Question

Raising Foreign Capital can be difficult given global accounting diversity ( is this statement true or false)

course : international accounting.

Answer 1

Restrictions on market entry Bans on foreign investment in certain sectors Quantitative restrictions (eg limit of 25 per cent foreign ownership in a sector) Screening and approval (sometimes involving national interest or net economic benefits tests) Restrictions on the legal form of the foreign entity Minimum capital requirements Conditions on subsequent investment Conditions on location Admission taxes Ownership and control restrictions Compulsory joint ventures with domestic investors Limits on the number of foreign board members Government appointed board members Government approval required for certain decisions Restrictions on foreign shareholders’ rights Mandatory transfer of some ownership to locals within a specified time (eg 15 years) Operational restrictions Performance requirements (eg export requirements) Local content restrictions Restrictions on imports of labour, capital and raw materials Operational permits or licences Ceilings on royalties Restrictions on repatriation of capital and profits

Most sources of information on FDI barriers in particular economies are incomplete and vague. For example, the GATS schedules provide a very incomplete picture of barriers to commercial presence in services sectors, because many sectors and measures are not included in the positive lists in the country schedules. APEC’s Guide to Investment Regimes of Member Economies also provides self-reported outlines of foreign investment regimes, in varying degrees of detail and completeness. Details relevant to the SERVICES TRADE AND FOREIGN DIRECT INVESTMENT 38 classification system discussed above, such as whether discretion or rules are involved, are generally not provided. APEC members’ Individual Action Plans (published in November 1996) also contain self-reported summaries of current foreign investment regimes. As APEC economies accounted for 49 per cent of Australia’s outward FDI flows in 1995–96, there are a number of studies which have examined the extent to which different types of barriers are used in APEC. Useful summaries are provided in PECC’s report (PECC 1995), in the IC’s report on firms locating offshore (IC 1996b) and in the BIE report on FDI in APEC (BIE 1995). PECC presents a table showing whether particular measures are or are not applied in each economy. The degree of restrictiveness of these measures is not taken into account. The measures are: screening or notification; restricted or closed sectors; performance requirements; fiscal incentives; taxation incentives; priority sectors; and exchange controls. PECC’s analysis indicates that the most common impediments are restrictions on foreign ownership in some sectors, which are used in all APEC economies, and screening or notification processes, which are applied in all economies except Hong Kong and the United States. Economies which apply the widest range of restrictions include China, Chinese Taipei, Thailand and PNG. An analysis of foreign ownership limits, by economy and sector, is presented in the IC’s report on firms locating offshore (IC 1996b). Among APEC economies, Korea has the largest number of sectors which are subject to foreign ownership limits. Along with PNG and Chinese Taipei, Korea also has the highest number of sectors that are completely closed to foreign investors. Australia is among the economies with the fewest sectors restricted to foreign investors. The types of foreign ownership limits vary widely, not only in terms of the share of foreign ownership allowed, but also in the conditions attached. For example, in Malaysia the permitted share of foreign ownership of new manufacturing sector projects depends on the expected degree of export orientation of the project. The higher the proportion of output to be exported, the higher the permitted share of foreign ownership. In some sectors in Indonesia, 100 per cent foreign ownership is allowed subject to the condition that within 15 years some of the shares are sold to domestic investors (APEC 1996). While not providing an inventory of measures by economy, UNCTAD makes some general comments on the nature and extent of barriers in each category. For example, restrictions on ownership and control are less common now than 4 BARRIERS TO FOREIGN DIRECT INVESTMENT 39 in the past, but are still widely applied to services, especially in the context of privatisations, and to natural resource sectors. In contrast, operational restrictions (such as local content or employment requirements) tend to be found across the board and are less sectorally oriented (UNCTAD 1996). Service sector privatisations in many economies have often involved limits on acquisitions by foreigners. For example, foreign ownership limits have applied in all Canadian privatisations, except rail. In Australia, explicit limits apply in some cases, such as Telstra and Qantas, while others such as State energy utilities have been, or will be, subject to the normal FIRB screening processes when privatised. The major market entry, ownership and operational restrictions applied to inward FDI in selected APEC economies are summarised in Table 4.2 (at the end of the chapter). Restrictions applying specifically to key service sectors are also listed. Service sectors tend to be the most heavily restricted sectors in many economies. For example, in Indonesia the six sectors where foreign investment is completely banned are all in services. Further, six of the eight sectors where foreign investment is banned unless it involves some joint venture with Indonesians are in services (the other two are electricity generation and transmission and nuclear power generation, which are not classified as service sectors in the GATS). In Japan, foreigners cannot hold licences to provide telecommunications services, television or radio broadcasting, air transport or maritime transport services (mining is also restricted). Korea is undergoing an extensive liberalisation process, with foreign ownership restrictions being lifted in 152 industries. However, even at the end of the process in January 2000, 29 industries will still be closed to foreign investment. Of these, all but five (in agriculture and fishing) are in the services sectors. Even among the economies with relatively liberal FDI regimes, some foreign ownership restrictions apply in key services sectors. The United States has no screening or authorisation process and no restrictions in most sectors, but it does restrict foreigners from holding broadcasting, common carrier and aeronautical radio licences (as well as licences to operate atomic energy plants). Similarly, Hong Kong has no screening process, but ownership restrictions apply in broadcasting (APEC 1996). While no sectors are completely closed to foreign investment in Australia, restrictions in addition to those set out in the Foreign Acquisitions and Takeovers Act 1975 apply for certain sensitive sectors. With the exception of SERVICES TRADE AND FOREIGN DIRECT INVESTMENT 40 real estate, all of these are in services (banking, civil aviation, shipping, broadcasting, newspapers, telecommunications). In summary, a wide range of FDI restrictions applies to service sectors in APEC economies. While the details vary, some common characteristics seem to be: • application of some form of screening or registration process, involving various degrees of burden for the foreign investor; • restrictions on the level or share of foreign ownership, particularly in some service sectors, and often in the context of privatisations; • widespread use of case-by-case judgements, often based on vague national interest criteria; • widespread use of restrictions on ownership and control (eg restrictions on board membership), particularly in sectors such as telecommunications, broadcasting, banking; and • relatively limited use of performance requirements or input controls in services sectors.

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