FDI Regulations Database Indicators of foreign direct investment regulations

Presentation for the Evian Group @ IMD

Augusto Lopez-Claros and Tanya Primiani Global Indicators & Analysis Department, World Bank Group

May 14, 2013

Summary

Overview Investing across sectors Starting a foreign investment Arbitrating and mediating disputes Employing skilled expatriates Converting and transferring currency Steps for creating a new indicator set

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Presentation of FDI Regulations Database 2012

Summary Overview

Objectives

FDI Regulations Database (formerly know as Investing Across Borders) is a World Bank Group initiative presenting indicators on countries’ laws, regulations, and practices affecting how foreign companies:

 Respond to information requests for benchmarks on FDI regulations by governments, private sector, development partners and academics.

 Invest across sectors.  Start foreign investments.  Arbitrate commercial disputes.

 Stimulate reforms.

 Convert and repatriate currency.

 Inform reform advisory work, research and analysis.

 Employ skilled expatriates.

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 Facilitate policy dialogue by identifying good practices and sharing of reform experiences.

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FDI Regulations Database 2012: Country coverage (105 countries across 7 regions) Economy coverage  Latin America and the Caribbean (LAC – 15 economies): Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Peru, Venezuela R.B.  Sub-Saharan Africa (SSA – 24 economies): Angola, Burkina Faso, Burundi, Cameroon, Chad, Côte d'Ivoire, Democratic Rep. of Congo, Ethiopia, Ghana, Kenya, Liberia, Madagascar, Mali, Mauritius, Mozambique, Nigeria, Rwanda, Senegal, Sierra Leone, South Africa, Sudan, Tanzania, Uganda, Zambia  East Asia and the Pacific (EAP – 13 economies): Brunei Darussalam, Cambodia, China, Hong Kong (China), Indonesia, Malaysia, Philippines, Papua New Guinea, Singapore, Solomon Islands, Taiwan (China), Thailand, Vietnam  Eastern Europe and Central Asia (ECA – 21 economies): Albania, Armenia, Azerbaijan, Belarus, Bosnia and Herzegovina, Bulgaria, Croatia, Cyprus, Georgia, Kazakhstan, Kosovo, Kyrgyzstan, Macedonia FYR, Moldova, Montenegro, Poland, Romania, Russian Federation, Serbia, Turkey, Ukraine  Middle East and North Africa (MNA – 9 economies): Algeria, Egypt Arab Rep., Iraq, Jordan, Morocco, Saudi Arabia, Syria, Tunisia, Yemen Rep.  South Asia (SAR - 6 economies): Afghanistan, Bangladesh, India, Nepal, Pakistan, Sri Lanka

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 High-income OECD (17 economies): Australia, Austria, Canada, Czech Rep., France, Germany, Greece, Ireland, Italy, Japan, Korea Rep., Netherlands, New Zealand, Slovak Rep., World Bank Group THE WORLD BANK Multilateral Investment Spain, United Kingdom, United States Guarantee Agency

FDI Regulations Database 2012: Topics covered

Investing across sectors Foreign equity ownership restrictions in:

Starting a foreign investment Rules and process of starting a foreign business

Primary sectors: -Mining, oil and gas -Agriculture and forestry

Manufacturing: -Electronics manufacturing -Food processing -Manufacturing of basic chemicals

Services: -Telecommunications: fixed-line and mobile infrastructure and service provision - Banking -Insurance -Accounting / auditing -Transportation: rail, road (truck), air, water (internal waterways), port operation -Electricity: generation (including renewable), transmission and distribution -Water distribution -Waste management and recycling -Courier services -Hotels / Accommodation -Media: newspaper publishing and TV broadcasting -Higher education

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Land-related legal rights and information access Rules for Special Economic Zones (pilot/research section)

Arbitrating and mediating disputes Strength of arbitration and mediation laws Strength of arbitration and mediation institutions Extent of judicial assistance Ease of arbitration process Ease of enforcement process

Hiring skilled expatriates

Converting and transferring currency

Rules and process of employing skilled expatriates

Rules for currency convertibility and repatriation

Process of appealing a rejected application for a work permit

Process of obtaining and servicing a foreign loan, and repatriating dividends

Rules and process for obtaining a spousal work permit

Restrictions on holding bank accounts

Restrictions on the membership of the Board of Directors

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FDI Regulations Database 2012: Methodology

FDI Regulations Database presents indicators of laws and regulations (de jure indicators) and their implementation (de facto indicators). They are not indicators of company or investor perception. More than 200 individual data points are presented for each country.

