economic growth in the long term. M/4, paragraph 58. In a comment on this point, it was stated that, although FDI contributed to the objective of the promotion of economic development, it also had other implications, and that this issue should be seen from the perspective of the need to ensure a general application of rules designed to serve important public interests. M/4, paragraph 65.

177. Another important dimension of the Group's work under this part of Item IV concerned the definition of the term investment in international agreements.

178. Statements were made on the merits of a broad, asset-based definition of investment covering both direct and portfolio investment. M/5, paragraphs 52-55. It was argued that such an approach was desirable in order to provide adequate protection to foreign investment, to ensure consistency with the large number of existing agreements that used this broad definition and to avoid the difficulty of distinguishing between direct and indirect investment. M/6, paragraph 90. The view was also expressed, however, that the Working Group had been established at the Singapore Ministerial Conference on the understanding that its work would be limited to consideration of FDI. M/5, paragraphs 52 and 56 and M/6, paragraph 88.

179. It was stated that any definition of investment should be based on the key concept that an investment was a capital transaction in which the investor expected a return. This concept of an expectation of a return would ensure that government grants and contractual arrangements for the supply of goods and services were not included within the definition of investment. M/6, paragraph 87.

180. The interrelationship between the definition of investment and the nature of substantive obligations in an agreement was emphasized. Thus, the point was made that the fact that bilateral investment treaties defined investment in terms of every kind of asset should be seen in conjunction with features of these treaties that narrowed the scope of application of the definition, for example by providing national treatment only in respect of post-establishment treatment of investment. The need to view the definition of investment in its interrelationship with other aspects of an agreement meant that approaches adopted in bilateral investment treaties were not necessarily appropriate in other contexts. M/5, paragraph 56. With reference to the distinction made in the domestic law of one Member between a narrow, enterprise-based definition of FDI in connection with the pre-establishment phase of investment and a broad, asset-based definition of investment for purposes of the protection of investment in the post-establishment phase, it was suggested that the work in the WTO should be limited to FDI when considering issues relating to liberalization. In the latter regard, use of the IMF's definition of FDI was proposed. M/5, paragraph 52. Pursuant to a request by the Working Group, the IMF submitted a contribution on its definition of FDI. See document W/61. The point was also made that, while there was clearly a difference between considering portfolio investment in relation to the protection of investment against expropriation and considering portfolio investment in the context of the application of national treatment to the pre-establishment phase of an investment, the use of different definitions for the purpose of different obligations could easily lead to unintended results. Likewise, a narrow definition was undesirable in the context of investment protection. The most promising approach appeared to be to start with a single, broad definition, but to carefully examine the applicability of specific substantive obligations to the elements covered by that definition. M/5, paragraph 60. It was stated that problems that could arise from the inclusion of portfolio investment in the definition could be addressed through exceptions and qualifications to obligations. Thus, including portfolio investment in a definition of investment in an agreement did not necessarily imply that all obligations of the agreement would apply to such investment. M/6, paragraph 90.

181. The point was made that the inclusion of portfolio investment in a definition of investment might have certain policy implications that required further study, in particular the causes and direction of volatility of portfolio investment flows and the impact on host economies. It was suggested that the Working Group analyze whether existing international instruments drew any distinction between FDI and portfolio investment. M/5, paragraph 57 and M/6, paragraph 92. Interest was also expressed in discussing the findings of the UNCTAD World Investment Report 1997 on the effects of portfolio investment in the context of balance-of-payments and in considering how this issue had been dealt with in the IMF. M/5, paragraph 58.

182. It was noted that the IMF Balance-of-Payments Manual stated that FDI was investment that reflected the objective of a resident entity in one economy obtaining a lasting interest in an enterprise resident in another economy, and that the lasting interest implied the existence of a long-term relationship between the direct investor and the enterprise and a significant degree of influence by the investor on the management of the enterprise. See document W/61. The question was raised which criteria were used by the IMF to determine the existence of a lasting interest and a significant degree of influence. In response, it was stated that the concept of lasting interest was not defined by the IMF in terms of a specific time-frame, and that the more pertinent criterion was that of the degree of ownership in an enterprise. A percentage of 10 or above of ownership was often deemed to reflect a lasting interest. Although this criterion was specified in the Manual, some countries might choose to allow for further qualifications which involved a degree of subjective judgement. Thus, if a direct investor owned less than 10 per cent of the ordinary shares or voting power in an enterprise, but had an effective voice in the management of the enterprise, the investment could be considered as FDI.

183. The issue of the relationship between the definition of investment and concepts used in the GATS was raised. Thus, in regard to the distinction between FDI and portfolio investment, the view was expressed that in the context of an instrument on trade-related investment issues, the relevant question was perhaps more whether the approach should be asset-based, as in the draft Multilateral Agreement on Investment, or whether it should be based on the concept of "commercial presence" as in the GATS, but extended to goods as well. M/5, paragraph 57. It was also stated that a major issue to be addressed was the need to clarify the relationship between the coverage of the term investment and the coverage of WTO agreements, particularly the GATS. M/5, paragraph 59.

184. A large number of specific issues were raised as requiring attention in regard to the appropriate coverage of an asset-based definition of investment. These issues pertained to: the treatment of branches and other unincorporated forms of business enterprise; majority and minority shareholdings; the implications of including intellectual property rights; the treatment of loans and contracts as investment; whether a commitment of capital or other resources located in the host country should be a condition for an asset to be covered; how to ensure flexibility and comprehensiveness of coverage so as to include new forms of investment; the need to exclude capital transactions which were not investments but mere financial transactions with speculative purposes; conditions under which real estate should be treated as investment; the treatment of investments made through third-country subsidiaries; the treatment of rights conferred pursuant to law, such as licences and permits; and the treatment of certain types of complicated transactions, including transactions which should not be treated as investments, such as the provision of public funds by a government to a government-owned institution, and the purchase of services by a government from a private entity. M/5, paragraphs 52-56 and 59 and M/6, paragraph 91.

185. A number of issues were raised regarding the matter of the categories of natural and juridical persons which should be considered as investors. Thus, the question was raised whether, in addition to the nationals of a country, permanent residents should be included among the natural persons considered to be investors. With regard to juridical persons, the following issues were raised: whether any enterprise formed under the law of a party should be considered an investor of that party, regardless of the nationality of the ultimate ownership or control of the enterprise; whether a combination of place of incorporation, administrative seat, and nationality of control or ownership should be used to determine whether an enterprise should be considered an investor of a party; the possible merits of a "denial of benefits" clause to prevent non-party nationals from establishing "mail box" companies solely to gain benefits under an agreement; the treatment as investors of all types of business entities recognized by applicable law, including those not requiring formal registration; and the treatment as investors of governmental and non-profit organizations. M/5, paragraphs 54-56.

