RESTRICTEDWORLD TRADE
ORGANIZATIONWT/WGTI/M/8
11 May 1999
(99-1931)
Working Group on the Relationship
between Trade and Investment
REPORT ON THE MEETING OF 22 AND 23 MARCH 1999
Note by the Secretariat
1. The Working Group on the Relationship between Trade and Investment met on 22 and
23 March 1999 under the Chairmanship of Ambassador Man Soon Chang (Korea).
2. Pursuant to the General Council's decision on the extension of the mandate of the Working
Group1, the Working Group discussed Items I-IV of the Checklist of Issues Suggested for Study
(WT/WGTI/M/1, Annex 1).  In addition, the Working Group reverted to pending requests forobserver status from a number of intergovernmental international organizations and discussed the
dates of its next meetings.
A. IMPLICATIONS OF THE RELATIONSHIP BETWEEN TRADE AND INVESTMENT
FOR DEVELOPMENT AND ECONOMIC GROWTH (ITEM I OF THE CHECKLIST OF
ISSUES SUGGESTED FOR STUDY)
3. Several delegations introduced or announced new written contributions pertaining to this Item
of the Checklist.  Comments were also made on the recent high-level symposium on trade and
development.  Finally, the Working Group reverted to the Note by the Secretariat on "The Effects of
Foreign Direct Investment on Development:  Technology and other Know-How Transfers and
Spillovers", which had been introduced by the Secretariat at the meeting of 25 and
26 November 1998.
4. The representative of Korea explained that his delegation's contribution in WT/WGTI/W/69
was a response to the interest that had been expr essed at previous meetings in the experiences of
individual countries with regard to the rôle of fore ign direct investment ("FDI") in the context of the
Asian financial crisis.  The contribution addressed three main themes.  First, after highlighting the
major factors explaining the Asian financial crisis, it discussed several recent empirical studies that
had found a positive correlation between a low level of net FDI and the occurrence of a currencycrisis.  This was explained by the fact that FDI fl ows were more stable than portfolio investment and
that, because of the links with their parents, subsidiaries of multinational enterprises in countries
affected by currency crises did not suffer drops in credit ratings or encounter difficulties in importing
raw materials or securing trade financing.  The studies had found that, among the five Asian countries
affected by a currency crisis, the probability of the occurrence of such a crisis had been the highest inKorea because of Korea's relatively high portion of short-term debts and the low ratio of FDI flows to
total debt.  This in turn implied that inward FDI could play an important rôle in preventing currency
crises.  Second, the contribution highlighted Korea's recent experience regarding the stabilizing rôle of
FDI in the current financial crisis.  Total FDI in Korea in 1998 had registered a 27 per cent increase
from 1997, representing the sixth consecutive year of increase.  This increase could be explained bythe expansion of economic opportunities for foreign investors as the currency devaluation combined
                                                     
1 WT/GC/M/32, p. 52.WT/WGTI/M/8
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with property price decreases had reduced the foreign currency costs of acquiring fixed assets, and
plunging equity prices in the aftermath of the financial crisis had drastically reduced the costs of
acquiring firms.  Another cause of the increase in FDI was Korea's improving international credit
standing that had resulted from the Government's  active reform programme, including legislative
reforms to induce foreign investment, such as the Foreign Investment Promotion Act that had takeneffect in November 1998.  A salient feature of FDI in Korea in 1998 was that the restructuring of
firms faced with large debt repayments and risi ng interest rates, lower stock prices, and the
Government's more liberal policy toward mergers and acquisitions had combined to expand
opportunities for direct investment in Korea through mergers and acquisitions.  Third, the contribution
discussed recent policy measures taken by the Korean Government to deal with the financial crisis.
While it appeared that Korea had turned the corner in overcoming the current crisis, difficult
challenges still remained ahead.  Although a large proportion of short-term foreign debt had beentransformed into long-term debt, the total sum of foreign liabilities had not decreased since the advent
of the crisis and still amounted to 45 per cent of GDP.  Moreover, industrial activity still lagged far
behind the level prior to the financial crisis and debt-to-capital ratios of Korean firms and banks
remained high. To deal with the difficulties ahead, policies should be focused on accelerating reforms
that addressed the roots of structural inefficiencies.  This would serve to attract more FDI into Korea,thereby helping to decrease foreign debt, raise the level of competitiveness and efficiency of
industries through recapitalization and restructure foreign debt maturities.  The overall effect of these
policies would be to further restore international confidence and thus secure greater liquidity.
5. The representative of India stated that his delegation would present several new written
contributions.  One of these contributions, which dealt with FDI and the transfer of technology
(subsequently circulated in WT/WGTI/W/73), was particularly relevant to Item I of the Checklist.
6. The representative of Australia informed the Working Group that the Australian Department
of Foreign Affairs and Trade would shortly be finali zing a study on "Foreign Direct Investment:  The
Benefits for Australia" which highlighted the contribution of FDI to Australia's economic
development.  The report would be circulat ed to Members as soon as it was available.
7. The representatives of the European Communities, Japan , the United States  and Canada  stated
that the contribution presented by Korea was important in that it provided evidence of the positive,
stabilizing rôle of FDI in the Asian financial crisis.  Interest was expressed in the experiences of other
countries with respect to the rôle of FDI in the context of the financial crisis.
8. With reference to the discussion in Korea's c ontribution of the differences between FDI and
portfolio investment, the representative of the United States wondered how as an operational matter a
distinction could be made between FDI and portfolio investment.  In commenting on this observation,
the representative of India stated that there were important differences not only between FDI and
portfolio investment, but also between various kind s of FDI.  In particular, FDI in the form of
acquisitions of existing domestic enterprises was clearly less beneficial in terms of its impact on
development than FDI in the form of greenfield investment.  The representative of the
European Communities questioned this view and observed that FDI in the form of acquisitions
entailed benefits deriving from greater access to capital, managerial skills, technology, and
international markets.  He also questioned the notion that there was a fundamental conceptual
distinction between portfolio investment and FDI, a nd argued that more relevant than the distinction
between portfolio investment and FDI was the distinction between long-term and short-term
investment.  It was important to bear in mind that portfolio investment was not by definition short-term and speculative.  The representative of Pakistan noted that in practice many countries made
distinctions between different types of investment, such as FDI and portfolio investment, as shown by
the example of Chile.WT/WGTI/M/8
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9. The representative of India stated that, while FDI was probably more beneficial than portfolio
investment in the specific context of a currency crisis, the effects of FDI also depended upon the level
of economic development of a country.  In this connection, he referred to the recent high-level
symposium on trade and development, at which it had been pointed out that trade liberalization could
not take place in a vacuum.  Likewise, an incr ease in FDI did not automatically lead to economic
growth.  There were other factors at work which the Working Group needed to look into.  Another
important theme raised by a number of speakers at the symposium concerned the need for government
intervention.  Bearing in mind that the contribution of FDI to development differed, depending on the
kind of economic activity concerned, the need for an active government rôle appeared to be
incompatible with the notion of a multilateral framework on investment that would inevitably reduce
the policy discretion of governments.  The negative effects of volatile capital movements required
further study in the Working Group.
10. The representative of the European Communities concurred with the view that the
relationship between trade and development and between investment and development could not be
understood in a vacuum.  One of the valuable results of the Working Group's work was precisely that
it had allowed for a consideration of the relationship between investment and development from a
wider perspective, including for example the impact of trade liberalization on the relationship betweeninvestment and development.  The appropriate extent of government intervention was for each
individual country to decide, but this issue had little bearing on the shape of the investment régime for
all investors, whether they were government-owned or privately-owned, and thus did not detract from
the importance of a transparent and non-discriminatory investment régime.  For example, the EC
Treaty foresaw that EC law did not affect rules of the member States regarding ownership, includingownership of enterprises, but this did not mean that state owned firms should behave differently from
or be treated differently from privately-owned fi rms.  While governments had an important rôle to
play as regulators of the market, the experience of some EC member States with detailed government
intervention had been negative and it had been concluded that governments should ensure an open,
non-discriminatory and transparent investment régime.  A number of themes raised at the recenthigh-level symposium on trade and development were relevant to the work of this Working Group.
First, the view expressed by many participants in the symposium that trade was not an end in itself but
should be seen as a means toward achieving development was pertinent, in particular with regard to
Item I of the Checklist.  A second theme emerging from the symposium was that, while trade and
investment alone could not provide all the answers to the problem of development, they had an
important rôle to play.  A third theme was that, in the debate on the relationship between development
and trade openness, views had differed on the desirable pace of trade liberalization but no support hadbeen expressed for closed markets.  It was significant that investment had often been included in
references to the value of openness for development.  A fourth major theme was the importance of
capacity building.  This should also be looked at from the perspective of investment.  Finally, in
support of the proposal to provide bound, duty-free treatment of imports from least-developed
countries, it had been argued that uncertainty regarding the tariff treatment of their exports hamperedFDI in these countries.  It was obvious that the conditions for FDI in these countries could be even
more directly affected by a lack of predictability of the regulatory framework for foreign investment.
