RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTI/W/76
12 May 1999
(99-1961)
Working Group on the Relationship
between Trade and Investment
ISSUES RAISED AND POINTS MADE ON THE DEFINITION OF INVESTMENT
Note by the Secretariat
1. The present Note responds to a request made by the Working Group at its meeting of 22 and
23 March 1999 for a Secretariat paper on issues raised and views expressed regarding the definition of
the term "investment" in international investment agreements.1
2. A central theme in the discussion in the Working Group on the term "investment" has been
the merits of a definition limited to foreign direct investment ("FDI"), as compared with a broader,
asset-based definition which would inter alia include portfolio investment.
3. The view has been expressed that, in the context of this Working Group, the definition of
investment should be limited to FDI.  The main arguments in support of this view are the following:
First, the decision to create the Working Group was taken on the understanding that its work would beconfined to FDI.
2  Second, the Group's analysis of the impact on foreign investment on growth and
development has focused exclusively on FDI.3  Third, because the definition of investment needs to
be seen in light of the purpose of a particular agreement, the use of a broad definition of investment in
bilateral and regional investment agreements does not imply that such a definition is appropriate in the
context of the Working Group.4  Finally, inclusion of portfolio investment in the definition of
investment for purposes of this Working Group is undesirable because of the negative effects of the
volatility of portfolio investment flows.5
4. It has been proposed in this connection that the Working Group use the IMF's definition of
FDI.
5. The contribution by the IMF in WT/WGTI/W/61 states:
"Direct investment  is the category of international investment that reflects the objective of a
resident entity in one economy obtaining a lasting interest in an enterprise resident in anothereconomy.  (The resident entity is the direct investor and the enterprise is the direct investment
enterprise).  The lasting interest implies 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.  Direct investment  comprises not only the initial transaction establishing the
relationship between the investor and the enterprise but also all subsequent transactions between themand among affiliated enterprises, both incorporated and unincorporated.
                                                     
1 WT/WGTI/M/8, para. 81.  (Reference to minutes hereafter cited as M/..).
2 M/5, paras. 52 and 56;  M/6, para. 88;  M/8, para. 75.
3 M/5, para. 56.
4 Id.;  M/7, para. 52.
5 M/8, para. 75.WT/WGTI/W/76
Page 2
"Direct investment capital  is capital provided by a direct investor to a direct investment
enterprise received by a direct investor from a direct investment enterprise.  The components of direct
investment capital transactions are equity capital, reinvested earnings, and other capital associated
with various intercompany debt transactions." 6
6. In connection with the view that the Working Group should limit its work to FDI, it has been
suggested that account should be taken of differences  between various kinds of FDI.  In particular, the
argument has been advanced that FDI in the form of acquisitions of domestic enterprises by foreign
investors is less beneficial than FDI in the form of greenfield investment.7  It has been suggested in
this respect that the Working Group needs to develop a clear definition of the components of FDI as
defined by the IMF and examine the benefits of FDI in relation to each of these components.8
However, the notion that foreign acquisitions are less beneficial than greenfield investment has been
contested.9
7. Support has also been expressed for a more comprehensive definition of investment by
reference to a wide range of assets owned or controlled by a foreign investor.  One version of this
approach is a statement that investment means "every kind of asset", followed by an illustrative list.10
A slightly different version is the combination of such an illustrative list with a definition which
highlights certain characteristics that are essential for an asset to be considered as an investment.  An
example is the proposal to define investment as "any type of property, tangible or intangible,
including rights of whatever nature, used in activities susceptible of generating profit that [is] owned
or controlled, directly or indirectly, by an investor of a party and that [has] been acquired with
resources transferred to the territory of another party or with resources reinvested in the territory ofthat party, by an investor of the first party".  This proposal states that, while the definition of
investment should include both direct and portfo lio investment, it should exclude capital movements
that are not really investments but mere financial transactions for speculative purposes and loans that
are not related to an investment.
11
8. The kinds of assets mentioned in the various proposals for an asset-based definition of
investment include enterprises, shares in enterpri ses, loans, claims to money, rights arising under
contracts, intellectual property, rights conferred pursuant to law such as licences and permits, and
tangible and intangible property.12  Issues raised for further consideration with regard to some of these
items are reflected in paragraph 16.
9. This broad, asset-based definition of investment has been supported on several grounds13:
First, a narrow approach, limited to direct investment, is inadequate for the purpose of ensuring
effective protection of foreign investment.  Second, the broad definition is consistent with theapproach followed in many existing investment ag reements.  Third, the distinction between direct and
                                                     
