Foreign investment is regulated through various laws and policies at national and regional levels. At the national level, countries typically have investment laws, codes, and bilateral investment treaties that define how and where foreign investors can invest. Regional economic groups also coordinate investment policies among member states. When foreign investors apply to make an investment, host countries screen proposals based on criteria like economic impacts and use of local resources/employment. Approvals may include conditions and are formalized through investment agreements. Restrictions commonly limit foreign ownership percentages in certain sectors and geographic areas.

1. FOREIGN INVESTMENT
Laws, Codes, Regulation,
Securities

2. Foreign Investment Laws and Codes
Investment Laws
Investment Codes –
Including Bilateral
Investment Treaties
Joint Ventures
National Investment
Policy
Regional Investment
Policy
Investment Applications

3. Investment Regulation – In General
• Single Owner Investment (includes individuals and entities of 10% or more control in
an enterprise not located in one’s home country
• Regulation of Investment commonly set out in investment laws and investment
codes
• Joint Ventures – Some socialist countries allow investments only in joint ventures –
the regulations are called joint venture laws
• A few states do not have general investment laws but instead put restrictions on
investment in specific sectors of the economy, such as agriculture, technology,
media, tourism and so on
• Some states have complex system of laws controlling investment, providing
incentives, governing technology, transfers, and limiting foreign exchange

4. Bilateral Investment Treaties (BITs)
• Sometimes laws are put into a “collection” and are made part of a
treaty with another state
• These treaties are most often arrangements between a developed
state and that state’sfavored developing states
• Sometimes these treaties are between developing states
themselves
• For the most part the provisions in BITs are the same as those in
the more progressive municipal codes and laws

5. MORE ABOUT BILATERAL INVESTMENT
TREATIES
• BITs constitute the most important protection of international foreign
investment to date
• BITs usually defined foreign investment in the conditions under which
investors from one state can invest in the other state – this usually means
that state parties to BITswill allow national and most-favored-nation status,
and will agree to fair and equitable treatment clauses as well as
compensation guarantees for expropriation
• Many of the BITs designate the World Bank’s International Centerfor the
Settlement of Investment Disputes (ICSID) as the arbitral body

6. NATIONAL FOREIGN INVESTMENT
POLICIES
• The form that foreign investment policies take varies from country to country
• The underlying purposes of the regulations are generally the same worldwide –
these include (1) promoting local productivity and technological development,
(2) encouraging local participation, and (3) minimizing foreign competition in
economic areas already well served by local businesses
• To achieve these purposes, investment laws establish basic policies for
screening and regulating foreign investment applications – these fall into three
categories: (1) encouraging investments through incentives and minimal
regulation; (2) use investment incentives but also require local participation
quotas; (3) allow foreign investment subject to local screening and supervision

7. REGIONAL INVESTMENT POLICIES
• Nations in a particular geographic region may collaborate on and agreed
to general standards for investment in the region region – the
ASEAN(Association of South East Asian Nations) is one such region
• An example of incentives in this regional investment policy can be
viewed in Exhibit 5-3 on page 228-229 of the Text
• The United States, Canada, and Mexico not only created an investment
alliance or packed, but entered into a formal trade agreement ( NAFTA)
the North American Free Trade Agreement

8. SCREENING FOREIGN INVESTMENT
APPLICATIONS
• Most (but not all) countries require foreign investors to: (1)
register with the government and (2) obtain governmental
approval of their proposed venture.
• Commonly, foreign investors register and file proposals with a
single central agency set up specifically to facilitate foreign
investments– not all countries use such an agency
• The central agency may itself conduct the screening or it may
simply coordinate the process

9. PROPOSALS REQUIRING SCREENING
• The criteria for determining which proposals need screening vary
greatly from country to country.
• A few states may subject all foreign investment to some form of
screening
• Others limit their reviews to proposals seeking investment
incentives, to those that involve a certain percentage of foreign
investment, or to those whose projected investment exceeds a
certain amount of capital