11. The representative of Japan stated that it had been pointed out at the high-level symposium on
trade and development that 40 per cent of African assets had been invested outside Africa as a result
of restrictive policies pursued by African countries.  At recent UNCTAD meetings, representatives ofthe business community had highlighted the importance of transparency of the regulatory framework
as one of the key elements of an attractive investment climate.  This was important not only to attract
foreign investment but also to foster domestic investment.
12. The representative of Pakistan noted that some academics had argued at the trade and
development symposium that the linkages between trade and investment did not merit a consideration
of rules on investment in the WTO context.  The fact that a number of prominent trade economistsWT/WGTI/M/8
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were opposed to including in the WTO what they perceived to be extraneous issues was a significant
element for the Working Group to take into account.
13. The representative of Korea stated that his delegation did not advocate the extreme view that
any kind of government intervention was necessari ly counterproductive to economic growth and
development.  However, in light of Korea's past  experience, his Government now recognized the
negative effects of excessive intervention, which explained why Korea had been moving rapidly
towards liberalization and deregulation, particularly in the aftermath of the Asian financial crisis.
14. The representative of Venezuela said that the discussions at the recent high-level symposium
on trade and development had shown that in recent years there had been an important evolution in the
debate on the rôle of governments in the process of economic development in that it was now
increasingly recognized that an active government rô le to pursue specific development objectives was
not incompatible with strategies based on openness to international integration and adherence to aframework of international, market-oriented rules.
15. The representative of the United States drew attention to the difference between the view of
Korea  on the negative consequences of excessive past government intervention and the view of India
that government intervention was essential.  A review of a plethora of academic studies over the last
20 years indicated that over time countries were departing from government intervention.  Forexample, empirical studies showed that there was a trend toward the reduction of the use of
performance requirements reflecting the experience of countries that these requirements, once seen as
essential, in the end had proved detrimental.
16. The representative of Malaysia stated that in light of the present financial crisis there was a
growing opinion among scholars and practitioners in favour of the need for government intervention.
Performance requirements and incentives were used extensively by many developing countries and
were useful given their present stage of development.  His delegation attached great importance to the
use of these instruments and disagreed with the view that they were detrimental.
17. With respect to the Note by the Secretariat on "The Effects of Foreign Direct Investment on
Development:  Technology and other Know-How Transfers and Spillovers" (WT/WGTI/W/65), therepresentative of the European Communities stated that his delegation fully shared the conclusions
drawn in this Note, which contained a balanced approach to the analysis of the spillover effects ofFDI.  Host countries benefitted from the introduction and use by foreign investors of technology and
know-how, but perhaps of even greater importance were the indirect benefits to host countries that
arose from the spillover effects of FDI.  The competitive assets of multinational enterprises were
usually related to new products and production processes but also to management, organizational and
commercial methods.  Local companies could improve their productivity by adopting some of thebusiness practices used by foreign companies.  The entry of a foreign company increased competition,
forcing local firms to use resources more efficiently and to seek new technologies.  Employees trained
by foreign investors spread their technical and managerial skills as they moved to other parts of the
host economy.  Furthermore, the collaboration of foreign affiliates with local partners and the
introduction of foreign investments which increased the stock of ideas contributed to domesticinnovation.  FDI constituted the main vehicle through which the transfers and spillovers of these
much needed intangible assets occurred.  Evidence suggested that the benefits of FDI were also
reflected in the host country's trade performance.  In itially, FDI influenced the pattern of trade and the
type of goods and services  exported by the host country through the activities of foreign affiliates.  In
the longer term, through technology spillovers FDI enhanced the competitiveness of local firms inworld markets, including small- and medium-sized firm s.  Policies that sought to control multinational
enterprises, such as performance requirements and technology transfer requirements, were often
self-defeating as they might either push the invest or to reduce technology imports to a minimum or to
circumvent the country's regulations.  Local conditions in host countries were the main determinant ofWT/WGTI/M/8
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the magnitude of technology transfers and spillovers.  The most important conditions that might
enhance such benefits appeared to be a high level of local technical skills and a competitive
environment.  Capacity building efforts, such as policies in support of local technological capabilities,
effective competition policies and adequate intellectual property protection, therefore appeared to be
the most appropriate policies that countries could implement in order to enhance and encourage thetechnology transfers and spillovers.
18. The representative of Costa Rica agreed with the observation in paragraph 10 of the Note that
the most significant channels for the dissemination of modern, advanced technology were the
spillover effects of FDI, rather than formal technology transfer agreements.  He also drew attention to
the discussion in paragraph 19 of case studies of the various ways in which the presence of
multinational enterprises could give rise to such sp illover effects and highlighted the rôle of linkages
between MNEs and local firms, as discussed in  paragraph 25 in relation to backward linkages.
Finally, he stressed the observation in paragraph 2 of the Note that the effects of FDI, overall and in
their particular details, depended very much upon the economic characteristics of the host country and
even more so upon the prevailing policy environment.
19. The representative of Switzerland observed that the Note showed that the effects of FDI
depended upon the characteristics and policy environment of host countries.  Of particular importance
was the discussion in paragraph 67 of the relationsh ip between the extent of spillover effects of FDI
and the level of development of host countries.
20. The representative of Pakistan stated that the Note was useful as a preliminary basis for
discussion, but that it was somewhat opaque in that it contained a comprehensive survey of academic
studies without clearly identifying policy implications.  The Note had been prepared with theassistance of academic experts with a certain view and did not adequately take into consideration
other views, for example those with respect to the contention in paragraph 10 that the most significant
channels for the dissemination of modern, advanced technology were the spillover effects of FDI,
rather than formal technology transfer arrangements.  It seemed that the main message of the Note
was that technology transfer might occur automatically as a result of FDI, that it was acknowledgedthat this might not occur in all cases, but that in such instances a range of policy measures were
available to host countries to stimulate and secure such transfers and spillovers, in particular policies
to support local technological capability and to  encourage competition between foreign and local
firms.  In this respect, a fundamental problem was that the Note did not adequately analyze the need
and scope for specific policies to enhance the contribution of FDI to technological development of
host countries.  Thus, the Note failed to give due attention to the rôle of performance requirements,
except that paragraph 71 pointed to the costs of such requirements.  The observations made inparagraph 72 clearly had important implications regarding the need for a certain rôle of governments,
but the Note failed to discuss these implications.  For example, the statement that "efforts to promote
inward FDI could also focus on industries where local technological capability is already relatively
strong, or where product differentiation and scale economies are not so significant that foreign firms
can easily take over the whole market" implied that governments should direct inward FDI toward
certain industrial sectors where there were greater chances that spillover effects would occur.
Similarly, the statement that "host country competition policy also has an important rôle to play in
promoting efficiency" highlighted the importance of a regulatory rôle of governments and underlined
the close linkage between investment and competition.  Finally, the statement in the last sentence of
paragraph 72 that "more research is needed to examine second-best policy alternatives for thoseindustries where local firms cannot be expected to co mpete effectively with foreign affiliates in the
short run" suggested that further analysis was necessary of the rôle of governments given that this was
precisely the situation facing the majority of developing countries.  The discussion so far in the
Working Group on FDI and technology transfers and spillovers was somewhat inconclusive and
unsatisfactory because it was not informed by a su fficiently detailed analysis of the nature and
effectiveness of specific policies used by governments to promote the transfer of technology.  TheWT/WGTI/M/8
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proposition that transfer of technology would occur once a reasonably high level of domestic
technological capacity had been achieved avoided the basic question of what specific policies could
be used optimally to enhance transfer of technology.  In order to give more attention to concrete
policies, it might be useful for the Secretariat to undertake an analysis of the relationship between
performance requirements and the transfer of technol ogy, as had been suggested by other delegations.
21. The representative of Korea stated that the Note enabled a better understanding of how FDI
contributed to economic development of host countries through technology and other know-how
transfers and spillovers.  The analysis and conclusions in the Note were also relevant to Korea's past
experience with FDI which had been described in his delegation's contribution in WT/WGTI/W/16.
Empirical studies provided evidence of the contribut ion of FDI to technological development in Korea
through the transfer of technology from parent companies to their foreign affiliates, the diffusion of
technology arising from linkages between foreign affiliates and local firms, and research anddevelopment projects initiated by foreign affiliates.  His delegation shared the conclusions in
paragraph 70 that local conditions in host countries were an important determinant of the magnitude
and scope of spillovers, and that a high level of local technical skills and a competitive environment
seemed to be particularly important.  In order for FDI liberalization to produce the expected outcome,
including technological advance, strong economic fundamentals and sound management of macro-economic policies were essential.  He expressed support for a suggestion by Venezuela at a previous
meeting for a study of the impact of performance requirements and investment incentives on the
transfer of technology.