6 (Italics in original).  In response to questions on the meaning of the concept of "a lasting interest", the
representative of IMF has indicated that this concept is not defined by the IMF in terms of a specific time-frame,
and that the more pertinent criterion is that of the degree of ownership in an enterprise.  A percentage of 10 or
above is often deemed to reflect a lasting interest.  Although this criterion has been specified in the IMF manual,some countries might choose to allow for further qualifications which involve a degree of subjective judgement.Thus, if a direct investor owns less than 10 per cent of the ordinary shares or voting power in an enterprise, buthad en effective voice in the management of the enterpri se, the investment could be considered as FDI.  M/7,
para. 49.
7 M/8, para. 8.
8 M/8, para. 75.
9 M/8, paras. 8 and 78.
10 See, e.g. WT/WGTI/W/43.
11 WT/WGTI/W/60.
12 M/5, paras. 54-55.
13 M/6, paras. 89-90 and M/8, para. 79.WT/WGTI/W/76
Page 3
portfolio investment is without economic rationale, as both forms of investment entail economic
benefits, and is also difficult to make as a practical matter.  Fourth, the key distinction is not that
between direct and portfolio investment but between  investment and capital movements that are of a
speculative nature.
10. The point has been made that how to treat portfolio investment is a complex question in that,
while there is a rationale for including portfolio inve stment in the definition of investment in order to
provide protection for such investment, governments have legitimate concerns regarding the negative
consequences of the volatility of such investment flows.  An additional factor of complexity is the fact
that the distinction between direct and portfolio investment is not easy to make in practice.14  With
reference to the UNCTAD World Investment Report 1997 , it has been observed that the policy
implications of portfolio investment might require further study, in particular with respect to the
causes and direction of volatility of portfolio investment flows and the impact on host economies.  Ithas been proposed that the Working Group analyze whether existing investment agreements draw a
distinction between direct investment and portfolio investment.
15
11. It has been argued that any definition of investment should reflect the key concept that an
investment is a capital transaction in which the investor expects a return, and that this concept an
expectation of a return ensures that government grants and contractual arrangements for the supply ofgoods and services are not included within the definition of investment.
16
12. The relationship between the definition of investment and the nature of substantive
obligations has been a prominent theme in the Group's discussions.  The suggestion has been made
that there may be merit in distinguishing between a narrow and a broad definition of investment
depending on the nature of the substantive obligations in the context of which the definition is used.Thus, it has been argued that there might be a need to make a distinction between the pre-and
post-establishment treatment of an investment, and that issues such as security of investment, as
distinguished from access, might be better handled through an asset-based approach.
17  A Member has
referred to its domestic legislation which uses the concept of FDI in connection with provisions
applicable to the pre-establishment phase and a broader, asset-based definition of investment forpurposes of the protection of foreign investment in the post-establishment phase, and has proposed
that work in the WTO should be limited to FDI when considering issues relating to investment
liberalization.
18  A number of Members have argued that the use of a broad definition in bilateral
investment treaties should be seen in light of the fact that such treaties generally provide for national
treatment only with regard to the post-establishment treatment of investment and that the use of such a
definition in these agreements does not mean that this definition would also be appropriate in other
contexts.19
13. While there has been interest expressed in exploring the possibility of using different
definitions of investment for purposes of different obligations, it has also been argued that this could
easily lead to unintended results and that it is preferable to use a single, broad definition but to
carefully examine the applicability of specific substantive obligations to the various components of
that definition.20  Related to this, it has been emphasized that the definition of investment should be
viewed in conjunction with the possibility to make exceptions to certain substantive obligations, and
that concerns regarding certain kinds of capital movements should be addressed through exceptions to
                                                     
