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1、CHAPTER 5,FOREIGN INVESTMENT,5-1,CHAPTER 5FOREIGN INVESTMENT5-1,Topics for this chapter: Foreign Investment Laws and Codes Supervision of Foreign Investment Securities Regulations Enforcement of Securities Regulation Internationally,5-2,Topics for this chapter:5-2,A. Foreign Investment Laws and Code
2、s,What is foreign investment?Ownership by one person of 10 percent of more of the controlling interest in an enterprise not located in the persons home country.Some states have general investment laws that limit the type (joint ventures) or percentage of foreign investment.Other countries put restri
3、ctions on investment in specific sectors, such as agriculture, technology, or media.Some of these laws are incorporated into bilateral investment treaties (BITs)(双边投资协定）.,5-3,A. Foreign Investment Laws and,BITs,Most often between a developed state and that states favored developing states.Many BITs
4、contain international dispute settlement provisions.BITs constitute the most important protection of international foreign investment.,5-4,BITsMost often between a devel,Typical Terms in BITs,BITs usually define foreign investment and the conditions under which investors from one state can invest in
5、 the other state.Often provide fair and equitable treatment clauses and compensation guarantees for expropriation. National Treatment & Most Favored TreatmentMany designate the World Banks International Center for the Settlement of Investment Disputes (ICSID) as the arbitral body.,5-5,Typical Terms
6、in BITsBITs usua,a. National Foreign Investment Policies,Purpose of foreign investment regulations:Promoting local productivity and technological development,5-6,So_Paulo,2. Encouraging local participation, and3. Minimizing foreign competition in economic areas already well served by local businesse
7、s.,a. National Foreign Investment,a. National Foreign Investment Policies,To achieve these purposes, investment laws establish basic policies for screening and regulating foreign investment applications. These generally fall into three categories:To encourage investment through incentives and minima
8、l regulations.To use investment incentives but also to require local participation quotas.Subject foreign investment to local screening and supervision.,5-7,a. National Foreign Investment,b. Regional Investment Policies,Nations in a particular region may agree to general standards for investment in
9、their region.One such region is the Association of Southeast Asian Nations (ASEAN).This region is a leading recipient of foreign direct investment (FDI).ASEAN countries act individually and collectively to attract investment.Exhibit 5-3 shows a sample of the investment incentives implemented by ASEA
10、N countries,5-8,b. Regional Investment Policie,ASEAN Investment Incentives,5-9,ASEAN Investment Incentives5-9,c. Screening Foreign Investment Applications,Most countries require the foreign investor to register with the government and obtain government approval of the venture. In many countries, for
11、eign investors register with a single central agency set up to facilitate foreign investments. Its internal staff may evaluate proposals.In other countries, such as India and Mexico, the central agency only coordinates other specialized agencies and departments.In some countries, such as Brazil, the
12、 evaluation is handled directly by various departments and agencies.,5-10,c. Screening Foreign Investmen,c. Screening Foreign Investment Applications: Screening Investment Proposals,There are many varied criteria by which countries screen proposals. Some examples of proposals that will be screened i
13、nclude:Proposals seeking investment incentives. (Brazil)Those with a certain percentage of foreign ownership. (40% in Philippines)Those that exceed a certain amount of capital. ($5M or majority ownership foreign - Argentina)Presidential approval needed for acquisition of majority interest in locally
14、 owned company worth more than $10M. (Argentina),5-11,c. Screening Foreign Investmen,c. Screening Foreign Investment Applications: Tiered Screening and Special Screening,In some countries, one person or department will do the screening if the investment is under a certain amount. In France, investme
15、nts of more than 10 million francs are screened in Paris. If less, they are screened locally.,5-12,Specialized agencies screen investments in natural resource-based industries:HydrocarbonsMineralsForestry,c. Screening Foreign Investmen,c. Screening Foreign Investment Applications: Information That M
16、ust Be Disclosed,Foreign investors must supply screening agencies with detailed information, such as:The industry to be established A financial planA production scheme showing annual volume and value of the productionA services scheme showing what services will be createdThe owners, the management s
17、tructure, and the relative share of local and foreign control,5-13,c. Screening Foreign Investmen,c. Screening Foreign Investment Applications: Evaluation Criteria,Criteria judge conformity with countrys national development objectives. The criteria vary greatly, but generally includes:Impact on the
