Download The Influences of WTO to International Direct Investment

The Influences of WTO to International Direct Investment
Chen Xuezhong1,2
Yuan Xuemei2 Li Guanghong2 Li Tongning2
1. School of Management and Engineering, Nanjing University, P.R.China, 210093
2.School of Management, Ji’nan University, P.R.China, 250022
，
Abstract: In 1990s International Direct Investment developed more rapidly than ever. The investment
status of developed countries improved, but the development was not balance. On the other hand, the
investment status of developing countries declined, and their domestic direct investments had more
differences. As an international economic organization, WTO constituted Agreement on Trade-Related
Aspects of Intellectual Property Rights, General Agreement on Trade in Services, Agreement on
Trade-Related Investment Measures and Agreement on Subsidies and Countervailing Measures. These
documents have played indispensable roles to the development of international direct investment.
Key words:
1
WTO, agreement, international direct investment, influence
Introduction
The goal of WTO agreements is to reduce various distortions and impediments to international
trade, ensure the validity of market access through establishing the agreement framework with higher
transparency. Therefore the agreements inevitably come down to the issues related to investment. But
the present WTO system only concerns part of these issues. The influence on investment of some
agreements or conventions is still unclear. The following agreements have more influence to
international direct investment: Agreement on Trade-Related Aspects of Intellectual Property Rights,
General Agreement on Trade in Services, Agreement on Trade-Related Investment Measures and
Agreement on Subsidies and Countervailing Measures. Following is the deeper analysis of the
influences.
2 Agreement on Trade-Related Aspects of Intellectual Property Rights and the
Development of International Direct Investment
Agreement on Trade-Related Aspects of Intellectual Property Rights makes the protection of
，
intellectual property rights become an indispensable part of multilateral trade system this agreement not
only requires the national treatment and the most-favored-nation treatment, but also provides the process
of dispute settlement and the lowest protection standard. From the angle of economic trade, the
intellectual property right can be divided into three categories in Agreement on Trade-Related Aspects of
Intellectual Property Rights. a. Knowledge protection and prevention from abuse by companies, such as
patents, layout-designs of integrated circuits, undisclosed information. B. Protection of expression forms
of words and culture and the investment to their disseminations, such as copyright and related rights. c.
The intellectual property rights which represent the quality of products by indications in order to reduce
the information dissymmetry of some producers and consumers, such as trademarks, industrial designs
，
and geographical indications. In the fields of technical innovation the result of intellectual property
right is patent. The purpose of patent protection is to promote research and development activities, we
cannot restrict the use of achievements without patent protection. One of the main reasons of copyright
and patent right is to prevent the use of new knowledge and technology without limit. Its influence to
：
investment is as follows
(1) The protection of intellectual property right will rapidly promote R&D investment and the
investment of new production equipment and technology. Thus the effective actualization of
“Agreement on Trade-Related Aspects of Intellectual Property Rights” can accelerate the investment of
research and development on new technology, new product and the production technical improvement in
both developed and developing countries.
(2) Agreement on Trade-Related Aspects of Intellectual Property Rights may prevent some
companies from investing to the imitation commodities and pirated productions, and the decrease of
investment opportunities may also cause capital flight. Considering that the multinational corporations
take different ways to market access, the investment to imitation commodities can be replaced by
international direct investment or the permitted domestic factories. This could stimulate the transfer of
intangible assets to host nations, but the knowledge in the intangible assets will possibly not spread.
(3) If the production of imitation products is substituted by imported products, the direct result is
the imbalance of the balance-of-payment in the nation. With the decrease of local products, the change
in trade volume, the lease expense and commission charge will bring the deterioration of the balance of
payment, so the developing nations need absorb more foreign capital But the production of imitation
commodities can continue under new admission agreements, thus the effect to the balance of payment
will be reduced.
(4) The implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights
may cause temporary market monopoly from the intellectual property right holders and the following
rise of commodity price. Analyzing from the elasticity of substitution and the price elasticity of demand,
the rise of price will bring the increase of consumer expenditure and have negative effect to the
economy development of some nations.
(5) The implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights
will also make the corporations probably not enter the market of host nations through international
direct investment. Because in the nations without enough effective protection to intellectual rights,
foreign corporations have to depend on international direct investment if they want to enter their
markets, in order to insure the ownership of information and partly achieve the substituted
implementation of intellectual property right by establishing more close relationship with consumers
through market sales. International direct investment is very important to the market admission of
knowledge and skill intensive products. For example, After Brazil abolished the patent of medicine
products in 1959, the international direct investment towards Brazil increased rapidly. During 1971 to
1979, the international direct investment increased 600% valued by the USD then. In 1980, the medicine
market share of foreign corporations was 71% in Brazil. If the implementation of the Agreement on
Trade-Related Aspects of Intellectual Property Rights is strengthened, the owners or holders of
intellectual property rights maybe enter the market of the host nation through license production or
export instead of international direct investment. This will have some impact on the development of
international direct investment.