22. The representative of the United States said her delegation agreed with many of the
observations in the Note and with the views of th e European Communities.  Government intervention
in relation to the transfer of technology often had negative effects.  Evidence showed that when firms
were forced to transfer technology to a licensee or a joint venture partner they would bring in only
second-best or third-best technology because they did not want to give up their intellectual property
rights.  She also agreed with the European Communities that there were many other policies that were
not interventionist and that were more important to the transfer of technology, such as policies in theareas of competition, education and infrastructure and the creation of sound and predictable legal and
financial systems.
23. The representative of Venezuela stated that a key problem in discussions on the transfer of
technology was the tendency to view technology flow s through the prism of competitive markets.  In
reality, international investment and technology flow s were determined by decisions of multinational
enterprises taken in a context of oligopolistic equilibrium in which such enterprises sustained their
strategic market dominance through the systematic application of various policies, such as localizationof individual stages of production, the use of internal transfer prices and technological innovation.
These strategies could not be adequately understood within a model of perfectly competitive markets
in which any active development policy was seen as per se  distorting investment, trade and
technology flows.  The strategic considerations und erlying the investment decisions of multinational
enterprises explained the fact that such firms preferred to buy from their affiliates to protect theirdominant market positions even where efficient local suppliers existed.  This strategically-motivated
conduct necessitated  policy responses on the part of host countries, for example through measures to
encourage multinational enterprises to conduct research and development in host countries with a
view to enhancing productive capabilities of local suppliers.
24. The representative of India stated that the conclusions drawn in the Note were perhaps valid
for some countries in some circumstances, but that there were also other views.  It was important to
bear in mind that multinational enterprises accounted for almost two-thirds of world trade and had a
virtual monopoly on the transfer of technology.  As a result, there was a basic asymmetry between the
buyers and the sellers of technology, which was a fundamental factor in regard to the type of
technology which was available to host countries.  A number of studies had shown that there wereWT/WGTI/M/8
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indirect costs associated with technology transfer, such as confidentiality requirements and export
restrictions.  In addition, the transfer of technology was not facilitated by the fact that international
agreements, such as the TRIPS Agreement, reflected the view that technology was of a proprietary
nature.  In view of these considerations, it was naïve to believe that FDI would automatically lead to
the transfer of technology.
25. The representative of Canada stated that, in  the context of investment, the issue was not the
relations between buyers and sellers of technology but the inflow of technology into an economy
through investment.  An important rationale of Canada's investment promotion programme was the
tangible benefits enjoyed by the Canadian private sector from technology flows associated with FDI.
Probably over 50 per cent of the technology in Canada was imported, a large part of it through
investment.  The Canadian Government had made a commitment in a number of investment
agreements not to impose transfer of technology requirements as a condition for an investmentbecause it believed that the imposition of such requirements had negative consequences, in particular
in the context of intense international competition for investment and technology.
26. The representative of Mexico agreed with the conclusion drawn in the Note that the positive
effects of FDI differed, depending on the characteristics and policies of host countries, and that in this
respect the existence of a competitive environment and a high level of local technological capabilitieswere of special relevance.  This conclusion confirmed the view of her delegation that the best way to
benefit from FDI as regards its impact on technological development was through the establishment
of a competitive economic environment and of a regulatory framework that favoured investment,
rather than through the use of instruments that inte rvened in investors' decisions.  Also of importance
were effective competition policies, the improvement of infrastructure and the promotion of adomestic technological capacity.  As pointed out in the Note, when certain conditions were met, the
presence of FDI tended to strengthen competiti on in domestic markets thereby improving the
productivity and competitiveness of local firms.
27. The representative of Japan stated that the experience of Japanese investors illustrated the
importance of domestic capacity building in host countries as a key factor to facilitate the transfer and
diffusion of technology.  Such domestic capacity building necessitated cooperation between domestic
and foreign firms and could not be achieved through the application of restrictive and discriminatory
measures to foreign investment.
28. The Working Group took note of the statements and agreed  to revert to Item I of the Checklist
at its meeting.
B. THE ECONOMIC RELATIONSHIP BETWEEN TRADE AND INVESTMENT (ITEM II
OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY)
29. Most statements made under this item of the agenda  pertained to investment incentives.
30. The representatives of Costa Rica, the European Communities  and Switzerland  agreed with
the view expressed in the written contribution presented by Mexico at the last meeting
(WT/WGTI/W/64) that fiscal incentives to attract investment were a second-best solution, and that a
more efficient approach was to address the causes of market failures directly.  The costs of fiscalincentives often exceeded their benefits, especially in the case of competition between countries or
regions to attract investment through the granting of incentives.  The effects of such incentives were
mainly negative as they reduced global welfare, di storted investment flows and related trade flows
and delayed the necessary structural reform.  Moreover, most decisions of investors, according to
information from industry, appeared not to be affected by incentives.  While the legitimate concernsof countries which needed to provide incentives to attract investment should be recognized, the
first-best policy for countries wishing to attract  FDI was to commit to long-term reform of theWT/WGTI/M/8
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regulatory and economic environment. It was necessary to explore the possibility of multilateral
disciplines in this area which should strike a balance between the recognition of the importance of
policy objectives for which incentives were often used and the need  for disciplines to avoid their
distorting effects.
31. The representative of Korea recalled that a number of Members had shared the conclusions
drawn in his delegation's contribution in WT/WGTI/W/62 that tax incentives had generally failed to
achieve their desired effects, and that, as a result of excessive competition among countries to attract
FDI, the costs of incentives often outweighed their benefits.  This harmful competition resembled a
prisoner's dilemma in which only cooperation among participants provided a mutually beneficial
solution.  However, some other Members had stressed the usefulness of incentives as instruments of
development policy. Korea's past experience suggested that this view could not easily be rejected.  In
order to maximize the positive effects of FDI, invest ment liberalization should be tailored to meet the
needs and priorities of each country's overall development policy.  Investment incentives and
performance requirements could play a positive rôle in this respect, if used in a market-friendly
manner.  It was therefore not possible to prohibit or eliminate all kinds of investment incentives under
multilateral rules and a more cautious approach was desirable.  This raised the question of how
multilateral rules could strike a balance between the potential benefits of incentives as tools to achieveimportant domestic policy objectives and the need to limit their harmful effects in terms of economic
efficiency.  In this regard, the example of the Agreement on Subsidies and Countervailing Measures
("SCM Agreement") merited further consideration, particularly in relation to the criteria contained in
this Agreement for distinguishing between actionable and non-actionable subsidies.  However, in
view of the fact that the SCM Agreement basically dealt with trade in goods, the question of how this
approach could be applied to investment incentives required further consideration.
32. The representative of Mexico stated that fiscal investment incentives and possible multilateral
disciplines to limit harmful competition to attract investment had generated significant interest and
merited a more thorough study in the Working Group.  In light of the views expressed, it appeared
that a cautious approach was warranted and that all incentives should not be treated in the same way.In this respect, it would be useful if the Secretariat could undertake a study that would differentiate
between various kinds of investment incentives, their effects and the possible disciplines that could
apply to specific kinds of incentives.
33. The representative of the United States agreed that it was necessary to distinguish between
various kinds of incentives and noted in this regard that investment agreements to which the
United States was a party distinguished between different performance requirements and between
combinations of requirements and incentives.  She also agreed with the view that the first-bestsolution was to adopt measures to address underlying market distortions, in which case the problem of
incentives might become moot.
34. The representative of the Dominican Republic stated that the debate on investment incentives
illustrated why Members were not yet ready to initiate negotiations on multilateral investment rules in
the WTO.  Investment incentives would be a major issue of controversy in such negotiations.  Hewondered why, if investment incentives were as distortive as had been argued by some Members, all
developed countries in the Western Hemisphere were using some kind of incentives.  During the last
25 years his country had gained positive experiences with the use of investment incentives, for
example to promote export diversification. In relation to the proposal for a study of different types of
investment incentives, he suggested that there was also a need to analyse the distorting impact on
investment flows of rules of origin in regional trade agreements, a subject which so far had not
received sufficient attention in the Working Group.
35. The representative of the European Communities agreed with the view that incentives should
not be treated as a monolithic whole.  The SCM Agreement was instructive as an instrument thatWT/WGTI/M/8
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differentiated between various kinds of subsidies.  He disagreed with the notion that, because
investment incentives were widely used, including by developed countries, there was no need to
consider possible disciplines.  A key argument that had motivated the creation of multilateral rules on
subsidies in the area of trade in goods was that developed countries with deep pockets had a greater
capacity to grant subsidies than developing countries.  The same argument was valid in relation toinvestment incentives.