(b) Advantages and disadvantages of entering into bilateral, regional and multilateral rules on investment, including from a development perspective; (c) the rights and obligations of home and host countries and of investors and host countries; (d) the relationship between existing and possible future international cooperation on investment policy and existing and possible future international cooperation on competition policy.

186. It was stated that an important advantage of bilateral investment treaties was that they could be tailored to the specific circumstances of the parties concerned and could address specific concerns, such as development issues. They could also be concluded more quickly than regional or multilateral agreements and could improve bilateral economic and diplomatic relations. Like bilateral investment treaties, regional agreements on investment were more politically feasible than multilateral agreements as they involved fewer participants and could be more precisely customized to address individual concerns. Nevertheless, as the number of bilateral investment treaties and regional agreements continued to proliferate, an economy might sign on to various investment agreements containing provisions with different standards and disciplines. This might create confusion for multinational enterprises operating on a global scale. M/5, paragraph 66

187. The view was expressed that a comprehensive set of consistent rules among all WTO Members would allow for a stable, transparent and consistent environment for firms operating in the global market, whatever their ownership structure or place of incorporation. The global application of broadly the same investment disciplines would remove the complexity arising for investors from the existing framework of bilateral and regional investment agreements and thus facilitate compliance. The value of a multilateral set of rules on investment in enhancing the predictability of the legal and regulatory environment in host economies was also stressed. A multilateral régime was likely to be more stable since an open commitment to investment liberalization could deter economies from backtracking and would thus give greater confidence to investors. The point was made that a multilateral approach should also provide benefits to governments and the peoples they represented. In this regard, it was stated that the complexity for governments of administering a multitude of investment agreements, possibly with different standards for investors from different investment partners, and many with most-favoured-nation treatment commitments incorporated into them, provided a strong argument in favour of a multilateral set of investment rules. Another important consideration concerned the benefits to be derived from incorporating investment rules into an existing framework of established WTO principles, in particular the principle of non-discrimination. A multilateral agreement could diffuse conflicts between economies' rules and reduce distortions of investment flows and the inefficient allocation of resources caused by the great number and variety of regulations on investment issues. M/4, paragraphs 60,66 and 67; M/5, paragraphs 66 and 67 and M/6, paragraph 81.

188. The point was also made, however, that, while predictability was an important consideration in investment decisions, it was not obvious that a multilateral set of rules was necessary to ensure predictability. M/4, paragraph 66. With reference to one written contribution, the point was made that the fact that a range of instruments existed which, as stated in this contribution, met the basic objective of striking a balance of rights and obligations for states and investors, might be interpreted as an argument for maintaining the status quo rather than striving for a multilateral framework. M/4, paragraph 66. In response, it was said that this statement should be viewed in its proper context of a factual analysis of existing agreements, which did not deal with the issue of the rationale of possible multilateral rules. M/4, paragraph 67.

189. Another point was that multilateral investment rules were likely to represent the lowest common denominators acceptable to the participants and that the negotiation of a multilateral framework would take time. Prolonged negotiations would inevitably create uncertainties to investors. M/5, paragraph 66. However, it was also stated that, although the level of ambition of a multilateral greement could not be as high as that in a bilateral or regional agreement, it would not necessarily lead to the lowest common denominator. M/5, paragraph 67.

190. A prominent theme of the Working Group's ensuing debate was the issue of the development implications of possible multilateral rules on investment.

191. In this connection, the observer from UNCTAD informed the Working Group of UNCTAD's work on criteria to evaluate the development dimension of international investment agreements. It was stated that the starting point of UNCTAD's work in this area was the consideration that development was the fundamental objective of developing country governments and of the international community as a whole. To what extent and how this objective could be served by international agreements that specifically addressed investment issues was a matter that was currently receiving considerable attention. If international agreements could indeed be helpful in this respect, an important issue was how the concerns of the principal actors in this regard, - i.e., host countries, home countries, investors - could be addressed in a mutually beneficial manner. It needed to be recalled in this context that to a large extent an investment-friendly environment was also a development-friendly environment. The requirements of such an environment needed to be determined carefully. There were various approaches that could be taken in this respect that were not necessarily mutually exclusive. One approach was to establish a catalogue of development-friendly elements of international investment agreements. Such a catalogue could be a checklist of elements, of issues and concerns, without establishing priorities or hierarchy, that could be consulted when negotiating international investment agreements. It would be compiled to ensure that, when negotiating agreements, negotiators had indeed considered all relevant issues. Given the considerable congruence of an investment-friendly environment and a development-friendly environment, such a catalogue would include virtually all issues that needed to be considered in the context of investment agreements. A more elaborate version of this approach would be to analyse each of these elements in greater detail, including to determine how they contributed, singly or collectively, to the development objective of host countries. This kind of analysis might be necessary in any event because in practice it was possible that one element would counteract another. A second approach began with the recognition that not only the contents, i.e., the specific treaty provisions of investment agreements, needed to be development-friendly, but that their very structure needed to reflect this objective, as should their implementation in terms of specific actions by various parties involved. The challenge was to spell out in operational detail what "structure" meant, beyond the statement of objectives. On the other hand, when it came to the contents, the catalogue of development-friendly elements was relevant. A third approach would be to identify a set of development objectives that international investment agreements should serve. Such objectives could include, for example, securing a stable, predictable and transparent investment climate; increasing the level and quality of FDI flows; strengthening domestic entrepreneurship; and recognizing the non-discriminatory exercise of governmental regulatory power in pursuing development objectives. M/5, paragraph 46.

192. It was stated that the three approaches outlined by the observer from UNCTAD were complementary, that the development dimension of an investment agreement should be reflected in concrete legally operative provisions, and that consideration should also be given to the social dimension of development. M/5, paragraph 47.

193. The point was also made that UNCTAD's work on this subject seemed to be aimed at exploring how the development dimension could be taken into account in individual elements of a multilateral framework for investment. However, it was questionable whether this approach adequately addressed the fundamental concern that a multilateral agreement, in particular one that included rules on the pre-establishment phase, would inherently remove the flexibility for developing countries to pursue development policies tailored to their specific needs. Rather than assuming that the development dimension could be accommodated in specific provisions of an agreement, it was necessary to deal first with the basic question of whether the very notion of a multilateral framework on investment was per se compatible with the need to preserve the ability of governments to pursue development strategies suited to the specific problems confronted by individual countries. M/5, paragraph 48.