In a word, the implementation of the Agreement on Trade-Related Aspects of Intellectual Property
，
Rights awaits further research at present it can promote the R&D investment and change the investment
environment of the those nations which absorb foreign capital so as to attract the inflow of foreign
capital.
3
The Influence of General Agreement on Trade in Services
In 1990s, the importance of service industries and trade in service stood out increasingly. The
General Agreement on Trade in Services extended the basic principles under multilateral trade system to
services, including all the services except government procurement, and regarded factor mobility service
as the target of liberalization. The definition of trade in service not only deals with the cross-border
service consumption and supply, but also relates to the service providers of one member nation who
provides service through commercial ways in any other Members. Therefore, this situation also relates
to the liberalization and ruless about international direct investment in service industries. General
Agreement on Trade in Services requires every Member to comply with the principles of national
treatment and most-favored-nation treatment. Because this agreement deals with 12 categories 155
divided service sectors, so it will certainly have significant influence to international direct investment
and the investment law.
(1) The General Agreement on Trade in Services promotes the liberalization of services in trade,
especially all the Members of WTO joined this agreement and carried out liberalization in varying
，
degrees this provided a big market for the multinational corporations in service industry and stimulated
their international direct investment in service industry and made some contributions to the economy
development of the developing countries. The main reasons are: a. The multinational corporations in
service industry invest vastly to some private companies which can provide basic facilities, and the
，
modernization of service facilities such as public facilities transportation, telecommunication, finance
and insurance would greatly improve the investment environment in the developing host nations and
attract more international direct investment. b. Since 1990s,the service industry of many developed and
developing nations have carried through the reformation of privatization, this reformation was beneficial
to the inflow of foreign capital and the improvement of management efficiency as well as the economic
development of developing countries.
(2) The implement of the agreements of WTO can lead the liberalization of commercial trade, and
the liberalization of trade in service is beneficial to the international direct investment. Because these
， stimulate more international direct
investments tend to increase the possibility of market access
investment. At the same time, international direct investment would aggravate the competition in host
nations and compel domestic companies to increase the domestic and overseas investment.
(3) The General Agreement on Trade in Services stipulates when the capital is required to provide
service, the capital must freely transfer among nations, this can certainly accelerate international direct
investment. For example, the footnote of Article 16 about market access indicates that “If a Member
undertakes a market-access commitment in relation to the supply of a service through the mode of
supply referred to in subparagraph 2(a) of Article 1 and if the cross-border movement of capital is an
essential part of the service itself, that Member is thereby committed to allow such movement of
capital.” This treatment obscures the distinction between capital and floating capital transaction.
Because the international transfer of capital is absolutely necessarily to the trade in service. But from the
other point of view, this represents a kind of capital flow which has nothing to do with current account,
so it has positive influences to the liberalization of capital flow.
(4) Because various kind of capital flow have higher substitution each other, the cross-border
investment may increase further, where the increase of investment amount depends on the actual
undertakings of each Members. The final liberalization of capital flow will help the global saving
distribute efficiently in the world.
4 The Influence of Agreement on Trade-Related Investment Measures to the
International Direct Investment
The Agreement on Trade-Related Investment Measures forbids Members to carry out some
investment measures such as requirements of local component, trade balance, import quota, foreign
exchange balance and domestic sales related to the export restrictions. This agreement also requires the
WTO members to observe the principle of national treatment when they deal with the investment
measures. But the prohibited investment measures in the Agreement on Trade-Related Investment
Measures are only part of many investment measures, those measures which are not forbidden by this
agreement are still used by the Members, and there are substitutions between the forbidden and
permitted investment measures. Therefore, the Agreement on Trade-Related Investment Measures has
two sides influence to the international direct investment.
(1) The implement of the Agreement on Trade-Related Investment Measures requires developed
and developing nations to carry out more positive stimulations to the investment, in other words, to
create favorable
investment environment for domestic and overseas investment
investment opportunities for fair competition
， provide
the
， not to distort the flow direction and competition of
investment by government policies. It is not beneficial to those developing nations who attract foreign
investment by adopting favorable taxation and expenses, this may has negative affect to the inflow of
international direct investment.
(2) The prohibited investment measures request the fulfilling of obligations to host nations, this can
lead the increase of investment to host nations, the requirement of local content is a great barrier to the
international direct investment, especially to those knowledge-intensive and skill-intensive companies,
because the local input (such as capital, raw materials, parts) counts for nothing or unnecessary to the
investors of multinational corporations. So the prohibition of some investment measures which have
requirements of “actual performance” such as the requirement of local content and foreign exchange
balance will attract the international direct investment.