Limited focus on 5 thematic areas of FDI policy*. Data is based on a hypothetical case study assumptions tailored for each of topic in order to ensure comparability of responses across countries. Surveys developed in consultation with Expert Consultative Groups (ECGs), whose 50+ members include specialists from UNCTAD, OECD, UNCITRAL, leading universities, etc. FDI Regulations Database relied on a survey of over 3,500 expert respondents in the 105 economies covered. Respondents include primarily investment promotion institutions, lawyers, accounting and consulting firms, chambers of commerce, and law professors. FDI Regulations Database does not rank countries, but benchmarks them against a regional average score. For a comprehensive list of the project’s limitations, including topic-specific ones, please visit our website: iab.worldbank.org * Some aspects of the business environment that matter to investors (such as security, macroeconomic stability, market size, corruption) are not measured by the indicators.

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FDI Regulations Database 2012: How to use it?

FDI Regulations Database 2012 focuses on regulatory issues related to Foreign Direct Investment and that could be reformed by governments. In that regard, it identifies common areas for regulatory reform that could be considered across economies. Initially: Investing Across Borders, with a report published in 2010 with data on 85 countries and scoring. Now, FDI Regulations Database 2012 consists in on-demand reports and contributions: South Asia report, May 2012 (at the request of the World Bank South Asia Office of the Chief Economist). Bangladesh Report, June 2012 (at the request of the World Bank South Asia Poverty Reduction and Economic Management (PREM) network as part of a larger Diagnostic Trade Integration Study on Bangladesh). Special report on Brazil, Chile, Colombia, Mexico, and Peru, March 2012 (at the request of the Andean Development Cooperation). Contributions to reports/studies on specific countries/regions: Greece, Tajikistan, APEC, ECA, MENA.

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Presentation

Investing across sectors Starting a foreign investment Arbitrating and mediating disputes Employing skilled expatriates Converting and transferring currency Steps for creating a new indicator set

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Investing across sectors: Topic overview

Investing Across Sectors indicator measures ownership restrictions on foreign direct investment across 32 sectors, grouped into 10 sub-sector groups for presentation and analysis purposes: Primary Sectors (agriculture, forestry, mining, oil and gas) Manufacturing (food processing, manufacture of basic chemicals and light manufacturing) Electricity (electric power generation (biomass, solar, wind) transmission and distribution) Transport (freight rail transport, freight transport by road, internal waterways freight transportation, international passenger air transport, port operation). Telecom (fixed-line telecommunications infrastructure and services and wireless/mobile telecommunications infrastructure and services) Media (newspaper publishing and television broadcasting) Banking Insurance (life insurance and health insurance) Services (waste management and recycling, water distribution, courier activities, accounting, bookkeeping and auditing services; tax consultancy and higher education). Tourism (Accommodation services).

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Investing across sector: Data for 2012 Foreign equity ownership index (100 = no ownership limit)

100 90 80 70 60

96

96

94

50

93

89.2

40

85

84

30

77

20 10 0 Eastern Europe & Central Asia (21)

High Income OECD (17)

Sub-Saharan Africa (24)

Latin America & the Caribbean (15)

Global Average

South Asia (6) East Asia and Middle East & the Pacific (12) North Africa (9)

Economies in Eastern Europe and Central Asia and the High Income OECD regions have fewer equity restrictions on FDI ownership, while economies in East Asia and the Pacific and the Middle East & North Africa regions are among the most restrictive. Worldwide, there are hardly any restrictions on FDI ownership in manufacturing and tourism. In contrast, restrictions on foreign ownership are strictest in media, transportation, electricity and telecommunications industries. Particularly, the most restricted sector among the 32 sectors covered is media with 48 economies imposing restrictions in the television broadcasting and 32 in the newspaper publishing sector.