10. PROPOSALS REQUIRING SPECIAL SCREENING
• In many countries, certain kinds of foreign investment
proposals require the approval of specialized agencies
• Commonly, investments in natural resource-based
industries (e.g., hydrocarbons, minerals, and for a
street) need the approval of agencies that formulate
special criteria tailored to the specific requirements of
the industries involved

11. TYPICAL INFORMATION TO BE INCLUDED WITH
INVESTMENT REGISTRATION
• (1) The industry to be established in the nature of the product to be produced
• (2) A financial plan, showing the amount of investment in external and local capital
• (3) a production scheme showing the annual volume and value of the production
• (4) a services scheme showing what services will be created and their volume and value
• (5) the owners, the management structure, and the relative share of local and foreign control
• (6) machinery and equipment needed, and their sources and cost
• (7) and import and export scheme showing the expected volume of imports and exports
• (8) the extent that local inputs (including raw materials) will be used and an estimate of the local value added
• (9) and employment scheme, including a program for training nationals to operate and manage the enterprise
• (10) a marketing study of the domestic and export market
• (11) product pricing and projected profits and rate of return
• (12) the proposed location of the industry

12. EVALUATION CRITERIA
• Impact on the balance of payment
• The number of jobs created
• The impact of technical know
• -how and the training program for indigenous employeesThe impact on the local market
• (including any possible negative consequences for already established national
enterprises)The contribution to the development of law less economically developed zones or
regions
• The ratio between foreign and national capital contribution
• The export diversification and stimulation, and import substitution
• The use of national inputs and components in the manufacture of the productThe effect on
price levels and the quality of the product

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

14. APPROVAL OF FOREIGN INVESTMENT
APPLICATIONS
• When the screening process is complete the host state will either
approve or disapprove a foreign investors proposal
• If the proposal did not ask for the host to grant any incentives,
and if the host does not insist upon any concessions from the
investor, the approval will often be in the form of a letter from
the appropriate agency
• If the host state grants and incentive or the investor agrees to
some concession, the arrangement will be set out in a formal
investment agreement – this agreement will be governed by the
host states contract laws, and any disputes will be resolved in
that states courts unless the parties agree otherwise

15. LIMITATIONS ON FOREIGN EQUITY
• Foreign investment laws frequently forbid or limit the
percentage of equity that foreigners may own in local
businesses (e.g., in India, foreign ownership is generally
limited to 40% and in Mexico to 49%)
• Notwithstanding these general restrictions, exceptions
are occasionally made for the purpose of attracting
capital to selected industries and sometimes as a matter
of administrative discretion

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

17. TYPICAL “CLOSED” SECTORS
• Public utilities
• Vital or strategic industries
• Industries that are sufficiently developed
• Medium or small-scale industries that can be developed by
domestic entrepreneurs

18. RESTRICTED SECTORS
• Many countries limit the percentage of foreign investment allowed
in certain economic sectors – this is done to limit the influence
that foreigners have been domestic political, social, and economic
affairs
• Examples: Australia limits foreign investment in its radio and
television companies to 20%; Canada restricts the amount of
equity ownership that foreigners may have and television
broadcasting; local and trust companies; fishing; newspapers;
bank; and federal oil, gas, and mining leases

19. FOREIGN PRIORITY SECTORS
• Foreigners are often encouraged to invest in sectors where local
development resources are limited, where foreign investment will
increase the number of local jobs, and where the foreign export
trade will grow.
• Developing countries, especially, allow foreign capital
participation in pioneerindustries and in industries that are
capital intensive.e, use advanced technology, increase
employment, our export oriented, and have products that have a
high degree of local value added

20. GEOGRAPHIC LIMITATIONS
• A few countries limit the geographic areas in which foreign
investors may conduct business or own land (as an example
Argentina, restricts foreign ownership of land and businesses
adjacent to its land and ocean front tears; Chile does not allow
foreigners to participate in coastal trade, except for very small
vessels)
• Some countries at times for bid foreign investment in their entire
territories – the right of the country to restrict foreign investment
in particular geographic areas is respected by other states as an
expression of the state’s sovereign authority.