36. The representative of Singapore stated that there appeared to be a view that since investment
incentives were second-best solutions, they should either be eliminated or be disciplined.  However,
as argued by ASEAN in WT/WGTI/W/41, the granting of incentives did not mean that there was no
recognition of the need to address underlying distortions through the adoption of other policies.
Rather, incentives were an important additional tool, together with other polices aimed at addressing
distortions.  As stated by Korea, incentives played an essential rôle in economic development.
37. The representative of India agreed with the view that it was necessary to focus the debate on
specific types of incentives.  Incentives were not only used by countries with deep pockets.  In a less
than ideal world there remained a need for governme nts to have some room for manoeuvre to attract
investment.  In this regard, he agreed with the balanced approach suggested by Korea.
38. The representative of Hong Kong, China recalled  that at the last meeting his delegation had
expressed serious reservations regarding the use of incentives, but had acknowledged that it did not
appear possible to envisage a total prohibition of all incentives in the WTO context at this juncture.  A
more realistic approach was to explore ways to discourage Members from engaging in unhealthy
competition in the use of incentives and to minimize their distortive effects.  His delegation was
interested in exploring the possibility of distinguishing between objectionable and non-objectionableincentives, in which connection the SCM Agreement might serve as a useful example.  Future work
on this subject should be inspired by the two fundamental WTO principles of non-discrimination and
transparency.
39. The representative of Canada stated that the granting of investment incentives amounted to a
transfer of money from the domestic tax payers to a foreign investor.  This was especially unfair from
the perspective of developing countries in which the tax base was often quite limited.  It was likely
that in many cases decisions were made to invest in developed countries because investors received
more generous incentives than in developing countries.  It would be useful if the Secretariat could
attempt to make a comparison between OECD a nd non-OECD countries with respect to their
aggregate expenditures on incentives.
40. The representative of the European Communities said that there should not only be a more
differentiated approach to investment incentives, but also to performance requirements.  Given that a
number of Members had argued in favour of the usefulness of performance requirements, he
wondered whether they believed that all performance requirements or only specific kinds of such
requirements were desirable.
41. The representative of Venezuela agreed that distinctions should be made between various
kinds of performance requirements.  While her delegation did not advocate conditioning the entry of
foreign investment on compliance with mandatory performance requirements, it was appropriate for
governments of host countries to treat enterprises which voluntarily decided to invest in research and
development differently from enterprises which did not do so.
42. The representative of Canada drew attention to a recent OECD study on the relationship
between trade and investment which had found, on the basis of an examination of data on 14 OECD
member countries, overwhelming evidence which su ggested that FDI tended to be complementary to
trade.  Each dollar of outward FDI stimulated 2 dollars in exports.  Intra-firm trade was a centralWT/WGTI/M/8
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element of this complementary relationship.  For host countries, the immediate result of FDI was an
increase in imports but in the medium-term the export capacity increased due to the inflow of capital
and productive assets and the positive spillovers with respect to technology and management.  The
study therefore found that countries such as Canada which were both substantial outward and inward
investors stood to gain in trade terms from both outward and inward FDI.
43. The representative of Egypt noted that the findi ngs in the OECD study referred to by Canada
appeared to differ somewhat from the conclusions drawn in the Note by the Secretariat in
WT/WGTI/W/7, which had found that in some instances there was substitution between trade and
investment.  He requested the OECD to make the study or a summary thereof available to the
Working Group.
44. The Working Group took note of the statements and agreed  to revert to Item II of the
Checklist at its next meeting.
C. STOCKTAKING AND ANALYSIS OF EXISTING INTERNATIONAL INSTRUMENTS
AND ACTIVITIES REGARDING TRADE AND INVESTMENT (ITEM III OF THE
CHECKLIST OF ISSUES SUGGESTED FOR STUDY)
(i) WTO provisions on matters related to investment
45. No statements were made on this indent of Item III.
(ii) Bilateral, regional, plurilateral and multilateral agreements and initiatives;  implications for
trade and investment flows of existing international instruments
46. A contribution on bilateral investment treaties was introduced by the representative of India,
and a proposal regarding the TRIMs Agreement and the GATS was made by the representative of
Hong, Kong, China.  Representatives of UNCTAD and the OECD provided information on relevantactivities of their organizations.
47. The representative of India introduced a wr itten contribution (WT/WGTI/W/71) on India's
experience with bilateral investment treaties.  India had concluded such treaties with 25 countries, had
finalized treaties with nine other countries, and was in the process of negotiating treaties with seven
countries.  The contribution discussed the main features of such treaties, including provisions on thedefinition of investment, the scope of the agreem ents, MFN and national treatment, expropriation,
compensation and repatriation, dispute settlement and the duration and termination of the agreement.
Bilateral investment treaties had found favour with developing countries such as India because they
did not restrict the ability of host countries to follow their own FDI policies in light of their unique
needs and circumstances.  Under these treaties, developing countries had the freedom to grant national
treatment only in the post-establishment phase, subject to such qualifications as they deemed
necessary.
48. The representative of the European Communities requested an explanation of what kind of
qualifications to national treatment India considered useful as a policy tool.  He also asked what was
the relationship between India's bilateral investment treaties and the MFN principle.  Not enough
attention had been paid so far to the concrete implic ations of principles such as national treatment and
MFN treatment.  In this respect, his delegation welcomed the contribution presented by Costa Rica atthe last meeting (WT/WGTI/W/68).  An interesting aspect of this contribution was that the investment
agreements concluded by Costa Rica provided for national treatment in relation to the pre-and
post-establishment phases of investment, but that only established foreign investors could invoke the
investor-state arbitration provisions.WT/WGTI/M/8
Page 11
49. The representative of India stated that his delegation had consistently taken the position that it
was not possible for a country like India to accord a right of establishment or national treatment in the
pre-establishment phase and that the entry of foreign investment needed to be regulated.  In all India's
bilateral investment treaties national treatment and MFN treatment were accorded with respect to the
post-establishment phase once investments had been admitted in accordance with the applicablepolicy framework.  Bilateral investment treaties provided protection of foreign investment and did not
deal with market access issues.  By contrast, the current discussion in this forum centred on the need
and desirability of a possible multilateral framework, the main focus of which was market access.
Because of this qualitative difference between bilateral investment treaties and the proposed
multilateral rules on investment, the argument that multilateral rules were more efficient because they
would obviate the need for concluding a large number of bilateral treaties was without merit.
50. The representative of the European Communities stated that market access had been only one
of a number of issues that had been discussed in the forum, along with investment protection and
development.
51. The representative of India welcomed the statement by the European Communities that
market access was not the primary focus of study in this Working Group and that issues such as
investment protection and development were also importa nt elements.  It would be useful if this point
could be further operationalized and given concrete shape in future discussions.
52. The representative of Hong Kong, China stated that investment-related provisions were
scattered over various WTO agreements with different foci and in an uncoordinated manner.  For
instance, the TRIMs Agreement, which applied to trade in goods only, prohibited the application of
trade-related investment measures that were inconsistent with WTO obligations of national treatmentand the elimination of quantitative restrictions.  There was merit in examining if the TRIMs
Agreement could be expanded to encompass more provisions on investment liberalization and
protection.  It would be useful to study whether a nd how the review of this Agreement provided for in
Article 9 might contribute to achieving investment liberalization in the multilateral context.
Suggestions that had been made that perfomance requirements imposed on investors by hostgovernments, for example joint venture, local ownership and technology transfer requirements, should
be added to the list of prohibited TRIMs annexed to the Agreement merited further deliberation in the
Working Group.  Another domain where improvements of the TRIMs Agreement might be
considered was investment incentives.  While it was unrealistic to call for the prohibition of all
investment incentives in the WTO at this stage, there was merit in exploring ways to discourage
Members from engaging in unhealthy competition for investment and to minimize the distortive
effects of investment incentives.  He further stated that while investment liberalization was addressed,to a limited extent, in the existing WTO agreements, investment protection was not covered at all.
For example, the GATS treated investment as a mode of trade in services through the establishment of
commercial presence and the movement of natural persons.  It adopted a sectoral and positive-list
approach in liberalizing trade in services.  It wa s worth exploring the feasibility of improving the
GATS to promote further investment liberalizati on and protection in the WTO context.  A key
question was whether it was feasible to expand the scope of the GATS to encompass provisions on
investment protection and to cover all forms of FDI.  Article XIX of the GATS provided that
Members shall enter into successful rounds of negotiation, starting from 2000 and periodically
thereafter with a view to achieving a progressively higher level of liberalization.  The upcoming
mandated negotiations provided a good opportunity for Members to make collective commitments tofurther constrain the use of discriminatory investment policies which were not conducive to market
access.
