PERVASIVENESS, USEFULNESS, AND LIMITATIONS OF INVESTMENT CODES
CHAPTER 2: PERVASIVENESS, USEFULNESS, AND LIMITATIONS OF INVESTMENT CODES
This chapter looks at the “universe” of investment codes. 3 How widespread such codes are and why do
Box 11. International Distribution
some countries choose to have an investment code,
of Investment Codes
and others not? What is the usefulness, actual or perceived of investment codes and what are their
Investment codes exist in all types of economies
limitations?
− large and small, industrialized and developing, socialist and market-oriented, and transitional.
Contrary to common belief, investment codes
Pervasiveness (“To Have or Have Not”)
are not a “developing country” phenomenon: Canada, New Zealand, and several EU
Since 1992 the number of countries around the
countries have or until recently had investment
world having national investment codes has
codes.
considerably increased and Box 11 shows the
diversity of countries that had or have investment Investment codes are not reserved to a
particular legal tradition: Common law
codes. The list dispels the often-heard myth that
countries with an investment code include
this instrument is used mainly by developing
Bangladesh, Ghana, Kenya, Malawi, Pakistan,
countries and countries with romano-germanic
Tanzania, and Uganda.
legal tradition.
Civil law (Napoleonic or “romano-germanic” tradition) countries with an investment code 3 The term “investment code” is a general term for a wide
include countries as diverse as Brazil, the range of legislative instruments: foreign company act,
Democratic Republic of Congo, Kazakhstan, foreign investment promotion act, foreign investment
statute, legislation on foreign capital, and others. Because
Senegal, and Turkey.
using all these terms here might be confusing, the handbook limits itself to “investment code” or “investment law/legislation.”
fundamental rights under which investors expect to operate. The legislative vehicle that governments use to effectively introduce and enforce such principles and guarantees in the country is less important.
However, there is an obvious advantage in having one central piece of legislation that specifies which sectors are open to foreign investors, what the entry requirements are, what guarantees investors have, and which public institutions (such as IPIs or one-stop shops [OSS]) they can access for assistance. Box 12 lists additional advantages.
One host-country legislative instrument that foreign investors usually want to review themselves, rather than through a local lawyer, is the investment code (another one is a summary
Countries without investment codes: Is investment unregulated?
France, Singapore, and the United States are interesting examples of countries that do not have an investment code and yet attract large levels of FDI. From the 1950s through the 1970s, Brazil was the leading FDI recipient among developing countries, without having an investment code.
Does it mean that these countries do not regulate foreign investment, that investment is totally free, or that investors have no guarantees?
The answer, of course, is no. In such countries, the guarantees, restrictions, and rules governing investment simply are found elsewhere in the legal framework: in the Constitution; in separate laws and regulations dealing with commercial activity, expropriation, taxation, and foreign exchange; or in laws governing specific sectors (such as
banking, finance, insurance, telecommunications, mining, or tourism). It is therefore important to move away from the notion that “no investment code equates no rule governing investment, no guarantee, or total freedom.”
As stated above, some countries choose to centralize investment-related regulations in a special piece of legislation called an investment code, while others regulate these regulations through various national laws. The fact that the same guarantees or conditions can be as effectively introduced through other laws and regulations actually supports the notion that a key function of investment codes is investment promotion.
Is there any strong advantage of one approach over the other?
In choosing between the two approaches, the government’s principal consideration should be to ensure that the legal framework clearly recognizes and effectively protects the
Box 12. Advantages of Consolidating Investment Regulations into a Code
For government, drafting and adopting one piece of legislation can:
Save time
Save scarce resources*
Be easier to amend than several laws and regulations (when circumstances necessitate revisions)
Be easier to implement
For a prospective investor, finding most of the guarantees and rules applicable to its invest- ment in a single text is much more convenient than having to review a number of disparate laws and regulations to understand how open the country is and to be immediately reassured about the security of investment and property.