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Presentation Investing across sectors

Starting a foreign investment Arbitrating and mediating disputes Employing skilled expatriates Converting and transferring currency Steps for creating a new indicator set

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World Bank Group Multilateral Investment Guarantee Agency

THE WORLD BANK

Starting a foreign investment: Topic overview

Starting a foreign business: Procedures to establish a wholly foreign-owned subsidiary (number) Time (days) required to go through these procedures Ease of establishment index: evaluates the characteristics of the regulatory regimes for business start-up (expedited procedures, foreign investment approval, online services, minimum capital requirements)

Accessing industrial land: Land regime: measures the different types of land holding available to foreign companies Industrial land rights: evaluates the security of legal rights attached to the lease of industrial land by foreign companies (whether the land can be subleased, subdivided, mortgaged, or used as collateral, etc.) Access to land-related information: measures the ease of access to land-related information through land administration systems

Pilot section: Special Economic Zones (SEZ): Existence of a legal framework for SEZs; types of zones available to foreign investors; establishment procedures inside zones; incentives offered to foreign companies established inside the zones. 12

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Starting a foreign investment: Data for 2012

In almost every economy measured, starting a foreign company takes longer and requires more steps than starting a domestic company. Of these additional procedures required, the legalization or authentication of the parent company’s incorporation documents abroad is the most common one (81% of the economies measured require it). This procedure has been made easier since 1961 with the Hague Apostille Convention. In OECD economies, the additional procedures required of foreign businesses add only 2.5 days on average to the total start-up time. In South Asia, they add 21 days on average. Hong Kong and Australia have the fastest process in the world for starting a foreign business. Also: Special Economic Zones (SEZs) are generally not more attractive than the rest of the economies territories for foreign start-ups. In every South Asia economy with SEZs, foreign businesses are established mostly outside rather than inside the special zones. More than half of OECD economies no longer have SEZ programs. Afghanistan is the only South Asia economy without SEZs.

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Presentation Investing across sectors Starting a foreign investment

Arbitrating and mediating disputes Employing skilled expatriates Converting and transferring currency Steps for creating a new indicator set

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Arbitrating and mediating disputes: Topic overview

An effective commercial arbitration regime matters for foreign investors. Complex commercial contracts require reliable, flexible dispute resolution mechanisms. Commercial arbitration (and other alternative dispute resolution mechanisms) give commercial parties considerable autonomy to create systems tailored to their disputes. The characteristics of arbitration – confidentiality, flexible procedures, party autonomy and easy enforcement – cater to businesses’ concerns in dispute resolutions.

Foreign investors often prefer to have alternatives to court litigation. Domestic litigation can be slow and ineffective. Even if courts treat foreign companies fairly, domestic firms have an advantage over foreign investors, as they are more familiar with court procedures and can use their own lawyers and language. Foreign investors views well-established, predictable arbitration regime as mitigating risk by providing legal security to investors (including assurance of contract enforcement rights, due process and access to justice).

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Arbitrating and mediating disputes: Data for 2012

All economies, except Ethiopia and Montenegro, recognize arbitration as a tool for resolving commercial disputes. About half the countries covered have laws that distinguish between domestic and international arbitration. The Czech Republic and Malaysia are among the 17 economies where businesses can conduct arbitration proceedings online. In most economies in Latin America and the Caribbean, foreign lawyers without local bar membership are not permitted to represent parties in arbitration proceedings. There are no functional arbitration institution in Pakistan or Brunei Darussalam, while Nicaragua and Poland have many active institutions. Many countries in Eastern Europe and Central Asia have adopted special rules to ensure fast enforcement proceedings of arbitral awards, such as establishing special authorities outside the judiciary to issue writs of execution.

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Presentation Investing across sectors Starting a foreign investment Arbitrating and mediating disputes

Employing skilled expatriates Converting and transferring currency Steps for creating a new indicator set

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World Bank Group Multilateral Investment Guarantee Agency

THE WORLD BANK

Employing skilled expatriates: Topic overview Countries need to prepare to face challenges of demographic shifts and a fast-changing labor market environment by defining adequate skilled migration policies as a complement to skills gaps and low employability. Companies increasingly take the ease of hiring foreign skilled labor into account with regard to their location decisions. The Employing Skilled Expatriates topic measures the current immigration regime with regard to skilled expatriates by gathering data on: The application process of a temporary work permit (procedures and time), The restrictions and limitations to hiring foreign skilled expatriates, The attractiveness of the immigration regime to foreign skilled expatriates (the ability to secure a permanent residency, obtain citizenship and the existence of a spousal work permit).

Data analysis highlights areas where countries can improve their skilled immigration regime so as to attract foreign skilled labor, FDI and support competitiveness of their economy.