194. In response to the latter point, it was stated that it should be acknowledged that in order to be development-friendly an investment régime had to be investment-friendly, and that, in the absence of disciplines to encourage inward investment, the attainment of the development objectives of an agreement would be difficult. Another observation made was that a basic question which had to be addressed in relation to both the pre- and post-establishment phases of investment was whether policy flexibility, which had been referred to and which was important to all governments, necessitated discrimination against foreign investment. M/5, paragraph 48. It was also stated that there was inherently a tension between the establishment of a multilateral framework in any area and retaining flexibility for national governments, and that finding a proper balance between them was perhaps the single biggest challenge. This could not be met simply by adding the development dimension to individual elements of an agreement; rather, one also had to look into the structure and design of an instrument and the guiding objectives which informed its concrete content. M/5, paragraph 49.

195. The argument was advanced that the issue of how the development dimension of international investment agreements should be approached should be considered in light of the implications of the discussions on the previous Items of the Checklist. Insufficient attention had been paid in the discussion under Item IV to basic development issues, due to a failure to recognize that the work under the previous Items had generated a number of issues requiring further discussion in the educative process before any conclusions could be drawn for the work on Item IV. In this regard, it was emphasized that progress under Item IV depended on the extent to which the Working Group could arrive at a common understanding on these previous items of the Checklist. M/6, paragraphs 68 and 71. In this connection, a number of themes which had emerged from the discussions on Items I-III of the Checklist were mentioned as being particularly relevant to the consideration of development issues under Item IV. It was stated that one important result of the discussion on the determinants of investment decisions in developing countries was that, while such decisions depended upon factors such as the availability of natural resources, the existence of a large domestic market, the existence of a suitable platform for manufacturing exports, the strength of local institutions, the quality of local infrastructure and the work force and the degree of macroeconomic stability, it had been found that the existence of an investment agreement was not an important determinant of investment decisions. Another relevant conclusion from the Group's work under the previous Items was that FDI was not a panacea, nor the most important factor in development and that national policies might significantly influence development-oriented FDI flows. In particular, national policies had an important rôle to play by attracting FDI through a liberal régime, encouraging FDI in priority areas and reducing possible negative effects of FDI. In certain circumstances, FDI might need to be phased in at a slower rate than the rate determined solely by market forces. Also, the importance of a sound and sustainable macroeconomic and financial environment could not be overemphasized. Sectoral targeting policies might be effective in addressing not only national but also regional or sector specific objectives. While non-market capital flows were more amenable to addressing development priorities due to the inevitable involvement of national governments, free market flows might need stricter disciplines at the national as well as international levels. It was questionable whether these disciplines could be multilateralized, in view of the unique circumstances of each FDI recipient. Selective and judicious intervention by governments might often be required to support domestic industry and technology creation and to ensure a level playing field for domestic enterprises. A correct policy environment was a necessary prerequisite to the full realization of FDI benefits, notably in regard to the transfer of technology, since various studies had pointed out that countries at low levels of development were likely to be able to induce FDI only into low technology activities. The discussions in the Working Group had also shown that, while FDI on the whole had positive effects, it was essential to consider possible negative effects, such as restrictions on technology transfer, the impact on balance of payments and exchange rates and the possible crowding out of domestic entrepreneurial activity. M/6, paragraph 69.

196. It was also stated, in this connection, that many questions requiring further consideration had been raised in the Group's discussion under Item II of the Checklist regarding the economic relationship between trade and investment. Some of the concluding statements in the Note submitted by the Secretariat on this subject (W/7) did not adequately take into account the complexity of the issues. The need for an examination of the relationship between investment liberalization and economic development through historical analysis of investment policies in individual countries had been raised, and it had been pointed out that the rôle of FDI in economic development went far beyond its relationship to trade. Developing countries were net importers of capital and technology and were faced with a huge competitive gap between their enterprises, particularly small- and medium-sized, and multinational enterprises. Developing countries recognized the importance and value of FDI and foreign technology for their growth and development, as evidenced by their autonomous liberalization of FDI and trade régimes and by their increasing shift towards market and outward-oriented approaches in economic policy. However, their experiences showed that the building up of domestic entrepreneurial, industrial and technological capabilities was essential not only to cope with, but also to realize the full benefits from, FDI and foreign technology. Without sufficient domestic capabilities, FDI and foreign technology seldom permeated the productive system of the national economy. Selective and judicious interventions by governments were therefore considered necessary. Academic studies had shown that FDI had contributed optimally to development in those countries where governments had played a strong rôle in directing FDI to certain sectors. Developing countries also needed to employ an appropriate mix of incentives and performance requirements for FDI to achieve specific developmental and political and social objectives. M/6, paragraphs 70 and 73.

197. In response to these arguments, it was stated that the Working Group had already addressed many of the points and that it had not neglected the development dimension. The argument was advanced that it appeared that underlying these points was a concern regarding the implications of multilateral rules for the ability of countries to regulate economic activities. This concern was valid and shared by all countries but did not constitute an argument against the benefits of establishing collective disciplines regarding the exercise of regulatory authority in certain areas. Regulatory sovereignty was adequately protected by the principle of non-discriminatory treatment of foreign investment. While it might be justifiable for regulatory purposes to make a distinction between investments depending upon objective characteristics, it was difficult to find a rationale for making a distinction between investments solely on the grounds of foreign ownership. The principle that countries could make regulatory distinctions based upon objective factors but subject to the requirement of non-discrimination on grounds of nationality was widely accepted in international agreements, including in WTO agreements. M/6, paragraph 72. The point was also made that, while it was true that favourable market conditions and the existence of a stable domestic legal and regulatory framework were more important as determinants of investment decisions than adherence to international investment rules, a favourable domestic environment could change during the lifetime of an investment. International rules were therefore important to enhance the stability provided by domestic rules. As to whether this purpose was best served by international rules in a bilateral or multilateral context, it was significant that countries which had concluded a very large number of bilateral investment treaties had found that the proliferation of such treaties now created the need for a more coherent approach in a multilateral setting. M/6, paragraph 72.

198. In regard to these comments, the view was expressed that discrimination on grounds of nationality was common in respect of movement of persons and that there was a need for a consistent approach to the movement of capital and to the movement of labour. The point was also made that a multilateral framework on investment might enhance predictability from the perspective of providing protection to foreign investment, which was important for capital exporting countries, but that, from the perspective of capital-importing countries, a multilateral approach would not enhance predictability, given that there was no guarantee that it would actually lead to increased inflows of FDI. M/66, paragraph 73. Since the lack of a multilateral investment frmework had not hindered investment flows, and since there was no evidence that the creation of such a multilateral framework would lead to increased investment flows and a more even spread of investment, the costs of embarking on a multilateral investment negotiaton needed to be weighed against benefits that were uncertain. M/6, paragraph 78.