53. With respect to the statement by Hong Kong, China that certain suggestions that had been
made to prescribe performance requirements, including transfer of technology requirements, merited
further deliberation in this Working Group, the representative of India stated that there was anWT/WGTI/M/8
Page 12
inconsistency between the view that an investment  agreement should be promoted on the grounds that
FDI brought in technology to the host country, and the view that host countries should be denied the
ability to require investors to transfer technology.  The representative of Malaysia associated himself
with these comments.
54. The representative of the United States stated that there was no inconsistency between the
view that FDI brought technology to a host country and the view that foreign investors should not be
forced to transfer technology.  Rather, the real  inconsistency was between the claim that forced
technology transfer helped the development process and the evidence which showed that, when forced
to bring in a particular type of technology, investor s would either not enter a market at all or bring in
less advanced technology.
55. The representative of India responded that the general notion that an investment agreement
would promote the transfer of technology to host countries was subject to many qualifications.  In
particular, while there might be transfer of technology from a parent to its foreign affiliate, this did not
necessarily lead to diffusion of such technology to the host economy more generally.
56. The representative of Egypt disagreed with the United States that firms would react to transfer
of technology requirements by not entering the market at all or by bringing in a lower level of
technology.  Egypt's experience was that firms used a certain level of technology in their globaloperations and found it costly to use an inferior type of technology for the purpose of investing in a
particular country.  This underlined the need fo r further analysis of how firms made investment
decisions.  He also questioned the notion that firms were forced to transfer technology.  Rather, firms
were encouraged to transfer technology through a variety of incentives, such as tax advantages and
the possibility to register under various laws which provided for different rights and obligations.
57. The representative of the European Communitie s stated that, if the effect of performance
requirements was that investors would bring in  lower technology, this would be a compelling
argument against the use of such requirements.  Howe ver, if, as argued by Egypt, firms would bring in
the most advanced technology anyway, the question arose why performance requirements were
necessary.
58. The representative of Japan observed that the effect of a technology transfer requirement on
the level of technology used by a foreign investor depended on many circumstances, including the
nature of the industry, and asked the representative of Egypt what particular industry he had referred
to.  The experience of Japanese firms indicated that firms made decisions as to what models of a
particular product would be produced in developed countries or in developing countries.  In this
respect, technology transfer requirements often resulted in the choice of developing countries as a
location of the production of relatively cheaper models.  In the production of such cheaper models,foreign firms might still use rather modern tech nology, but this technology would be less advanced
than the technology used in developed countries.
59. The representative of Korea recalled that the issue of the review under Article 9 of the TRIMs
Agreement had recently been the subject of informal discussion in the framework of the TRIMs
Committee.  It was the understanding of his delegation that the conclusion emerging from thisdiscussion was that the Working Group was the proper forum to address this issue first, before
detailed deliberations would take place in the Committee.  As a consequence, his delegation
considered that the Working Group should address this issue at some future time.
60. The representative of Venezuela stated that in the recent informal discussion in the TRIMs
Committee a number of delegations had suggested that a distinction could be made between two
aspects of Article 9:  on the one hand, the review of the operation of the Agreement with a view to
making possible improvements, and on the other, the possibility of complementing the AgreementWT/WGTI/M/8
Page 13
with provisions on investment policy and competition policy.  It had been suggested in this
connection that work could start on the former issue in the Committee but not on the second aspect in
view of the ongoing work in the two Working Groups.  On that occasion, her delegation had
expressed doubts as to the opportuneness of this suggested distinction on the grounds that Article 9
reflected a carefully negotiated balance between interests of developed and developing countryMembers which could be upset by the suggested distinction.  Her delegation therefore supported the
proposal by Hong Kong, China to study the issue of the review of the TRIMs Agreement in the
Working Group.  This would offer the opportunity to treat this matter in a transparent and open
manner without the pressure of a negotiation.
61. The representative of Egypt stated that, while the Working Group could discuss various
elements of the TRIMs Agreement, this could not substitute for the review of that Agreement under
Article 9 which should be conducted by the Council for Trade in Goods.  He expressed scepticism asto the possibility of extending the GATS to all forms of FDI in view of the fact that the structure and
obligations of the GATS specifically related to services.
62. The representative of the European Communities shared the view of Egypt that the Working
Group could discuss a broad range of substantive issues, including issues which might also be brought
up in the context of Article 9 of the TRIMs Agreement, but that the Working Group was not the bodycompetent to conduct the review required by Article 9 of that Agreement.
63.  The representative of India noted that the decision contained in the Singapore Ministerial
Declaration to establish the Working Group expressly referred to the review of the TRIMs Agreement
under Article 9.  This reference had been requested by his delegation in order to highlight the
interface between the work of the Working Group and the review foreseen in Article 9.  While thismatter required further reflection, it was clear that there needed to be a consistent approach to these
two exercises.
64. The representative of UNCTAD informed the Working Group of activities undertaken by
UNCTAD in the context of its work programme on international investment agreements. UNCTAD
organized round table discussions with interested groups from civil society to provide a forum forpublic-private sector dialogue on issues related to international investment agreements.  The latest
such event with the International Confederation of Free Trade Unions had taken place on 9 December
1998 in Geneva and another event involving parliamentarians might be forthcoming.  At the request
of the Group of 15, UNCTAD had organized a seminar in January 1999 at which a number of bilateral
investment treaties had been negotiated between G-15 countries.  Regional symposia on key concepts
and issues relevant to international investment agreements would take place on 17-18 May 1999 in
Cairo and later in the year in Argentina.  In addi tion, preparations were underway for an interregional
symposium in China in September.  A joint UNC TAD/WTO seminar for Geneva-based delegates was
scheduled for 21-22 April.  On 24-26 March 1999, UNCTAD would hold an Expert Meeting on
international investment agreements.  The principal issue for consideration at this meeting was the
discussion of ways and means to provide for flexibil ity in international investment agreements in the
interest of promoting growth and development, wh ile at the same time allowing such agreements to
serve other objectives.  The representative of UNCTAD then drew attention to a new series of Issues
Papers on key concepts and issues relevant to international investment agreements.  The series
covered the clauses commonly found in bilateral investment treaties, but also dealt with matters not
often found in traditional BITs, such as competition, illicit payments, incentives, investment-related
trade measures, transfer pricing and social issues.  The first six papers in this series had beenpublished in February 1999 and dealt with FDI and development;  scope and definition;  admission
and establishment;  MFN treatment;  investment-related trade measures, and transfer pricing.
65. The representative of the OECD brought the Working Group up-to-date on recent work in the
OECD on international investment rules and on th e OECD Guidelines for Multinational Enterprises.WT/WGTI/M/8
Page 14
With respect to international investment rules, he noted that negotiations on a Multilateral Agreement
on Investment ("MAI") were no longer taking pla ce.  OECD member countries were now in the
process of designing a new work programme on international investment rules for adoption at this
year's OECD Ministerial Meeting.  The relevant OECD Committee had not yet taken a decision on the
contents of this work programme, but there was a generally shared view that work in the OECD on
international investment rules should continue and that the many positive achievements of the MAI
negotiations should not be lost.  OECD member countries agreed on the desirability and the value of
an international framework for investment.  There was also a broadly shared view that future work
would be of an analytical and e xploratory nature.  OECD member countries were also undertaking the
first review of the OECD Guidelines for Multinational Enterprises since 1991 as part of the normal
follow-up process to ensure that the Guidelines were effective and that necessary changes were made
to ensure their continued relevance.  The current review would address both the implementationprocedures and the substantive provisions of the Guid elines.  The main issues in the review were the
territorial scope of the Guidelines, i.e. the question as to whether the Guidelines should apply to the
global operations of OECD-based multinational enterprises or only to their operations in OECD
countries;  the possible need to update the Guidelines in certain areas, notably labour and the
environment;  and ways and means to strengthen the procedures for implementation of the Guidelines,especially with regard to the rôle of national contact points.  In connection with the launch of this
review, a conference had taken place in November 1998 in Budapest at which representatives of
governments, the business community, labour and other representatives of civil society had discussed
the influence of the Guidelines and explored ways to  strengthen their rôle.  The rôle of the Guidelines
in the field of environmental protection had also been the subject of a conference on FDI and theenvironment held in January 1999 in The Hague.  It was expected that the terms for the review would
be decided in April 1999 and that the review would be concluded by the time of the OECD
Ministerial Meeting in 2000.
66. The representative of Pakistan suggested that the UNCTAD Issues Papers could be used by
the Working Group as a basis for its consideration of some issues.  The concept of investment-related
trade measures was useful because it pointed to the need to consider the question of investment
incentives within a broader conceptual framework which also encompassed various trade measures,
including rules of origin and regional trade agreements, as factors affecting locational decisions.
