Investment facilitation in the Asia-Pacific region

Investment facilitation in the Asia-Pacific region

By Bijit Bora

SYDNEY (JP): Foreign investment has been a catalyst for
economic growth and integration in the Asia Pacific region. Yet
there has been a lack of a formal multilateral mechanism. The
depth of economic integration in the region is increasing the
pressure on the region to consider a regional institutional
mechanism to facilitate trade and investment.

There are a number of reasons, in addition to the general
argument for institutional integration, put forth to build the
case for a regional investment instrument. First, it is
acknowledges the important role that foreign investment can play
in ensuring economic growth such as capital formation and the
transfer of technology and managerial expertise. Second, it
ensures that the sequence of unilateral initiatives by Asia-
Pacific countries continue in the future. In that sense these
policies can be "locked in" so that they would be difficult to
change in the future. Third, the dangerous trend initiated by
NAFTA and CUSTA to liberalize foreign investment in a
discriminatory fashion needs to be addressed and can be addressed
in a regional forum. The arguments against this type of
liberalization are similar to the hub and spoke fears associated
with regional trade liberalization.

Against this background the Pacific Economic Cooperation
Council (PECC) began to work on the concept of a regional
investment code in May 1992. The code was designed to encourage
investment in the region by advancing a set of principles that
economies could adhere to on a voluntary and non-binding basis.

The group was careful to argue that such a step would be a
pragmatic start towards achieving a binding regional code.
In October 1993 the First Report of the APEC Eminent Persons
Group recommended APEC Leaders to consider a set of non-binding
investment principles consistent with the PECC Investment Code.
At the inaugural Leaders Meeting in Seattle the APEC Leaders
instructed their Senior Officials to deliver a set of investment
principles for their consideration when they meet for a second
time in Bogor the following year. Since then an Investment
Experts Group has been established under APEC which began the
hard work of negotiating the principles.

What will be in the non-binding Asia-Pacific Investment
Principles (APIP) is yet to be revealed, but in line with the
PECC code it will probably contain four main parts. A set of
basic principles to govern international investment relations,
codes of conduct for governments and foreign investors and a
dispute settlement mechanism. Let us consider each of these
sections.

The basic set of international investment relations
principles are transparency, national treatment and non-
discrimination.

Transparency ensures that policies, laws, regulations and
procedures relating to foreign investment are accessible,
understandable and visible. National treatment applies to common
treatment of foreign and domestic investors in like situations.
This can apply to both pre- and post-establishment situations.

Non-discrimination, of course, is the central issue facing
APEC. It is more commonly known as most-favored-nation status and
ensures equitable treatment of foreign investors regardless of
their country of origin. This principle is the cornerstone of the
GATT and fundamental to the concept of "open regionalism".

The section on codes of conduct by host governments can be
expected to contain provisions covering investment incentives,
performance requirements, expropriation, repatriation, double
taxation, capital export barriers and the entry of personnel. The
basic principle being that host governments will limit their use
of policies listed under each provision subject to an exclusion
clause. Of course, the nature of the exclusion has been the
subject of much discussion. For some issues the exclusion clause
is not contentious such as expropriation. However, for other
issues such as investment incentives and performance requirements
many governments were unwilling to concede their sovereignty and
restrict their use. Such a response is understandable since
governments want to retain control over the attractiveness of
their region as a host to foreign investment, but also want to
ensure that their constituents receive maximum benefits.

Incentives and performance requirements allow a host
government this flexibility, but to the detriment of the global
trading and investment regime.

The section on provisions governing the behavior of foreign
investors is also a subject that generates a lot of debate. On
one side of the debate is the suggestion that such a provision
assumes foreign investors will behave in an anti-competitive and
anti-social fashion beyond the domestic laws and regulations of
its hosts. The other side of the debate argues that such a
provision only encourages foreign investors to abide by domestic
laws and acknowledge the concessions they have obtained from
their hosts. Developing nations are in favor of such as a
provision since it exhorts foreign investors to abide by national
laws and regulations. It also highlights the important point that
governments are conceding their right to impose policies on
foreign investors and that in exchange foreign investors should
be willing to behave as a good corporate citizen.

As for dispute resolution, there is a distinct possibility
that APEC may develop a regional dispute resolution mechanism.
Until such a time the unique nature of investment disputes is
that it recognizes the needs of state-firm disputes. There are
third party dispute settlement mechanism, but not all APEC
members subscribe to their services. Therefore, the dispute
settlement provision will not specifically advocate a mechanism,
but will encourage disputes to be solved quickly and efficiently
and where feasible the parties engaged in the dispute should
consult third party mechanism.

The critics of APIP point to the weakness of having it non-
binding. To counter these critics each government will have to
embark on a sales mission and indicate to their business sector
and to the Asia-Pacific business community that APIP is a first
pragmatic step towards developing a rules based regional
investment agreement. The sales mission will also have to clarify
how a non-binding approach facilitates investment flows and also
indicate a mechanism by which the non-binding principles can be
converted into a binding code. This task will have to be taken on
by the private sector so that the APEC Leaders will be encouraged
to continue their work on investment facilitation.