199. In response to these arguments, it was stated that, since a number of Members were both capital exporting and capital importing countries, the dissimilarities in perspective were not as great as had been suggested and that protection of foreign investment was important not only for capital-exporting countries but also for host countries insofar as investment was a source of their economic growth. M/6, paragraphs 74 and 81. Regarding the issue of the impact of multilateral rules on investment flows, it was stated that a parallel could be drawn with multilateral rules on trade liberalization. What could be guaranteed by such rules was not increased trade flows per se but the existence of increased opportunities to trade, which could be exploited by firms depending upon their competitiveness. The same concept applied to multilateral rules on investment. M/6, paragraph 74. Whether investment flows would actually increase as a result of such a framework was impossible to predict, just as there had been no absolute certainty that a multilateral framework for trade would lead to increased trade at a time when the GATT was concluded. M/6, paragraph 80. The need to view this matter in a long-term perspective was underscored, in which connection the point was made that in the case of trade, efforts at multilateral liberalization over the past fifty years had sometimes been slow in producing results. The effect that a multilateral framework would have on investment flows also depended upon whether it would address impediments to FDI that arose from unnecessary regulations on FDI and differences in trade régimes. M/6, paragraph 81. Reference was also made to the experience of one Member which showed that investors with an interest in investing in a particular market often encouraged the conclusion of bilateral investment treaties because they regarded such treaties as providing a margin of comfort regarding the investment climate in the country in question. The fact that in many cases negotiations on bilateral investment treaties were initiated at the request of third countries showed that in their perspective such treaties made a difference in attracting investment. M/6, paragraph 83. The argument was also advanced that, although it was difficult to point to a single cause of the increase in FDI flows, there was a clear correlation between this increase and the widespread liberalization of investment régimes. This raised the question of how to consolidate this liberalization by international rules. In this regard, bilateral treaties were a second-best approach, as compared with a multilateral approach. Thus, more relevant than the question of whether the lack of a multilateral framework for investment had hindered investment flows was the value of such a framework in avoiding a backsliding of liberalization. M/6, paragraph 80.

200. The point was made that the notion of predictability as a possible rationale for multilateral investment rules was more relevant to long-term than to short-term investment. This highlighted the importance of clarifying whether such rules should cover both long-term and short-term capital flows. M/6, paragraph 76.

201. The view was expressed that the contours of any set of rights and obligations on investment would depend on whether the objective was the promotion, treatment and protection of investment, its liberalization, or both. The definition of investment would also be relevant in identifying such rights and obligations. Broadly speaking, the host country would need to ensure the effective promotion, fair treatment and full protection of FDI, while the home country would need to respect the policies and rules of the host country and actively assist in the realization of its objectives, or at the very least, not undermine such objectives. The crux of the matter was how multilateral rules could take into account the development dimension in a more meaningful manner than through references in preambles and through transition periods. The development dimension should be manifest in each of the elements of any set of multilateral rules on investment. For example, it might be argued that in respect of the issue of the right to invest or establish, which was invariably linked to the matter of extending national treatment to foreign investors at the entry stage, the incorporation of the development dimension would require that there be no such automatic right. This would ensure that host countries retained the ability to screen, to allow and to oversee only the types of FDI that would, on the one hand, best suit their industrial policies and developmental needs and, on the other, not stifle both investment and development. Also meriting further examination was the question of whether a positive list or negative list approach, or a combination of both, should be used, especially in light of the experience gained in the negotiation and implementation of the GATS. It was likely that a positive list would be very short and a negative list very long because host countries would wish to maintain a certain level of flexibility in screening and approving investment. In addition to the issue of the use of a positive list or a negative list, the advantages and disadvantages of developmental exceptions should be considered. Taking into account existing WTO obligations, the issue of performance requirements and incentives was another area in which the development dimension could be manifested in order to allow developing host countries the flexibility to institute certain measures that would permit the establishment and growth of ancillary industries, whether upstream or downstream. In regard to payments and financial transfers, the ability to freely repatriate or remit earnings was an important consideration for the home country or investor. At the same time, investors were expected to bring in fresh capital so as not to put undue pressure on the domestic financial market of host countries. The transfer of technology was another area where the development dimension should be addressed, although it was not clear how binding obligations might be formulated, given that this was primarily a matter for private enterprises. This issue was nonetheless important for developing host countries, especially those which needed to display an economic justification for their production and export capability and thus avoid being vulnerable to anti-circumvention measures in the framework of anti-dumping laws. M/6, paragraph 79.

202. The point was made that openness to, and non-discriminatory treatment of, foreign investment were not incompatible with development. It was stated in this regard that, contrary to the impression that might be conveyed by the discussions in the Working Group, there was no single conception of the development dimension of a multilateral agreement. Reference was made to the experience of one Member which had based its development approach on the attraction of FDI and which viewed the development dimension within a regulatory framework that permitted openness and predictability. A multilateral agreement would contribute to these objectives. M/6, paragraphs 75 and 84.

203. The view was expressed that the development dimension should not be viewed from the angle of a confrontation between home countries of multinational enterprises and host countries. The key to giving effect to the development dimension of a possible set of multilateral investment rules was an appropriate degree of flexibility so that it would neither subject developing countries to an unqualified application of such rules nor provide for a total exemption of developing countries from disciplines. The GATS exemplified the type of approach that could be taken with respect to the development dimension. Another aspect of flexibility was the need to take into account the interests of both capital exporting and capital importing countries. For example, developing countries had a legitimate interest in the promotion of technology transfer on reasonable commercial terms as part of technological capacity building, while developed countries had an equally legitimate interest in the adequate protection of intellectual property rights. M/6, paragraph 77.

204. The point was made that, given that FDI involved activities of private firms, a framework of rules on the treatment to be accorded to private firms by governments would need to be balanced by a set of rules on the conduct of firms, notably in the field of competition policy. M/6, paragraph 76.

205. The point was made that the development perspective of a future course of action should be addressed more fully, through a deepening and widening of the debate in the Working Group, while at the same time existing agreements should be allowed to continue and evolve organically. In parallel, work might be advanced on some issues relating to rights and obligations. In this context, a common definition of investment would have to be explored further, while there was also a need for further work on the issue of the admission of investment. In regard to the issue of obligations of investors, it would be useful to explore further the OECD Guidelines for Multinational Enterprises, the draft UN Code of Conduct for Transnational Corporations and the UN set of Multilaterally Agreed Equitable Principles for the Control of Restrictive Business Practices. M/6, paragraph 71. It was also stated that there should be a more detailed examination of the costs and benefits of a multilateral framework on investment and that future discussions on the development impact of FDI should be more concrete and focused. M/6, paragraphs 81 and 82.