Regarding the statement made by the OECD representative, he considered that the fact that the further
work envisaged in the OECD on international invest ment rules was of an exploratory and analytical
nature underlined the need to proceed with caution in this area.  In order that the Working Group
might benefit from the experience gained by OECD member countries in the MAI negotiations, hesuggested that the Secretariat prepare a factual account of the difficulties that had been encountered in
these negotiations and of the positions that had been taken on these issues.
67. The representative of the United States stated that she wished to reflect further on the
suggestions made by Pakistan to use the UNCTAD I ssues Papers and to review the work of the MAI
negotiations.
68. The Working Group took note of the statements and agreed  to revert to Item III at its next
meeting.
D. ITEM IV OF THE CHECKLIST OF ISSUES SUGGESTED FOR STUDY
69. Several delegations introduced new written contributions pertaining to this Item of the
Checklist.  The Working Group also discussed the issue of the definition of the term investment ininternational investment agreements and heard statements on other issues covered by Item IV,
especially the issue of the advantages and disadvantages of a possible multilateral framework of
investment rules.WT/WGTI/M/8
Page 15
70. The representative of India highlighted the main themes addressed in a written contribution
which has been circulated subsequently in WT/WGTI/W/74.  First, the contribution identified three
fundamental factors explaining decisions of multinational enterprises to invest in developing
countries:  availability of natural resources;  market size and the existence of a suitable platform for
exports.  The strength of local institutions, the quality of local infrastructure and of the work force andthe degree of macro-economic stability also played a rôle.  Second, the contribution stressed the need
to address certain possible negative effects of FDI, including restrictions on the transfer of
technology, the negative impact on the balance of payments and exchange rates, and the crowding out
of domestic entrepreneurial activity.  While it was often assumed that FDI promoted the transfer of
technology, a number of studies had pointed out that countries at low levels of development were
likely to be able to induce FDI only to low technology activities.  Third, the contribution pointed to
the fact that developing countries were net importers of capital and technology and that there was ahuge competitive gap between their enterprises and multinational enterprises.  Developing countries
recognized the importance and value of FDI and fo reign technology to their growth and development,
but their experience 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.  Fourth, the contribution argued that capital and labour werecomplementary factors of production which needed to be studied together, as had been discussed in
more detail by his delegation in WT/WGTI/W/39.  Fifth, the contribution underlined the importance
of the issue of obligations of foreign investors, in which connection account should be taken of
relevant OECD and UN instruments.  Finally th e contribution stressed the need to place the
development dimension at the centre of the work of the Group.
71. The representative of Japan introduced a written contribution, subsequently circulated in
WT/WGTI/W/75, on the  rôle of international invest ment rules in ensuring stability and transparency
of the legal systems and policies of host countries.  The contribution identified a range of concrete
problems experienced by Japanese firms that were caused by a lack of stability and transparency of
the regulatory environment in host countries.  This lack of stability and transparency reduced theability of foreign investors to develop their business operations based on long-term plans, increased
the costs of their investments, and distorted the conditions of competition in favour of domestic firms.
Enhancing stability and transparency would not only remove these problems faced by foreign
investors, but would also benefit local firms and would contribute overall to the development of host
countries.  Based on existing international agreements, a number of provisions that were essential to
enhancing transparency and stability of investment laws and regulations could be identified.  Of
particular importance in this respect were rules requiring the publication of laws and regulations, theavailability of enquiry points, due process requirements with regard to authorization and licensing
procedures, non-discrimination requirements, standstill requirements, and dispute settlement
procedures.  The merits of including these and possible other approaches to enhance stability and
transparency as part of a multilateral framework on investment required further analysis.  While
improving transparency and stability in legal systems should be regarded as one of the core issues tobe dealt with in improving the environment for fo reign investment, it was necessary to take into
account the fact that international rules designed to enhance transparency and stability could entail
administrative costs for host countries and might deprive them of some of their policy tools that
provided necessary protection to their domestic industries.  Developing countries therefore needed to
be given sufficient time for the implementation of such rules.  The introduction of provisions ontransparency and stability did not necessarily deny existing rules and regulations in host countries nor
did it make if difficult for host countries to implement development policies.  Such rules, associated
with other measures to improve the investme nt environment, such as the development of
infrastructure and human resources, would rather contribute to sustainable development.
72. Introducing a written contribution subsequently circulated in WT/WGTI/W/70, the
representative of Korea stated that this contribution was intended to show how multilateral rules on
investment, and the process of negotiation of such rules, could contribute to enhancing transparencyWT/WGTI/M/8
Page 16
and stability of the legal environment for foreign investment.  In discussions on this subject, there
seemed to be agreement at least on the point that a high level of transparency and predictability for
foreign investment was crucial to creating a favourable climate for foreign investment as it enabled
foreign investors to make decisions under minimum uncertainty and reduced risk.  Foreign investors
were unlikely to invest in a country where they could not precisely ascertain the laws, regulationsadministrative practices and procedures that would apply to their investments.  For individual
countries, enhancing the transparency of their investment institutions involved making public all the
rules and regulations affecting investment.  A transparent list of relevant regulations reduced the risks
of investing in a country, and the preparation of  such a list provided a country with a better
understanding of the scope, effects and shortcomings of its regulations.  Compared with bilateral
investment treaties, which by and large had been in effective in dealing with the transparency issue,
multilateral investment rules might provide a unified set of regulations regarding the transparency of
investment régimes.  The negotiating process on mu ltilateral investment rules in itself could lead to
increased transparency.  Thus, Korea's accession to the OECD in 1996 and its subsequent
participation in the negotiations on a MAI had necessitated the establishment of a comprehensive, yet
focused list of the rules and regulations affecting investments in Korea.  This comprehensive review
of Korea's investment régime had resulted in a better understanding of the difficulties foreigninvestors faced when attempting to understand Korea's investment regulatory framework.
Furthermore, inter-agency coordination among different ministries had made inefficiencies in the
Korean investment régime evident to Korean policy makers and had created an environment
conducive for policy makers to the formulation of remedies for such inefficiencies.  Korea's
experience suggested that implementing reforms aimed at enhancing transparency for foreign
investors was indeed a daunting task for developing countries.  While many countries would benefit
from providing a clear and comprehensive overview of rules and regulations governing investment,
providing all the necessary information to foreign investors was beyond the capacity of the
governments of many developing countries.  A multilateral investment treaty should therefore include
a provision on technical assistance to aid countries to set up a comprehensive, yet focused list of allregulations and rules governing foreign investment.  In addition, transparency provisions as a core
component of a multilateral investment treaty would serve as a valuable reference for countries
desiring to enhance the overall level of transparency of their investment régime.
Definition of investment in international investment agreements
73. In response to a question posed at the last meeting by the European Communities, the
representative of Costa Rica explained that the concept used in his delegation's contribution in
document WT/WGTI/W/60 of capital movements that did not constitute real investment but were
mere financial transactions for speculative purposes was difficult to define, but was meant to cover
transactions that were not aimed at the acquisition of interests in enterprises or in activities of a certain
permanent character.  While this had to be determined on a case-by-case basis, a relevant element was
the time-frame of the transaction.  Thus, if the duration of a capital movement was only several
months or weeks, this could be seen as an indication that the capital movement was exclusively forspeculative purposes.  Notwithstanding the need to exclude such speculative capital movements from
the definition of investment, his delegation considered that the definition of investment should be as
broad as possible and should encompass any asset susceptible of being invested or used in income- or
profit-generating activities, including both direct and portfolio investment.
74. The representative of the European Communities considered that a broad definition of
investment was desirable, but that at the same time account should be taken of concerns about the
implications of such a broad approach for financial systems.  Thus, the distinction made by
Costa Rica between investment and capital movements that served different, speculative purposes was
of crucial importance and required further study.  He recalled the point made by his delegation at the
last meeting that the IMF's definition of FDI as investment "that reflected the objective of a residententity in one economy obtaining a lasting interest in an enterprise resident in another economy",WT/WGTI/M/8
Page 17
raised the question of how to determine the existence of a lasting interest.  A question which should
be addressed in a more systematic manner was the relationship between the definition of investment
and the nature of substantive disciplines.  The UNCTAD Issues Paper on Scope and Definition
pointed to the distinction between a narrow definition used in certain agreements and a broad
definition in other agreements.  An interesting suggestion made in previous discussions on this matterwas that in a multilateral framework on investment different definitions could be applied for purposes
of different obligations.