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Employing skilled expatriates: Data for 2012

Globally, the average time needed to obtain a Temporary Work Permit (TWP) is 8 weeks. In Singapore and the Republic of Korea, which are recognized as globally good performers, it only takes 1 week to obtain a TWP. Economies where it takes the longest time to obtain a TWP are Saudi-Arabia (with an average of 26 weeks), Greece (24 weeks) and Nepal (23 weeks).

Regarding the application process to obtain a TWP: In 80% of the surveyed economies, it still needs to be done in person and manually. Only 10% of the surveyed economies have a fast-tracking option for TWP. Only 20% of the surveyed economies have a One-Stop Shop for TWP. 50% of the surveyed economies impose a labor market test on employers.

Only few countries offer a Spousal Work Permit. 25% of the countries surveyed do not allow the transition from a temporary work permit to permanent residency and/or citizenship.

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Presentation Investing across sectors Starting a foreign investment Arbitrating and mediating disputes Employing skilled expatriates

Converting and transferring currency Steps for creating a new indicator set

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Converting and transferring currency: Topic overview An open foreign exchange regime, with no restrictions on converting and transferring currency abroad, is an attractive aspect of the foreign investment climate Foreign investors confirm this: 40 % of global executives identify transfer/convertibility restrictions as the most concerning type of political risk Converting and Transferring Currency addresses these issues, gathering data on controls or restrictions on: FDI-related capital inflows and foreign loans. Repatriating assets/dividends and making other payments abroad. Export proceeds and foreign exchange bank accounts.

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Converting and transferring currency: Data for 2012

Out of the 99 economies surveyed, 52 economies maintain generally unrestricted foreign exchange regimes for FDI. 25 economies impose moderate to heavy controls on average across transactions covered by CTC. 22 economies impose administrative or procedural requirements on most transactions. Additional results include: 23 economies require government approval or some other authorization to receive a foreign loan. In 12 of these, it takes more than three weeks on average to receive this approval. 31 economies have at least one substantial control on transactions related to repatriating investments and making income payments abroad. 15 economies impose quantitative limits on foreign exchange available for some payments abroad such as technical or royalty fees, international travel payments, or transferring expatriate wages. 34 economies require approval or authorization to open a foreign bank account, or do not allow offshore accounts at all. It takes more than two weeks on average to receive the government approval in 12 of these.

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Presentation Investing across sectors Starting a foreign investment Arbitrating and mediating disputes Employing skilled expatriates Converting and transferring currency

Steps for creating a new indicator set 23

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More information is available at

iab.worldbank.org

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ANNEX

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Steps in the development of new regulatory indicators GIA follows a standard process for developing new indicators Three general steps are followed; details, along with examples from the FDI Regulations’ Converting and Transferring Currency Indicators (CTC), follow General steps to develop new indicators: 1. Develop the concept for the regulatory indicators 2. Gather legal and implementation data about the regulatory area 3. Develop indicators and disseminate the results 26

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Step 1: Develop the concept Identify a regulatory issue constraining business development and growth CTC: noted that foreign exchange restrictions on profit repatriation are cited by businesses as a constraint to foreign investment

Develop a background note and draft set of indicators CTC: identified foreign exchange restrictions on specific types of transactions most relevant to foreign investors; gathered input from relevant WBG topic specialists

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Conduct background research on the issue CTC: reviewed research on macroeconomics from IMF and political risk from MIGA, to identify existing evidence and indicators about exchange restrictions

Form a group of experts to advise on the indicators CTC: formed an expert group of investment lawyers, central bankers, and risk insurers to advise on the most important aspects of currency convertibility World Bank Group Multilateral Investment Guarantee Agency

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Step 2: Gather data

Develop a legal questionnaire to gather data CTC: wrote specific questions based on input from expert group and existing data available from IMF

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Pilot the questionnaire across a sample of countries CTC: received pilot questionnaire responses from India and China; survey was then updated based on responses and expert group input

Distribute the questionnaire across all countries CTC: lawyers and bankers in 105 countries were invited to respond

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Step 3: Develop indicators and disseminate results

Review and code questionnaire responses CTC: reviewed the 5 to 15 responses received per country; followed-up with respondents when necessary; and compared responses with external data where available, to determine final information

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Develop and apply an indicator scoring methodology CTC: based on good practices identified in the literature and by the expert group, developed quantitative scores for the qualitative data

Analyze and disseminate the indicators CTC: identified economies with favorable foreign exchange regimes, identified associations between indicator scores and FDI flows, and disseminated results through a topic note and website (forthcoming)

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