206. It was stated that differences between bilateral investment agreements and a multilateral framework for investment existed in three principal areas: the negotiation of rules, the substance of rules and the use of rules. It was argued in this connection that, with regard to the negotiation of rules, a distinction could be made between bilateral agreements and a multilateral framework in terms of fairness and equity, efficiency and length of time of negotiations. While the negotiation of a bilateral investment agreement, especially an agreement between a developing country and a developed country might be affected by the unbalanced political and economic power relations between the countries in question, this risk was reduced in a multilateral negotiation. Even though there were differences between countries, obligations under a multilateral agreement could be tailored to those acceptable to all countries. A multilateral approach could enable countries to take a progressive approach to liberalization. The expansion of the existing network of bilateral investment agreements was a more costly and inefficient approach to provide the necessary legal framework for the growing globalization of economic activity than the creation of a multilateral investment agreement, which could be built on the common elements of existing bilateral agreements. However, the negotiation of a multilateral agreement was likely to take more time than the negotiation of bilateral investment agreements. With regard to differences between bilateral investment agreements and a multilateral agreement in terms of substantive rules, it was argued that a multilateral agreement could resolve the problem of the inconsistencies between bilateral investment agreements, and that, by negotiating a multilateral agreement on investment in the WTO, consistency of multilateral investment rules with the GATS, the TRIMs Agreement and other WTO provisions could be ensured. A multilateral agreement would also provide more scope for harmonization of rules and, since changes to the rules would need to be agreed on by all parties, would result in greater predictability of rules. The periodical review of a single set of rules in a multilateral framework was more efficient and less time-consuming than the review of the numerous existing bilateral investment agreements. It was also argued that, compared with the many different rules contained in bilateral investment agreements, the existence of a single set of rules in a multilateral framework would enhance the predictability for investors, and that dispute settlement procedures were likely to be more fair and effective in a multilateral context than in a bilateral context. The establishment of investment rules in a multilateral organization could also enlarge the geographical scope of application of such rules as countries acceding to that organization would accept all its rules as a package.

207. It was argued that another important advantage of multilateral investment rules concernd the development dimension. A multilateral agreement which encompassed developed and developing countries would necessarily take into account the implications of all of its provisions for developing countries, while ensuring mutual advantages and increased benefits for all parties. Such an agreement would therefore need to protect development objectives, for example by allowing for specific derogations for developing countries. The desirability of a multilateral framework on investment also arose from the need for a more integrated treatment of trade and investment in the same multilateral framework, the contribution which a multilateral framework could make to consolidating the unilateral liberalization of investment regimes which had occurred over the last decades, the need to provide disciplines to avoid distortions arising from the competition for FDI, the greater consistency and effectiveness of multilateral rules, as compared to the diversity of the existing international investment agreements, and the possibility to build on established WTO principles and dispute settlement mechanisms.

208. The view was expressed that, while the creation of multilateral rules on investment was desirable, this did not mean that multilateral rules should replace bilateral investment agreements. Rather, multilateral investment rules and bilateral investment agreements could be complementary and mutually reinforcing. In this context, it was also stated that it was doubtful whether a multilateral framework on investment could remove all the deficiencies of bilateral investment agreements.

209. The point was made that, to substantiate the argument that the establishment of a multilateral framework on investment would entail significant benefits, especially when compared with existing bilateral investment agreements, it would need to be shown that such a framework would provide for the same degree of flexibility as bilateral investment agreements for countries to pursue development objectives while attracting foreign investment. It was also necessary to address the point that there remained uncertainty as to the benefits of such a framework in terms of stimulating flows of FDI and promoting the transfer of technology to developing countries. In this regard, it was stated that the propositions advanced so far in favour of a multilateral framework on investment were too general to be persuasive. The assertions that obligations under a multilateral agreement could be tailored to be those acceptable to all countries, and that the unique situation of each country could be accommodated in such an agreement, did not seem very plausible in the light of recent experiences in multilateral negotiations. Similarly, the view that a multilateral framework was preferable to bilateral investment agreements because such bilateral agreements were affected by power relations between the countries in question, was contradicted by the fact that the countries which were advocating bilateral investment agreements were the developing countries. Moreover, the idea that power relationships would not come into play in a multilateral context was questionable. With regard to the point that a multilateral agreement would contribute to enhancing predictability because there would be less occasion for changes, it was stated that if, as argued, bilateral investment agreements involved an unequal power relationship, it was highly unlikely that such agreements would be the subject of frequent changes.

210. In response to the comment that rules on trade or investment, whether in a bilateral or multilateral context could not guarantee an increase in trade or investment flows, but could only guarantee the existence of increased opportunities to trade and investment, it was stated that, while it was obvious that no guarantee could be given that multilateral rules on investment would lead to an increase in FDI flows, it was incumbent upon the proponents of such rules to point out that the potential benefits of such rules outweighed their potential costs.

211. It was stated that the fact that the debate in the Working Group on a possible multilateral framework on investment had been rather general was due to the fact that this debate had started rather late. As part of the Group's future work, there should be a more detailed discussion on various possible types of rules which could be provided for in a multilateral framework.

212. Comments were made on a number of specific issues raised in a proposal made in one written contribution that the Working Group examine common elements of existing international investment instruments in order to determine whether or not such elements should be incorporated into future multilateral treaties. M/4, paragraph 61.

213. In this connection, the view was expressed that the principle of national treatment was the cornerstone of a scheme that would promote growth of investment flows at a global level and that it was therefore necessary to guarantee national treatment in the fullest manner possible, on the basis of clear and precise concepts and in a manner that ensured transparency. National treatment should apply not only to established investment but also to the pre-establishment phase. It should apply both de jure and de facto and at both federal and sub-federal levels of government. Clear criteria should be developed to identify the potential investor. Exceptions, reservations and temporary safeguards would be necessary but these had to be explicit and clearly identified and subject to control. National treatment should be of a general character, and provision should be made for the removal and progressive liberalization of sectoral reservations within appropriate timetables. It might be necessary to allow for various types of sectoral reservations, for example temporary reservations, that would be subject to pre-set timetables for removal and other types of reservations that would be subject to periodic rounds of negotiation. General exceptions should not go beyond what had been established in the WTO agreements. A temporary safeguard might be necessary for serious balance-of-payments difficulties, the invocation of which would be subject to verification. The preceding considerations also applied to the issue of MFN treatment, provided, however, that MFN treatment be considered as a minimum advantage and as such be subject only to general exceptions and not to sectoral reservations and temporary derogations. MFN treatment should also be accorded unconditionally. M/5, paragraph 63.

214. It was pointed out that agreements which provided for the application of national treatment to both the pre-establishment and the establishment phase of investment generally adopted a negative list approach, which meant that the national treatment obligation applied to all laws, regulations and sectors, except those which were the subject of explicit reservations. Such agreements also usually contained a prohibition of the introduction of new measures incompatible with the national treatment principle. With regard to the principle of MFN treatment, the point was made that, in addition to a standstill commitment and specific reservations, exceptions to this principle were frequently provided for in regard to regional trade agreements and bilateral taxation agreements.