75. The representatives of Korea and India
 reiterated their delegations' views that the work of the
Working Group should be limited to FDI.  In this regard, the representative of Korea mentioned the
possible negative consequences of the volatility of portfolio investment and recalled his delegation's
suggestion that the Working Group use the IMF's definition of FDI, as described in document
WT/WGTI/W/61.  His delegation saw merit to the use of different definitions of investment forpurposes of different substantive obligations, in which context he referred to the distinction made in
Korea's domestic legislation between a narrow, enterprise-based definition in the provisions
applicable to the pre-establishment phase of investment and a broad, asset-based definition in the
provisions applicable to the post-establishment phase of investment.  He also proposed that the
Working Group study the implications of electronic commerce for the treatment of commercialpresence in the context of investment agreements.  The representative of India argued that capital
movements with speculative purposes, portfolio investment and intellectual property were notincluded in FDI, which was the core subject of study in this Working Group.  It was necessary to
develop a clear definition of the precise components of FDI and to study the benefits of FDI in
relation to each of these components.  While the IMF's data on FDI covered three components -greenfield investment;  reinvested earnings, and loan capital provided by parent firms to their foreign
affiliates - it appeared that greenfield investment accounted for only 5-10 per cent of total FDI flows.
76. The representative of Hong Kong, China st ated that, viewed from the perspective of
investment protection and promotion as the centra l objective of investment agreements, it was
desirable to define investment as broadly as possible, but that such a broad definition raised severalquestions that required careful consideration:  first, whether it was feasible and practical to apply the
same set of international investment rules to diff erent categories of investment, for example, direct
investment, portfolio investment and intangible assets;  second, whether the use of a broad definition
might have unintended consequences in terms of the scope of application of substantive rules;  third,
whether it was fair and desirable to give the same level of protection to short-term and long-term
investors;  and, fourth, whether a broad definition could adequately take care of the development
needs of all Members.
77. The representative of Egypt stressed the need to view the definition of investment in relation
to the specific scope and objectives of an agreement.  He recalled in this connection that Egypt used a
broad definition in its bilateral investment treaties.
78. The representative of Argentina stated that his country used a broad definition of investment
in its bilateral investment treaties, including tangible and intangible property and intellectual property
rights.  The possible scope of a definition of investment needed to be studied with greater precision in
the Working Group, particularly with regard to the treatment of portfolio investment.  It was also
useful to consider further the suggestion to apply different definitions for purposes of different
obligations.  Referring to the contribution by the IMF in document WT/WGTI/W/61, he stressed the
need for the Working Group to take into account appr oaches already agreed in other fora.  Argentina
did not discriminate between greenfield investment and foreign acquisitions of domestic enterprises.
The experience of the last decade showed that foreign investment through the acquisition of existing
enterprises entailed significant economic benefits, for example in the context of privatizations.WT/WGTI/M/8
Page 18
79. The representatives of Japan, the United States , the European Communities , Canada  and
Chile questioned the desirability and feasibility of limiting the definition of investment to FDI.  First,
a definition of investment only in terms of direct investment would be incompatible with the basic
objective of international investment rules to provide protection of investment.  In this regard, it was
stated that an investment usually consisted of a complex of different properties that were difficult toseparate;  that bilateral investment treaties for the protection of foreign investment typically adopted
broad definitions of investment; that, in view of the economic benefits deriving from both direct and
indirect investment, a distinction in the treatment  of foreign investors depending upon whether their
shareholdings constituted direct or indirect investment was difficult to justify;  that, as a practical
matter, any attempt to draw a clear line between direct and indirect investment would raise very
complex issues because of the difficulty of defining when a particular investor held a controlling
interest in an enterprise;  and that the distinction between investment and speculative capitalmovements was more pertinent than the distinction between FDI and portfolio investment.  Second, it
was argued that concerns regarding the implicatio ns of including non-FDI forms of investment and
speculative capital movements should be dealt with through appropriate qualifications to substantive
obligations rather than through limitations of the definition of investment.  Specifically, the definition
of investment should be considered in conjunction with provisions on the movement of capital.Reference was made in this respect to provisions in  most investment agreements on transfers of funds,
which could be formulated to allow for a certain policy flexibility by permitting certain restrictions on
transfers, for example for macro-economic reasons or for the stability of the financial system.  As an
example, mention was made of the provisions on capital movements in investment agreements
concluded by Chile which allowed Chile, as an exception to the disciplines on free transfer of capitaland related funds, to impose certain restrictions on capital flows, for example, by prohibiting the
repatriation of capital within less than a year after it had been invested.
80. The representative of Egypt asked why the delegation of Korea considered that the
implications of electronic commerce for commercial pr esence needed to be considered in the context
of investment rules, rather than in the framework of the GATS.  The representative of Korea stated
that his delegation simply wished to highlight the need to study the implications of electronic
commerce for commercial presence and that the issue of how to deal with commercial presence in this
Working Group had not yet been clarified.
81. Several requests were made for background notes to be prepared by the Secretariat:  first, a
note providing a comprehensive overview of definitions of investment in existing international
instruments;  second, a compendium of issues raised and views expressed so far in the Working
Group's discussion on the definition of investment;  and, third, a note on the transfer provisions ininvestment agreements, in particular the link betw een transfer provisions in investment agreements
and various capital account transactions and capital account liberalization.  It was suggested that the
latter study might usefully be undertaken in cooperation with the IMF.  Regarding the first of these
suggestions, the view was expressed that the re cent UNCTAD Issues Paper on Scope and Definitions
provided an excellent overview of existing definitions and could be used as a basis for further work inthe Working Group.  It was therefore preferable to review this paper before considering whether
additional work by the Secretariat was necessary.  The Chairman indicated that he would consult with
the Secretariat on these suggestions.
Other comments on Item IV
82. The representative of Korea stated that, while one group of Members, mainly consisting of
the developed country Members, was in favour of establishing multilateral rules on investment,
another group, representing the views of the developing country Members, was yet to be convinced of
the benefits of a multilateral framework on investment.  While recognizing the positive effects of FDI
on economic growth and development in general, the latter group was concerned about the possible
negative effects of FDI and about the possibility that multilateral rules on investment might imposeWT/WGTI/M/8
Page 19
restrictions on their freedom to pursue their own development policies as well as on their authority to
regulate the entry of foreign investment.  They also doubted whether multilateral rules on investment
would actually lead to increased investment flows and were concerned that, even if multilateral rules
resulted in greater FDI flows, the benefits associated with such flows might accrue only to the
investors at the expense of the interests of host countries.  These concerns were legitimate andnecessitated more substantive discussions on the potential costs and benefits of a multilateral
approach to investment.  However, his delegation considered that these concerns did not provide a
compelling argument against the benefits of multilateral rules on investment and that no convincing
arguments had been presented so far regarding any real costs of a multilateral framework on
investment.  The contributions submitted by India at the present meeting articulated the fundamental
concerns in relation to the development dimension and possible costs or negative effects of FDI on
economic growth and development in a well-structured and comprehensive manner, but did not offerconvincing arguments against the potential benefits of multilateral rules per se .  In this respect, it was
important to distinguish between the issue of possib le negative effects of FDI, on the one hand, and
the issue of possible costs of multilateral rules on investment, on the other.  Nevertheless, the issues
raised and suggestions made by India were particularly important for the Group's consideration of the
development dimension of the trade and investment interface.  Most significant in this regard was theobservation by India that a more coherent analysis was necessary of the implications of investment
and trade liberalization on economic growth of countries at various stages of development.  As noted
by India, the Working Group's discussions needed to be informed by the particular needs,
endowments, perceptions and political and economic policies of individual countries.  While it was
difficult to find a common ground, as long as there was agreement on the value of enhancedtransparency and predictability for a stable flow of  FDI, which in turn contributed to overall economic
growth and development, his delegation saw no reason to be preoccupied with potential costs that had
yet to be proven.  It was difficult to predict whether investment flows would actually increase as a
result of the creation of a multilateral framework, but there was no doubt that potential long-term
benefits existed.  Rules on investment, as in the case of rules for trade, would only guarantee theexistence of increased opportunities for investme nt rather than the increase in FDI flows per se .
Development concerns could be addressed by providing safeguard mechanisms which allowed for a
certain flexibility for host countries.  The key question was how to strike a balance of interests
between capital exporting and capital importing countries.  In this regard, the three elements identified
in the concluding part of India's contribution in WT/WGTI/W/74 were relevant:  the need for
investment arrangements to be investor-friendly, the need for such arrangements to provide a
sufficient degree of freedom and flexibility for host countries, and the need for such arrangements toaddress investors' obligations.  The proliferation of bilateral and regional investment treaties increased
the potential for distortions of investment flows, due to the discrepancies between such treaties.  A
more coherent approach in a multilateral setting could address this problem.  This did not mean,
however, that multilateral rules should absorb or replace all the existing bilateral or regional
investment treaties.  This was not only politically impossible, but also undesirable from the economicand policy perspective.  In many cases, bilateral or regional investment treaties promoted a higher
level of investment liberalitazion.  Multilateral rules and bilateral or regional investment treaties
could, and should, operate in a mutually comple mentary and reinforcing way.  As emphasised by
Costa Rica at the last meeting, in a globalizing  world economy, the development dimension should be
viewed within a regulatory framework th at promoted openness and predictability.