18、 balance of paymentNumber of jobs createdImpact of technical know-how and the training program for indigenous employeesImpact on the local market,5-14,c. Screening Foreign Investmen,Evaluation Criteria (cont.),Contribution to the development of less economically developed zones or regionsRatio betwe
19、en foreign and national capital contributionExport diversification and stimulationUse of national inputs and components in the manufacture of the product（本地化要求）Effect on price levels and the quality of the product,5-15,Evaluation Criteria (cont.)Con,d. Application Process Formal and Informal,The inv
20、estment application submitted by a foreign investor must demonstrate two things to the local authorities:The proposed investment fits the guidelines of the investment law, andThat the investment agrees with the investment philosophy of the host country.Reading 5-1 demonstrates how failure to underst
21、and the investment philosophy in the host country can lead to mistakes by an investor.,5-16,d. Application Process Formal,e. Approval of ForeignInvestment Applications,Approval or disapproval of an application will be done by an informal letter unless the investor asks for an incentive or the invest
22、or is asked to make a concession. In either case, a formal investment agreement is needed.Agreement will be governed by the host states contract laws.Disputes will be resolved in host state unless the parties agree otherwise.,5-17,e. Approval of ForeignInvestm,Case 5-1Arab Republic of Egypt v. South
23、ern Pacific Properties, Ltd. et al.,Southern Pacific Properties (SPP) entered into contracts with an Egyptian state-owned corporation (EGOTH) and the Egyptian government, represented by the minister of tourism.Egypt backed out of the contracts that provided for arbitration.Court set aside judgment a
24、gainst government because tourism minister had no authority to bind government. Burden fell on investor to make sure that proper approval had been given for the investment.,5-18,E.G.O.T.H.eg/en/Index.htm,Case 5-1Arab Republic of Egyp,f. Business Forms,International investors may be limited by the ho
25、st country in the kinds of business forms they are allowed to use. Most states want foreign investors to use businesses that:Have local participationFully disclose their activities to the publicLocal participation usually means a joint venture organized as a partnership, LLC, or publicly traded stoc
26、k corporation. (what does govt want?)Percentage of local ownership usually determines what incentives are available.When public disclosure is highly valued, it usually requires a public stock corporation to be set up.,5-19,f. Business FormsInternational,g. Limitations on Foreign Equity,Foreign inves
27、tment laws frequently limit the percentage of equity that foreigners may hold in local businesses.In India, the limit is 40%.In Mexico, it is 49%.Exceptions are usually allowed to attract investors.,5-20,Foreign Investment Promotion Board (FIPB) screens all applications for foreign investment in Ind
28、ia.,g. Limitations on Foreign Equi,h. Sectoral Limitations,Foreign investment is commonly restricted by particular economic sectors.Investment laws usually:Reserve certain sectors of the economy for exclusive ownership by the state or its nationals.Permit a limited percentage of foreign ownership in
29、 certain sectors, orDefine certain sectors where full or majority foreign ownership is allowed.,5-21,h. Sectoral LimitationsForeign,Closed Sectors,Most states do not allow foreign ownership in certain sectors. Sectors that are often closed are:Public utilities（公用事业）Vital or strategic industriesEx: F
30、rance reserves broadcasting, telecommunications, railroads, gas, and electricity to state agencies or state-owned companiesIndustries that are sufficiently developedEx: Flour milling in Ireland/leather production in JapanMedium or small-scale industries that can be developed by nationals.,5-22,Close
31、d SectorsMost states do n,Restricted Sectors,Restricted Sectors states limit percentage of foreign investment allowed in these sectors. This is done to limit foreign influence in domestic political, economic, and social affairs.Ex: Korea limits ownership in telecommunications to 49%.Ex: Australia li
32、mits radio and television ownership to 20%.,5-23,Seoul,Perth,Restricted SectorsRestricted S,Foreign Priority Sectors,Sectors of a states economy in which foreigners are encouraged to invest. Local resources may be lacking or the investment may help create jobs.Ex: In Bangladesh, the government invit
33、es investment in many sectors, including:Electronic equipment, agro-based industry, cement（水泥）, rayon（人造纤维）, computer software, chemicals and petrochemicals, frozen foods, and paper Ex: South Africas priority sectors include:Automotive industry, marine, rail, and aerospace, capital equipment（资本设备，固定