215. It was stated that the contents of the national treatment principle, its relationship to the MFN principle, and the scope and nature of exceptions to national treatment should be a central theme of further work in the Working Group.

216. In regard to the issue raised in the above-mentioned proposal of the advantages and disadvantages of negative list and positive list approaches, the point was made that this matter needed to be considered in the light of the purpose of an agreement. If the purpose was liberalization of rules, the principles of national treatment and MFN should apply and a negative list should reflect temporary exceptions. The GATS was a hybrid of the two approaches, containing a positive listing of sectors and a negative listing of limitations on market access and national treatment. Given that the purpose of international instruments on investment was to provide transparency and predictability of treatment, and that negative lists outlined exceptions to general treatment, the question arose as to whether negative lists should represent permanent exceptions or areas which were currently not in conformity but which would be brought into conformity through gradual liberalization. Another relevant point was that the majority of bilateral investment treaties applied MFN and national treatment standards to investment only once it had been admitted. This underlined the importance of the definition of investment and how certain principles would be applied to the pre- and post-establishment phase of an investment. This could also suggest that any definition related only to post-establishment investment. As a general matter, it was important to ensure that any approach converged with that of the GATS. M/5, paragraph 64.

217. With respect to the issue of procedures for investment approval, the view was expressed that transparency in the mechanism would be an important factor. A transparent screening process did not necessarily impede FDI but, rather, might be a predictable factor in the administration of FDI and not a determining factor in FDI decisions. M/5, paragraph 64.

218. On the question of whether mechanisms for investor-state disputes should be provided and whether the scope of such disputes should be limited to investment protection, the view was expressed that there might be a need to make a distinction between the pre- and post-establishment phases of investment. Given the intergovernmental nature of the WTO, the issue of investor-state dispute settlement in the WTO required careful examination. However, there could be rules requiring domestic judicial review. M/5, paragraph 64.

219. It was stated that issues such as the merits of positive and negative list approaches and the nature of dispute settlement procedures raised complex questions that might usefully be discussed in the Working Group from an educational perspective but that it would be premature to attempt to reach conclusions. The point was made that difficulties had been encountered with regard to the use of a negative list approach in the OECD negotiations on a Multilateral Agreement on Investment and that the experience with the GATS appeared to indicate that a positive list approach was preferable when a new area was, for the first time, the subject of liberalization at a multilateral level. M/5, paragraph 65.

220. Another subject discussed in the Working Group with respect to the issue of rights and obligations of home and host countries and of investors and host countries was the OECD Guidelines for Multinational Enterprises. At the request of the Working Group, the observer from the OECD made a contribution on the experience with these Guidelines (W/40). In explaining the background to these Guidelines, it was stated that their adoption in 1976 as part of the Declaration on International Investment and Multinational Enterprises reflected a desire of OECD member countries to address in a balanced manner related issues of international cooperation in the field of international investment. The key elements of the Declaration were a commitment of a political character by the member countries to offer foreign-controlled enterprises operating on their territories national treatment and a set of recommendations to multinational enterprises on how they should behave in the territory of OECD member countries. While the Guidelines were not legally binding, the OECD governments were committed to promoting their observance and they were the subject of tripartite cooperation involving the business and labour communities. The object of the Guidelines was the behaviour of multinational enterprises within the territories of the OECD member countries, but the introductory paragraphs of the Guidelines made it clear that there was an expectation on the part of OECD governments that these enterprises would behave in accordance with the Guidelines wherever they operated around the world. The Guidelines were not designed to introduce different norms for multinational enterprises and domestic enterprises. Areas covered by the Guidelines included competition policy, environment, disclosure of information, and employment and industrial relations. Regarding the implementation of the Guidelines, provision had been made for the establishment by member countries of national contact points that were responsible for conducting relations with parties interested in the Guidelines, particularly the business and labour communities, and that were also to act as channels for contacts with governments of other countries that might be interested in a particular case. Within the OECD, the Committee on International Investment and Multinational Enterprises ("CIME") had the responsibility for matters relating to the implementation of the Guidelines, for conducting periodic reviews and for handling specific issues that arose. One of the features of the follow-up process was the possibility of the adoption by CIME of clarifications of the Guidelines when a particular case had not been resolvable at the national level and had raised issues that warranted a clarification of the Guidelines. Most of the clarifications adopted to date related to the sections on labour relations. The Guidelines were reviewed periodically, normally every five years. A review was aimed primarily at assessing the experience with implementation of the Guidelines and did not necessarily lead to changes in their text. However, it was possible that such textual changes resulted from reviews, as for example on the occasion of the last review when a chapter on environmental protection had been added. M/5, paragraph 39.

221. In regard to the relationship between the Guidelines and the Multilateral Agreement on Investment (MAI) which was being negotiated in the OECD, it was stated that there was broad support among the countries participating in these negotiations on the following principles: first, countries would use this occasion to reaffirm their commitment to the Guidelines; second, non-OECD countries acceding to the MAI would be expected to join in this commitment and establish national contact points to ensure effective follow-up in their countries; third, the text of the Guidelines would be annexed to the MAI without, however, altering their legal status; and, finally, arrangements would be put into place within the OECD to ensure that non-OECD member countries would be able to participate fully in the CIME on an equal footing with OECD member countries. M/5, paragraph 40. The representative of the OECD answered specific questions raised by Members regarding the mechanism for ensuring compliance with the Guidelines; the reasons for their legally non-binding character; the experience with specific issues that had arisen in regard to their implementation; the relationship between the Guidelines and the OECD National Treatment Instrument; and whether it was possible for non-OECD member countries to raise issues relating to non-compliance with the Guidelines before the relevant OECD bodies. M/5, paragraph 41.

222. At the request of the Working Group, UNCTAD submitted a contribution on the differences between the OECD Guidelines for Multinational Enterprises and the draft UN Code of Conduct for Transnational Corporations (W/52). It was stated that the OECD Guidelines were part of a package that also contained decisions on national treatment, investment incentives and conflicting requirements as part of the Declaration on International Investments and Multinational Enterprises. On the other hand, the draft UN Code, negotiations on which had been terminated in the early 1990s without adoption of the Code, would have addressed in a single, comprehensive instrument both the rights and responsibilities of states and foreign investors. Like the Guidelines, the draft UN Code had been intended to be a legally non-binding instrument. Regarding the definition of foreign investors, both the Guidelines and the draft UN Code adopted a broad definition of transnational corporations, covering public and private enterprises and equity and non-equity forms of investment. Both the draft UN Code and the Guidelines established procedures for follow-up review and amendment. In regard to norms for the conduct of enterprises, subjects that were dealt with in both the draft UN Code and the Guidelines included: applicability of host country national laws to foreign enterprises; adherence to general policy goals and development objectives of host countries; cooperation with host country governments; non-interference in internal political affairs of host countries; abstention from corrupt practices; disclosure of information; competition; balance of payments and financing; taxation and transfer pricing; employment and labour relations; environmental protection; consumer protection and technology transfer. In addition, the draft UN Code contained provisions on respect for human rights and fundamental freedoms, adherence to socio-cultural values of host countries and review and renegotiation of contracts. Regarding standards of treatment of transnational corporations by host governments, the draft UN Code covered a number of issues not dealt with in the OECD Declaration, for example, expropriation and compensation and the settlement of disputes. In regard to geographical coverage, the draft UN Code was intended to be a universal instrument, while the Guidelines were formally applicable only within the OECD area. It was difficult to compare the precise formulations of standards in the draft UN Code and in the OECD Guidelines as there had been many versions proposed and discussed during the course of the negotiations of the draft UN Code. M/5, paragraph 43.