83. The representative of the European Communities,  referring to a contribution presented at the
last meeting by Japan (WT/WGTI/W/67), supported the view that a multilateral framework on
investment would provide for greater consistency with existing disciplines on trade and investment
than a network of bilateral investment treaties and would therefore contribute to enhancing the
predictability of the global investment environm ent.  Moreover, the development dimension would
necessarily be taken into consideration in a negotiation involving countries with different levels of
development.  The possibility to rely on well established principles, such as non-discrimination, and
existing dispute settlement mechanisms was another important advantage of a multilateral approach.WT/WGTI/M/8
Page 20
In respect of the more recent contribution by Japan in WT/WGTI/W/75, he stressed that European
firms also regarded the lack of transparency and stability as an obstacle to their foreign investments.
Stability and transparency of the regulatory framework in any given country benefited both foreign
and domestic investors.  As to the procedural means of enhancing transparency, publication of laws
and regulations was certainly necessary, as stated in the Japanese contribution, but other procedures toensure provision of information to all interest ed parties without imposing excessive burdens on
authorities should also be explored.
84. The representative of Hong Kong, China observed  that trade and investment were inextricably
linked in today's globalized economy and that trade and investment rules therefore needed to be
mutually reinforcing.  Viewed from this perspective, his delegation saw merit in exploring a
multilateral approach to strengthening the global investment environment.  Comprehensive rules on
investment in a multilateral context might help address possible gaps and inconsistencies in existinginvestment instruments and prevent possible distorti ons of investment flows and inefficient allocation
of resources caused by the large number and variety of existing investment instruments.  Investors
might find it easier to comply with common investme nt disciplines in a multilateral context than with
a web of bilateral and regional investment agreements.  A multilateral régime provided more
predictability and stability for investors.  While the past decades had witnessed unilateral investmentliberalization in a number of economies, there was no assurance that such efforts would continue.  In
view of the experience of the OECD Negotiating  Group on the MAI, it seemed appropriate for work
in the WTO to take a more incremental approach by  examining what should be the core principles of
a multilateral investment framework, while recognizing the need for an appropriate degree of
flexibility to take account of the development needs of Members.  Several policy questions meritedfurther consideration in this respect.  A first question was whether the core obligations of a
multilateral framework would merely pertain to national treatment and MFN treatment, or whether
they should also include international standards for investment protection.  A second question was
whether provisions should be included on potentially distortive governmental policies, such as
performance requirements and incentives.  Third, there was the question of whether the existing WTOdispute settlement mechanism could apply to investment disputes among parties to the multilateral
framework or whether a separate dispute settlement mechanism should be created.  Fourth, another
relevant question was what standing, if any, investors should have in future dispute settlement
procedures.  Finally, the question arose as to how exceptions would be treated.  Any multilateral
framework was likely to be ridden with exceptions, especially if it were to recognize Members' rights
in setting domestic regulations.  Whether a negative list or a positive list approach should be followed
was a key issue in this regard.  While there was no doubt that a multilateral investment frameworkwas worthy of further deliberation, one should not lose sight of other possible multilateral channels,
for example, under the TRIMs Agreement and the GATS, to promote investment liberalization and
protection.  There was no reason not to explore va rious proposals in parallel as long as one was
mindful of the need to ensure the coherence of various multilateral solutions eventually reached by
Members.  In conclusion, his delegation welcomed more deliberation on the desirability of amultilateral framework on investment.  At this juncture, it had no pre-conceived view on how this
subject might be taken forward in the Seattle Ministerial Conference.  Given the complexity of the
issue and the limited experience on investment rules at the multilateral level, his delegation
considered that it was essential to move ahead at a pace with which all Members felt comfortable.
85. The representative of the Philippines stated that the arguments advanced at the present
meeting in favour of multilateral rules on investment did not add anything new to the debate.
Referring to questions raised by his delegation on previous occasions, he stressed that general
reassurances did not suffice and that, in order for his delegation to be persuaded of the merits of
negotiations on investment rules in the WTO, it had to have reasonable expectations regarding
concrete benefits of such rules.  It was therefore necessary to devote more time to the key question ofthe advantages and disadvantages of multilateral investment rules in the WTO.  A useful starting-
point might be to ask what lessons could be learnt from the failure of the MAI negotiations.WT/WGTI/M/8
Page 21
86. The representative of Pakistan recalled that his delegation had made comments on Japan's
contribution in document WT/WGTI/W/67 at the last meeting.  As at the last meeting, his delegation
considered that the arguments advanced at the present meeting were at too high a level of generality
and that a more concrete identification of benefits and costs of possible multilateral rules on
investment was necessary.  While it was difficult to disagree with certain very general notions, forexample, the proposition that international rules imparted stability and predictability, in practice much
depended upon what the precise contents of the rules was.  It was in this context that his delegation
had previously argued that, in view of the nature of the rules being proposed, the benefits seemed to
be outweighed by costs.  In broad terms, two categories of costs could be distinguished.  First, the loss
of autonomy of developing countries to pursue their own development policies as a result of, for
example, obligations in regard to performance requirements and incentives.  Second, the possibility of
unduly favouring multinational enterprises, especially in their relationship with host countries.  Thisinvolved issues such as the nature of a dispute settlement system and the relationship between the
investor and the home state.  Reference had been made to the three principles enunciated in the Indian
contribution as a possible basis to find common ground.  However, the difficulty was that core
principles as such were not sufficient to allay th e concerns that had been raised regarding possible
negative effects of multilateral rules on investment.  Rather, the pertinent question, which had not yetbeen sufficiently addressed, was how such core principles would be operationalized.  Thus, a key task
before the Working Group was the need to identify costs and benefits in a much more concrete
manner.
87. The representative of Argentina supported th e views of Hong Kong, China regarding the
desirability of considering a multilateral approach  to investment in the WTO.  The principle of
non-discrimination, which was the corner stone of the WTO, was also an important reason for
adopting a multilateral approach to investment.  The multitude of bilateral investment agreements
involved discriminatory treatment, including betw een developing countries.  The systemic concerns
raised by many Members regarding the implications of regional trade arrangements were also
pertinent with regard to the discri minatory impact of the proliferation of bilateral investment treaties.
He agreed with previous speakers that the precise contents of possible provisions on investment
merited more attention, in which context he mentio ned the need to deal not only with investment
protection but also with investment  promotion.  With respect to the concerns raised by some Members
about implications of investment rules in the WTO, he stressed that the contents of such rules would
be determined by a negotiation governed by the principle of decision making by consensus.
88. The representative of the European Communitie s stated that multilateral rules on investment
entailed important benefits in ensuring stability of investment régimes and avoiding discrimination.
With respect to the often raised question of the benefits of such rules from the perspective of host
countries, he noted that European firms had indicated that, while their investment decisions were
primarily based on economic criteria, they were also affected by perceptions of risk and instability.
The existence of rules was therefore a factor affecting the overall flow of investment even though it
might not be a decisive factor in a given case.  He agreed with Korea that the question of the possiblenegative effects of FDI was distinct from the issue of the possible costs of multilateral rules on
investment, and that so far few specific arguments had been advanced on such costs.  With respect to
the concerns regarding possible loss of policy-making autonomy and flexibility, it was important to
bear in mind that international rules limited regulatory  sovereignty only to the extent satisfactory to all
parties involved.  It was clear that an agreement that would unduly restrict Members' ability to pursuetheir policy objectives would not be accepted.  A useful approach to identifying costs and benefits of
investment rules was to consider how existing investment agreements dealt with certain matters.  In
this connection, he mentioned as an example th e contribution from Costa Rica in WT/WGTI/68 which
described certain limitations of the scope of dispute settlement, exceptions to MFN treatment, and the
use of a negative list.  Multilateral rules on investment would not replace bilateral investment treaties,but such treaties were not an alternative to a set of basic rules at the multilateral level.  Finally,
because investment negotiations in the WTO should be guided by the WTO's own principles,WT/WGTI/M/8
Page 22
philosophy and practice,  there was no need to seek guidance from the experience of OECD member
countries with the MAI negotiations.
89. The representative of Switzerland supported the views expressed in favour of multilateral
rules on investment in the WTO.
90. The Working Group took note of the statements and agreed  to revert to I tem  I V at its next
meeting.
E. OBSERVER STATUS FOR INTERNATIONAL INTERGOVERNMENTAL
ORGANIZATIONS
91. In light of the ongoing process of informal consultations in the General Council, the Working
Group agreed to maintain the status quo by inviting those organizations present at the meeting to
attend the next meeting on the same basis.
F. DATES OF NEXT MEETINGS92. The Working Group agreed to hold its next meeting on 3 and 4 June 1999 and to revert at that
meeting to the question of the dates of a subsequent meeting.
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