How To Get More Of It

Keeping the antenna high

Muhammad Zamir

Among the many departures made tothe multilate-ral trade regime was the introdu-ction of the investment issue in the Uruguay Round (UR). It was pushed on the Agenda of the UR by the industrialised countries. Despite the resistance of developing countries, the Final Act of the GATT included an Agreement on Trade Related Investment Measures (TRIMs). This Agreement required member countries to phase-out performance requirements, especially those relating to trade -- such as local content requirements and foreign exchange neutrality.

At the same time, besides the TRIMs Agreement, the industrialised countries made a number of attempts to widen the scope of the multilateral regime on investment beyond what is covered in Agreements on TRIMs and GATT (viz. commercial presence as a mode of delivery of services). These attempts included initiative to negotiate a Multilateral Agreement on Investment (MAI) in 1995 under the aegis of OECD. This however failed. The industrialised countries also pushed to bring a more comprehensive agreement on investment than TRIMs on the WTO Agenda after the First Ministerial Meeting of the WTO at Singapore in 1996. Attempts were also made in this regard at the Doha Ministerial Meeting in November 2001.

The question that will be asked is why was such pressure brought upon the developing countries? The reason was simple. These countries sought FDI inflows to assist host countries in the supplementing of the domestic resources of capital, technology, skills and market access and the investing countries wanted to maximise their return on their investment.

The situation, however, became complex because of several factors. Developing countries realised that they were being taken into a non-level working field. Despite assurances, to the contrary, they discovered that there was great variation in the developmental impact of different FDI projects on the host countries. Ultimately, results seemed to depend greatly upon the extent of new knowledge brought in, employment, value addition and exports generated and contribution made to the local technological capability building. It was also clear that the quality of FDI inflows varied a great deal.

In addition, a few other factors crept into the equation.
The proposals made by the developed countries in the WTO in relation to foreign investment regulation appeared to be directly against the interests of the developing countries.

The notion of 'national treatment' made it impossible for developing country governments to regulate foreign investment in a manner that was congruent with their national interests. They realised that their national interests were unlikely to coincide all the time with the interests of the foreign investors. They also perceived that the imposition of the national treatment requirement would lead to a serious reduction in the development capacity of the developing country government policies.

Secondly, they identified that the other problem with the 'national treatment' principle was that those who support national treatment for investors do not do the same in relation to migrant labourers. It was consequently argued that if they were going to support national treatment for capital, they should support it for labour as well. There was broad consensus among developing nations that if there should be no nationality for capital, there should also be no nationality for labour either.

The so-called developed country response to this anxiety on the part of the developing countries (with their free-market ideology) was paternalistic in character. They pointed out that their efforts were meant to 'protect' the developing countries from harming themselves by adopting bad policies, such as trade protection and regulation of foreign investment.

The controversial nature of the debate eventually led to the view that this issue would remain out of the ambit of multilateral discussions for the moment.

At this point it would be useful to see how foreign direct investment has been viewed in certain countries -- Germany (after the Second World War), Ireland, Japan, Korea and Taiwan. This survey will illustrate the caution with which these countries reacted to prospects of foreign investment and foreign absentee-management practices.

I am bringing up the experiences of these countries to explain why Bangladesh should be equally careful in their approach towards foreign investment within this country. We have seen that in the recent past Tata from India and some other investors from the Middle East have indicated their special interest to invest in certain strategic sectors in Bangladesh. We have also discovered that despite our best intentions, our existing regulatory mechanisms are not totally up to the required mark for safeguarding national interests.

In Germany, in the few decades following the Second World War, controlling inward foreign investment became a major new challenge.

The difficulty of hostile take-over was indirectly resolved through the presence of close industry-bank relationship as well as through the power of labour exercised through the supervisory board. This acted as a significant barrier and made FDI selective. It would be important to remember here that UK, France and Germany did not have to control foreign investment until the Second World War, as they were capital-exporting countries before that. However, when they were faced with the challenge of upsurge in American investment, they used a number of formal and informal mechanisms to ensure that their national interests were not hurt. This included foreign exchange control and regulations against foreign investment in sensitive sectors. At the informal level they also used mechanisms like restrictions on take-overs and 'voluntary restrictions' by TNCs in order to restrict foreign investment and impose performance requirements.