223. It was also stated that one important difference between the OECD Guidelines and the draft UN Code was that the Guidelines addressed only the behaviour of enterprises and did not contain provisions involving commitments by governments. However, the Guidelines were part of a package that included other elements that brought into play commitments by governments, notably a commitment to accord foreign enterprises national treatment. The Guidelines themselves and other elements of the Declaration on International Investment and Multinational Enterprises were in the nature of political commitments but certain follow-up procedures had been established through a legally binding OECD Council Decision. The Guidelines did not contain a formal definition of multinational enterprises. They contained a sentence that described the fact that these entities were enterprises operating in more than one country but there was no attempt to define the term "enterprise" as such. M/5, paragraph 43.

224. Attention was drawn to the complementarity between the OECD Guidelines for Multinational Enterprises and recent business-driven initiatives to develop voluntary codes of conduct for domestic and international business activities. Another observation made was that it was interesting that both the draft UN Code of Conduct for Transnational Corporations and the OECD Guidelines had attempted to strike a balance between obligations of governments and obligations of enterprises. In the draft UN Code this balance had been sought within a single instrument, while in the case of the Guidelines, it was reflected in separate but related instruments. This notion of balance should also be kept in mind in discussions in the WTO and was particularly pertinent to the relationship between work on investment and work on competition. M/5, paragraphs 42 and 44.

225. At the request of the Working Group, UNCTAD made a contribution which, in addition to a comparison between the OECD Guidelines for Multinational Enterprises and the draft UN Code of Conduct for Transnational Corporations, contained the text of this draft Code as well as of the draft Code on the Transfer of Technology and the set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices. Document W/52.

D. RECOMMENDATION

226. Paragraph 20 of the Singapore Ministerial Declaration provides, inter alia, that the General Council will keep under review the work of the Working Group on the Relationship between Trade and Investment established under that provision and will determine, after two years, how the work of the Working Group should proceed.

227. The Working Group recommends that the General Council decides as follows:

The Working Group shall continue the educational work that it has been undertaking on the basis of the mandate contained in paragraph 20 of the Singapore Ministerial Declaration. The Work of the Working Group, which shall be reviewed by the General Council, shall continue to be based on issues raised by Members with respect to the subjects identified in the Checklist of Issues Suggested for Study See Annex 1.. It is understood that this decision is without prejudice to any future decision that might be taken by the General Council, including in the context of its existing work programme.

ANNEX 1

CHECKLIST OF ISSUES SUGGESTED FOR STUDY

Non-Paper by the Chair

Revision

It was widely recognized that the Working Group's work programme should be open, non-prejudicial and capable of evolution as the work proceeds. It was also emphasized that all elements, not only category I, should be permeated by the development dimension. Particular attention should be paid to the situation of least-developed countries. In pursuing the items of its work programme, the Working Group should avoid unnecessary duplication of work done in UNCTAD and other organizations.

_______________

Implications of the relationship between trade and investment for development and economic growth, including:

- economic parameters relating to macroeconomic stability, such as domestic savings, fiscal position and the balance of payments;

- industrialization, privatization, employment, income and wealth distribution, competitiveness, transfer of technology and managerial skills;

- domestic conditions of competition and market structures.

In this work, the Working Group should seek to benefit from the experience of Members at different stages of development and take account of recent trends in foreign investment flows and of the relationship between different kinds of foreign investment.

II. The economic relationship between trade and investment:

- the degree of correlation between trade and investment flows;

- the determinants of the relationship between trade and investment;

- the impact of business strategies, practices and decision-making on trade and investment, including through case studies;

- the relationship between the mobility of capital and the mobility of labour;

- the impact of trade policies and measures on investment flows, including the effect of the growing number of bilateral and regional arrangements;

- the impact of investment policies and measures on trade;

- country experiences regarding national investment policies, including investment incentives and disincentives;

- the relationship between foreign investment and competition policy.

III. Stocktaking and analysis of existing international instruments and activities regarding trade and investment:

- existing WTO provisions;

- bilateral, regional, plurilateral and multilateral agreements and initiatives;

- implications for trade and investment flows of existing international instruments.

IV. On the basis of the work above: The question of the timing of work under section IV was the subject of a decision taken by the Working Group at its meeting of 2-3 June 1997.

- identification of common features and differences, including overlaps and possible conflicts, as well as possible gaps in existing international instruments;

- advantages and disadvantages of entering into bilateral, regional and multilateral rules on investment, including from a development perspective;

- the rights and obligations of home and host countries and of investors and host countries;

- the relationship between existing and possible future international cooperation on investment policy and existing and possible future international cooperation on competition policy.

ANNEX 2

Summary of contributions received in the Working Group on the Relationship between Trade and Investment

Symbol

(WT/WGTI/W/-) Member / Other source Where introduced (Reference in Minutes) Topic W/1 European Community and member States M/1, Paras. 7-9 General submission on issues for study W/2 Switzerland M/1, Paras. 7-9 General submission on issues for study W/3 India M/1, Paras. 7-9 General submission on issues for study W/4 OECD M/1, Para. 4 Presentation on relevant activities of organization W/5 WORLD BANK M/1, Para. 4 Presentation on relevant activities of organization W/6 UNCTAD M/1, Para. 4 Presentation on relevant activities of organization W/7 + Corr.1 M/2, Para. 18 The Relationship between Trade and Foreign Direct Investment – Note by Secretariat W/8 + Adds.1-4 M/2, Paras. 4-8 Implications of the Relationship between Trade and Investment for Development and Economic Growth – Work Undertaken in Other Intergovernmental Organizations W/9 APEC M/2, Para. 41 Presentation on relevant activities of organization W/10 Hong Kong, China M/2, Para. 28 Experience of Hong Kong, China regarding the relationship between FDI and development; the relationship between trade and investment and between investment and competition policy; WTO provisions relevant to investment; possible approaches for addressing the interrelationship between trade, investment, competition W/11 Japan M/2, Para. 12 Impact of FDI on development and growth; the relationship between trade and investment; existing international instruments and activities regarding trade and investment W/12 European Community and member States M/2, Para. 31 Analysis of the relationship between trade and FDI and determinants of FDI, based on study of outward FDI from the United Kingdom Symbol