14 M/5, para. 58.
15 M/5, para. 57.
16 M/6, para. 87.
17 M/5, para. 57.
18 M/5, para. 52 and WT/WGTI/W/49.
19 M/5, para. 56.
20 M/6, para. 89.WT/WGTI/W/76
Page 4
substantive obligations, rather than through limitations of the definition of investment.  Reference has
been made in this respect to exceptions in existing investment agreements to provisions on the free
transfer of capital.21
14. A view has been expressed that, though a broad definition of investment is desirable in order
to ensure effective protection of foreign investment, it raises policy questions that require furtherconsideration
22:  whether it is feasible and practical to apply the same rules to different categories of
investment, for example, direct investment, portfo lio investment and intangible assets;  whether a
broad definition might have unintended consequences regarding the scope of application of
substantive rules;  whether it is fair and desirable to provide the same level of protection to short-term
and to long-term investors;  and whether a broad definition can adequately take into account the
development needs of all Members.
15. It has been argued that further consideration of how obligations of an investment agreement
would apply in relation to the specific elements of a broad, asset-based definition is necessary not
only with regard to portfolio investment but also w ith regard to other elements of such a definition,
for example, rights arising from contracts and rights relating to contributions of technology.23
16. Several issues have been raised regarding specific components of an asset-based definition of
investment.
− Whether branches and other unincorporated forms of enterprise should be covered as
investment.24  It has been suggested that all types of entity should be included that are
recognized by applicable law even though formal registration might not be required.25  The
need to cover both majority and minority shareholdings has been mentioned.26
− Whether the treatment of loans as investments should be limited to loans of a long-term
nature.27
− The need to clarify the treatment of rights arising under contracts as investments, in
particular, the need to make a distinction between contracts related to the sale of goods or
services and contracts that involve a certain level of commitment of financial and/or human
resources by an investor.28
− Whether the capital or other resources committed by an investor should be located in the host
country.29
− While it has been stated that it is generally accepted that all forms of intellectual property
might constitute an investment, there have al so been reservations expressed regarding the
appropriateness of treating intellectual property rights as a form of investment.30  The issue
has been raised of the need to clarify the interrelationship between investment agreements and
intellectual property agreements when intellectual property is treated as a form of
investment.31  The view has been expressed that the inclusion of intellectual property rights in
the definition of investment does not require a particular level or nature of protection of
                                                     
21 M/6, para. 90 and M/8, para. 79.
22 M/8, para. 76.
23 M/6, para. 91.
24 M/5, para. 52.
25 M/5, para. 54.
26 M/5, para. 52.
27 Id.
28 M/5, paras. 52 and 55.
29 M/5, para. 52.
30 M/5, paras. 54 and 56.
31 M/5, para. 52.WT/WGTI/W/76
Page 5
intellectual property rights, and that the level of protection of specific forms of intellectual
property rights is addressed in other contexts, for example, the WTO.32
− The need to examine the conditions under which real estate should be considered as a form of
investment.33
− With regard to the link of ownership or contro l between an investor and an investment, it has
been argued that, because control can exist even when there is no majority ownership of an
enterprise, there should be no attempt to define control specifically.34  On the other hand, it
has been suggested that the term "control" should be defined by using the definition of this
term in the GATS but expanded to include both direct and indirect forms of control.35  It has
been observed that indirect ownership or control could be through subsidiaries or other
intermediate companies or persons, including those of third countries.36  It has also been
stated that the treatment of investment made through subsidiaries in third countries requires
further analysis.37
17. Though the discussion in the Working Group has centred on the difference a definition of
investment limited to FDI and a broader, asset-based definition which would include portfolio
investment, it should be noted that it has also been  observed that in the context of an instrument on
trade-related investment issues the relevant question is perhaps more whether the approach should be
asset-based or based on the concept of "commercial presence" as in the GATS, but extended to goodsas well.
38  It has also been stated that it is necessary to clarify the relationship between the coverage of
the term investment and the coverage of WTO agreements, particularly the GATS.39
18. At the meeting of 22 and 23 March 1999, requests were made for a Secretariat Note providing
a comprehensive overview of definitions of investment in existing international investment
agreements and for a Secretariat Note on the transfer provisions in investment agreements, inparticular the link between such provisions and various capital account transactions and capital
account liberalization.  With respect to the first request, the comment was made that the recent
UNCTAD Issues Paper on Scope and Definition contained an analysis of existing definitions of
investment and could perhaps be used as a basis for further work in the Working Group.
40
__________
                                                     
32 M/5, para. 54.
33 M/5, para. 55.
34 M/5, para. 54.
35 M/6, para. 86.
36 M/5, para. 54.
37 M/5, para. 55.
38 M/5, para. 57.
39 M/5, para. 59.
40 M/8, para. 81.