34、设备）, chemicals, clothing and textiles, mining, and tourism,5-24,Foreign Priority SectorsSector,i. Geographic Limitations,A few countries limit the geographic areas in which foreign investors may conduct business.Argentina restricts foreign ownership of land and businesses adjacent to ocean frontiers
35、.Belize forbids foreign commercial fishing inside its barrier reef.Thailand Restricts the purchase of land by foreigners.Chile Does not allow foreigners to engage in coastal trade（沿海贸易）.The right of a state to restrict investment in certain geographic areas is respected by other states in accordance
36、 with the states sovereign authority.,5-25,i. Geographic LimitationsA few,Case 5-2Brady v. Brown,Brady and Cardwell (BC) wanted to acquire coastal land in Mexico.Foreigners were forbidden from owning property within 50 kilometers of the shore, Mexicos “Forbidden Zone.”BC hired Brown, who created con
37、tracts under which BC invested in property. Attorney Brown manipulated the transactions by forming corporations with his family members as majority stockholders.,5-26,Case 5-2Brady v. BrownBrady a,Brady v. Brown,Brown asked U.S. court to apply comity and find that contracts were void under Mexican l
38、aw.Court found that action for fraud was not prevented by comity since BC were innocent investors and had been given improper advice about legal trusts.,5-27,Mexico City,Brady v. BrownBrown asked U.S.,j. Free ZonesSpecial Economic Zones,Geographical areas wherein goods may be imported and exported f
39、ree from customs tariffs and in which a variety of trade-related activities may be carried on.Used by states to encourage multinational enterprises to invest in their economies by making direct investment.Characterized by geographical size and by the type of activities that may be carried on within
40、the zone.,5-28,j. Free ZonesSpecial Economic,Free Zones Characterized by Size,Free zones vary greatly in size:From large multistate regions (e.g. NAFTA)To small subzones located in a building.The largest are called free trade areas (FTAs). Comprised of two or more states that have agreed to let each
41、 others enterprises carry on trade across their borders free of tariffs and restrictions.NAFTA is a free trade area.,5-29,Free Zones Characterized by S,Free Zones Characterized by Size,State may open up its entire territory or all its sectors (e.g. Singapore).May open up certain regions (e.g. Chinas
42、 Special Economic Zones).The oldest type of zone is the free city, an entire port city that has been opened to international trade (e.g. Hong Kong).The free trade zone (or foreign trade zone) is a designated smaller area near a port.,5-30,The Foreign Trade Zone Board approves FTZs in the US. The US
43、has more than 180 FTZs and 256 subzones.,Free Zones Characterized by S,Free Zone Categories by Activities,The type of activities that take place within a free zone include:Storage（存储）Distribution（分销）Manufacturing（制造）Retailing（零售）The full range of activities are allowed in an FTZ, but may be restrict
44、ed in a subzone, such as a single retail building.,5-33,Hong Kong,Free Zone Categories by Activ,Free Zone Categories by Activities,Export processing zones (EPZs) （出口加工区）are free zones in which manufacturing facilities process raw materials or assemble parts imported from abroad and then export the f
45、inished product.For customs purposes, the materials and parts are treated as if they never entered the host country. No tariffs or duties are imposed.,5-34,Free Zone Categories by Acti,Free Zone Categories by Activities,Free retail zones (duty-free zones) areas in international airports and harbors
46、where travelers can buy goods free of taxes.Bonded warehouse（保税仓库） located at a port of entry, shippers can store goods until they clear customs（清关）.,5-35,Free Zone Categories by Activ,k. Foreign Investment Guarantees,Host countries provide guarantees to foreign investors to attract investment. Some
47、 important guarantees include:Compensation in the event of nationalization(国有化）Repatriation of proceeds upon sale of the enterpriseRepatriation of profits and dividendsRepatriation for current incomeRepatriation of principal（本金） and interest （利息）from loansNondiscriminatory treatmentStabilization of
48、taxes and regulationsConvertibility of local currency,5-36,k. Foreign Investment Guarante,k. Foreign Investment Guarantees,Constitutional provisions 1 usually deal with compensation due foreign investors in the event of:Nationalization（国有化） acquisition by a state of property previously held by priva
49、te persons or companies in a large scale.Expropriation（征收） depriving a person or company of private property. Most countries laws require that the taking be in the public interest and that “fair,” “just,” or “full” compensation be paid to the owner.,5-37,k. Foreign Investment Guarante,k. Foreign Inv
50、estment Guarantees,Foreign investment laws provide guarantees in addition to constitutional provisions:Repatriation guarantees the assurance of a host state government that foreign investors will be able to take out of the state both the investment capital they brought in and the profits they earned