Ireland has arguably been the most impressive case of industrial transformation in the last two decades of the 20th century in Europe. It consciously undertook an important policy shift and a more targeted approach with regard to foreign investment within that country.

This was done keeping in mind the interests of indigenous firms. Consequently, this selective policy enabled Ireland to focus specially on such foreign direct investment that would be helpful for enhancing their existing technological capability, export marketing and skills. In other words it was intended to shift expenditures on industrial policy from supporting capital investment towards improving technology and export marketing. To attract FDI, emphasis was given on industries like electronics, pharmaceutical, software, financial services and tele-services. In other words, it was a carrot and stick policy.

Japan's restrictive stance towards FDI has been well known to economists for many decades. Up to mid-1960s, FDI policy regime remained extremely restrictive. Till 1963, foreign ownership was limited to 49 percent, while in some 'vital' industries it was banned altogether. FDI was slightly liberalised in 1967 and maximum of 50 percent ownership was permitted in 33 different industries. There was however indirect discouragement through the proviso that the Japanese partner in the joint venture must be engaged in the same line of business as the contemplated joint venture. Further liberalisation took place after 1969 and more than 100 new industries were added to the list. At this time some strategic industries like petrochemical and automobiles were considered as possible candidates for FDI liberalisation, but in the end these proposals were rejected. This highly restrictive policy stance was maintained in subsequent periods despite gradual liberalisation of FDI at the formal level. Consequently, Japan was arguably the least FDI-dependent outside the socialist bloc. Professor Ha-Joon Chang of the University of Cambridge has provided us with an interesting statistic. According to him, between 1971-90, FDI accounted for only about 0.1 percent of total fixed capital formation in that country.

In the case of Korea, things were slightly different. Korea was not hostile to foreign capital per se, but if possible, it wanted such capital to be under 'national' management. The Korean government designed its FDI policy on the basis of a clear and rather sophisticated notion of what are the costs and benefits of inviting TNCs. They also approved FDI only when they thought the potential net benefits were positive. By this they meant -- investment augmentation, employment creation, industrial 'upgrading' effect, balance of payments contribution and technology transfer. To begin with, there were policies that restricted the areas where TNCs could enter. Until as late as the early 1980s, around 50 percent of all industries, and around 20 percent of the manufacturing industries were still off-limits to FDI. Later, the government tried to encourage joint ventures, preferably under local majority ownership, in an attempt to facilitate the transfer of core technologies and managerial skills. Foreign ownership of over 50 percent was prohibited except in areas where FDI was deemed to be of 'strategic' importance. Secondly, over the next two decades, preference was always given to those investors who were more willing to transfer technologies. Thirdly, local contents requirements were quite strictly imposed, in order to maximise technological spill-overs from TNC presence. FDI was eventually drastically liberalised following the 1997 financial crisis. This was not only because of the pressure of the IMF but also because certain policy makers thought that the country needed to incorporate itself into the emerging international production network. Caution was exercised during infancy and restrictions lifted only after the child could walk unaided.

Taiwan took an almost similar attitude towards FDI as that of Korea. However, it could not afford to be restrictive for a long period. This was principally because of the relative absence of large domestic private sector firms, which could provide credible alternatives to TNCs. In this Taiwan was in between Korea and Latin America. For a long time however, Taiwan continued to restrict the extent to which foreign investors could capitalise on their technology. Secondly, local content requirements were extensively used, but it was less tough for products solely meant for exports. In this regard, their policy was strategic.

I have narrated the experiences of these countries because Bangladesh today is in the process of taking significant decisions linked to investment and future capitalisation through trade. We have to be cautious and careful in the protection of our national interests, in an era, where the factors of globalisation and liberalisation are creating serious pressures on emerging economies.

Our Board of Investment has to approach the inherent complexities related to the investment regime and trade disposition with a measure of bi-partisan interest. The future of Bangladesh rests on it.

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Muhammad Zamir is a former Secretary and Ambassador