(WT/WGTI/W/-) Member / Other source Where introduced (Reference in Minutes) Topic W/13 Poland M/2, Para. 13 The rôle of FDI in Poland's transition from a centrally-planned economy to a free market economy W/14 United States M/3, Para. 4 Trade of foreign affiliates in the United States; FDI relationship between the United States and the European Union; US-EU goods and services trade between related parties W/15 Colombia M/3, Para. 13 Impact of FDI on the Colombian economy; the influence of trade policy on FDI; FDI policy of Colombia W/16 Korea M/3, Para. 16 Trends in FDI; rôle of FDI in Korea's economic development; the relationship between trade and investment W/17 Cuba M/3, Para. 12 Impact of FDI on the Cuban economy W/18 Japan M/3, Para. 4 Japan's historical experience with FDI policies; analysis of existing international investment agreements W/19 Canada M/3, Para. 39 Stocktaking of existing agreements W/20 Bolivia Trends in FDI; rôle of FDI in the Bolivian economy; the interrelationship between investment, trade and technology and implications for development; analysis of existing investment agreements; issues relevant to a possible multilateral framework and implications for development W/21 UNCTAD Reports on expert meetings on investment held in May and September 1997 and on the second session of the Commission on Investment, Technology and Related Financial Issues held on 29 September-3 October 1997 W/22 M/4, Para. 45 Bilateral, Regional, Plurilateral and Multilateral Agreements – Note by the Secretariat W/23 Australia M/3, Para. 29 WTO provision relevant to investment W/24 M/4, Para. 30 Availability of Statistics on Foreign Direct Investment and on the Activities of Foreign Affiliates – Note by the Secretariat Symbol

(WT/WGTI/W/-) Member / Other source Where introduced (Reference in Minutes) Topic W/25 M/4, Para. 30 The Relationship between Trade and Foreign Direct Investment: Foreign Direct Investment Originating in Developing Countries – Note by the Secretariat W/26 OECD M/4, Para. 8 Analysis of the relationship between FDI and economic development on the basis of case studies of six developing countries W/27 United States M/4, Para. 6 Effect of foreign affiliates on science and technology development in the United States W/28 + Corr.1 Switzerland M/4, Para. 47 Bilateral investment treaties W/29 United States M/4, Para. 47 Bilateral investment treaties W/30 European Community and member States M/4, Para. 57 Identification of common features and differences of existing international investment instruments from the perspective of the European Community and its member States (including rights and obligations of home and host countries and of investors and host countries) W/31 Costa Rica M/4, Para. 5 Trends in FDI; impact of FDI on the Costa Rican economy; FDI policy of Costa Rica W/32 United States M/4, Para. 58 Faced divestiture W/33 Hong Kong, China M/4, Para. 59 Identification of differences, possible conflicts and gaps in existing international investment instruments W/34 Japan M/4, Para. 47 Bilateral investment treaties; common elements of existing investment treaties; suggestions regarding treatment of specific issues in future multilateral work W/35 Cuba M/4, Para. 29 Outward FDI from Cuba W/36 Canada M/4, Para. 59 Stocktaking of existing agreements; benefits of multilateral rules W/37 Turkey M/4, Para 28 Evolution of FDI policy of Turkey; legal framework of FDI in Turkey; impact of FDI liberalization on FDI flows; relationship between trade and FDI W/38 M/5, Para. 7 Synthesis of the Information made available to the Working Group on the Links between Foreign Direct Investment and Development – Note by the Secretariat W/39 India M/4, Para. 36 Relationship between the mobility of capital and the mobility of labour Symbol

(WT/WGTI/W/-) Member / Other source Where introduced (Reference in Minutes) Topic W/40 OECD M/5, Para. 39 Guidelines for Multinational Enterprises W/41 ASEAN M/5, Para. 18 Investment incentives W/42 Korea M/5, Para. 27 Bilateral investment treaties W/43 Japan M/5, Para. 52 Definition of investment W/44 W/44 WAS NEVER ISSUED W/45 Cuba M/5, Para 30 Measures affecting Cuba's trade and investment relations W/46 UNCTAD M/6, Para. 53 Report on the UNCTAD expert meeting on Existing Regional and Multilateral Investment Agreements and their Development Dimension, 1-3 April 1998 W/47 Peru M/5, Para. 27 Bilateral investment treaties W/48 Niger M/6, Para. 40 Bilateral investment treaties W/49 Korea M/5, Para. 52 Definition of investment W/50 UNCTAD M/6, Para. 53 Calendar of UNCTAD activities in the field of investment W/51 Turkey M/6, Para. 40 Bilateral investment treaties W/52 UNCTAD M/6, Para. 64 Comparison of draft UN Code of Conduct on Transnational Corporations and OECD Guidelines for Multilateral Enterprises; texts of UN documents on transnational corporations, transfer of technology and restrictive business practices W/53 UNCTAD M/6, Para. 53 Recent UNCTAD publications relevant to the Working Group W/54 European Community and member States M/6, Para. 59 Different approaches to the admission of investment in international investment agreements W/55 United States M/6, Para. 23 The relationship between foreign investment and competition policy W/56 M/6, Para. 9 The Impact of Investment Incentives and Performance requirements on International Trade – Note by the Secretariat W/57 Korea M/6, Para. 24 The relationship between foreign investment and competition policy W/58 UNCTAD M/6, Para. 54 Agreed Conclusions of the Third Session of the UNCTAD Commission on Investment, Technology and Related Financial Issues; 14 September 1998 W/59 Japan M/6, Para. 29 The relationship between foreign investment and competition policy W/60 Costa Rica M/6, Para. 86 Definition of investment W/61 IMF M/6, Para. 93 Definition of investment W/62 Korea M/6. Para. 10 Investment incentives Symbol

(WT/WGTI/W/-) Member / Other source Where introduced (Reference in Minutes) Topic W/63 European Community and member States The relationship between foreign investment and competition policy W/64 Mexico Investment incentives W/65 The Effects of Foreign Direct Investment on Development: Technology and other Know-how Transfers and Spillovers - Note by the Secretariat W/66 International Intergovernmental Organizations – Observer Status in the Working Group on the Relationship between Trade and Investment W/67 Japan The differences between multilateral and bilateral agreements on investment rule-making W/68 Costa Rica Treatment of Investment and Investors: National Treatment and Most-Favoured-Nation Treatment

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