(3) The increase of trade volume of the input which substitutes for the local procurement will result
in the increase of foreign direct investment from the nations of capital export.
(4) The prohibited investment measures in Agreement on Trade-Related Investment Measures are
limited, and they are confined only to the investment measures of trade in goods, there are still many
unprohibited investment measures, if the governments widely use those investment measures without
any restrictions by the other rules of WTO, and this change can make international investors have
insecurity to the investment policy of the nation and lose confidence to the policy, finally the
international direct investment will be postponed.
In conclusion, the implement of the Agreement on Trade-Related Investment Measures has various
influences to the nations with different investment policies. New investment policies will be issued
when the Members carry out this agreement, some of the policies will promote international direct
investment and others may restrict the further development of international direct investment.
5 Agreement on Subsidies and Countervailing Measures and the Development
of International Direct Investment
In Article 1 of the Agreement on Subsidies and Countervailing Measures, a subsidy shall be
deemed to exist if there is a financial contribution by a government or by any public body within the
territory, or there is any form of income or price support in the sense of Article XVI of GATT 1994 and
a benefit is thereby conferred, a subsidy shall be deemed to exist. This is the first time for the
multilateral trade system based on GATT to clearly definite “subsidy”. But this agreement can only
apply to the trade in goods, it can not be used in trade in services. Therefore, this agreement will have
effects on the international direct investment in industries except service industry, the influence on trade
in services is limited.
Agreement on Subsidies and Countervailing Measures divided subsidies into three parts, the first is
“prohibited subsidies”, the second is “actionable subsidies”, the third is “non-actionable subsidies”
，
including some commonly used assistance, assistance for research and development, assistance to
environmental protection and special assistance to disadvantage regions. This agreement improved the
multilateral law system related to subsidies, but we should see that some Members may enhance their
competition power by fully using “non-actionable subsidies”, this kind of subsidies will become actual
“investment yield”
；At the same time, WTO Members may farthest make use of “actionable subsidies”
and avoid being appealed to dispute settlement procedures by other Members as far as possible.
Furthermore, there may be conversions between “actionable subsidies” and “non-actionable subsidies”.
These may result in economic and trade policy uncertainty of WTO Members and affect the investment
environment as well as international direct investment. Considering from the point of obligation
requirements, the influences of this agreement to international direct investment are as follows:
(1) The gradual cancellation of the prohibited subsidies will have positive effect to the economic
development of Members. With the increase of economic benefits, international direct investment will
also increase.
(2) This agreement divided subsidies into three parts, different part of subsides have different
treatments, if the investors can anticipate the change in the long run, the specific subsidies will lead the
increase of international direct investment. But as an encouragement investment measure, subsidies have
inside instability, it will affect the decisions of the investors, especially affect the international direct
investment to developing countries.
(3) Since the commonly used subsidies are still carried out, the governments may substitute them
for the specific subsidies which are specific to an enterprise or industry or group of enterprise or
industries. It certainly will add financial burden of the governments. The imbalance or deterioration of
financial revenue and expenditure shall have negative influence to private investment and economic
development. Originally developing countries have many difficulties in raising capital, and this
particular situation will cause more financial burden on the governments.
(4) Because this agreement prohibits and requires to phase out export subsidies, it may decrease the
，
export which used to compete by subsidies the balance of trade will deteriorate, as a result, the relevant
Members need the capital import so as to improve the imbalance of the balance-of-payment and increase
the foreign capital inflow. In the long run, the elimination of the export subsidies may affect the
production structure of import and export commodities, but have few influences to the balance of trade.
(5) The implement of this agreement mainly depends on the encouragement investment measures,
especially for those nations and regions which encourage international direct investment by the use of
subsidies, the international direct investment in their nations may be negatively affected by the
cancellation or limitation of these subsidies and then decrease.
(6) The subsidy obligation of this agreement shall not apply to agricultural subsidy and service, and
there had some preferential clauses for developing country Members. The least-developed country
Members and those Members whose GNP per capita is below US$1000 shall not be restrained by the
agreement. These Members shall phase out their export subsidies within the eight-year period (i.e. until
2002); Transformation economy Members shall phase out the export subsidies within a period of seven
years; Developing country Members, transformation economy Members and least-developed country
Members shall respectively phase out the local content subsidies within periods of five years, seven
years and eight years from the date of entry into force of the WTO Agreement. In addition, the
privatization subsidies are deemed to “actionable subsidies”. Thus in the short term, the influence of this
agreement to international direct investment in developing country Members is limited. But in the long
term, the change of subsidy policies shall increase or decrease the investment to the Members who
provide subsidies. The definition and classification of subsidies improve the farsightedness of the
investment environment and promote international direct investment.
In conclusion, the influence of Agreement on Subsidies and Countervailing Measures to
international direct investment depends on the subsidy policies each Member used to apply and their
changes.
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