*Although it is doubtful that a serious flaw or gap in the overall legal framework can be redressed simply by inserting
a provision or two in the investment code. An expropriation clause in the code is no substitute for a good expropriation act.
of the tax system for businesses). So, if a country Europe. Although investment codes appeared in does not have an investment code, it could, at
that region prior to 1989 (in Hungary and least in theory, miss the opportunity of receiving
Poland), they became pervasive throughout the the interest from this potential foreign investor.
region after the collapse of the communist system. In effect, the new governments used
In addition, from a practical point of view, investment codes to send a clear signal to governments with low capacity and capabilities
investors that there had been a major change in would do better to have a single investment code
policy toward private/foreign investment, and in which government officials can find most of
that they were now “fully open for business” and what they need to know about investment
offering necessary guarantees starting with the regulation in their country.
recognition of private property rights (which most socialist economies did not recognize). The signaling function of investment codes is not to
be underestimated and has been extensively used
Usefulness
by many developing countries including in Africa, Asia, and Latin America, following
Developing an investment code has been popular important changes in economic policies. 4 for some time and shows no sign of abating. One
successful example is Turkey (see the case study in Investment codes are obviously also a legal tool Appendix 2).
that may augment legal security and trans- parency, by providing the fundamental guaran-
Clearly, the policymakers and nations that have tees that investors expect, by correcting gaps or adopted an investment code must see the benefit
inconsistencies in the legal framework, and by of such a tool.
clearly stating the entry requirements and sectoral restrictions that exist in the country.
Why do countries choose to have an investment code?
By informing potential investors of the conditions to invest in the country, as well as of
Investment codes serve two key purposes: the guarantees that they will receive, investment codes, if enforceable, can provide investors with
1. They help to implement government policy the comfort they seek when investing in a foreign on private investment (domestic or foreign).
jurisdiction, particularly a developing economy. They translate policy into legislative
This is why we often take the view that the language, and embed it in a normative
investment code is not “just” a legal tool but also instrument that has the force of law.
a potentially important promotional tool that Administrative agencies can then apply the
can support the government’s effort to attract instrument, and parties can use it in a court
more private investment, particularly FDI. of law or arbitration proceedings.
Box 13 summarizes the various purposes that
2. They also are an important tool for
investment codes serve.
supporting investment generation. As we have shown, investment codes can serve
As a policy implementation instrument, invest- several purposes. However, they are not a ment codes have been particularly useful in
countries that have undergone a radical change in economic orientation, notably the former
4 On the “signaling” function of investment codes in
command economies of Central and Eastern
transition economies see Gray and Jarosz (1995).
Box 13. Purposes of Investment Codes
1. An investment law:
It is an instrument of policy implementation
n is an instrument of policy implementation in terms of: a. the role of the private sector in the economic development.
b. industrial policy (that is, which sectors to favor or not and for
whom). c. the role of FDI in economic development.
n contributes to setting up or clarifying rights and obligations of inves- tors, of the host government and its administrative agencies, and of
other investment stakeholders. n is a vehicle to strengthen the rule of law in this field of paramount
economic importance. n deals with institutions related to investments, and their operations and
impact. n establishes a governmental framework for the protection and
promotion of investment, which is an essential ingredient of economic development.
2. Promotion starts with informing potential and existing investors, and the
It is a tool for investment
code certainly contributes to this. But an investment code can also help to
promotion and investment improve the country’s investment climate through a reduction of legal and
climate reform
institutional barriers to private investments. The establishment of a stable and consistent framework is in itself an incentive and a signal to investors, and a mean to expand domestic enterprise and access international investment markets.
3. A peculiar feature of most investment operations, compared with trade
It provides security to
transactions, is their duration. Because their timeframe is much longer,
private investments
investors look for a stable and predictable legal framework and for institutions with authority over their investments. Investors value the legal security provided by investment legislation, and this influences their investment decisions.
4. Faced with the complexities and uncertainties of many national legal
It enhances transparency
systems, investors look for a single piece of legislation that brings
in investment operations
consistency and homogeneity to the legal framework covering their
contributing to good
investments, instead of myriad legal provisions and administrative
governance
rulings. Transparency implies that all relevant legislative and regulatory provisions have been published and that they are made easily available in a comprehensive form to interested investors.
Source: IC research Source: IC research
costs. To foster the development of a good investment climate, those factors need to be addressed in conjunction with the invest- ment code to form a coherent system attrac- Limitations tive to potential investors, domestic and foreign. Obviously, each investor will have a
There are limits to what even the best investment different view on the relative importance for code can achieve.
their business of these different dimensions of the investment climate, but, generally
First limitation: An investment code does speaking, they are all important factors and not constitute the entire legal and regulatory
need to be addressed to establish an attractive framework applicable to economic activities.
business environment. Investors, foreign or domestic, are subject to
all the laws and regulations of the country of investment. If such laws are overly restrictive of private business, even a well-written
Box 14. Usefulness and Limits of
investment code will not produce an environment conducive to investment.
Investment Codes
Second limitation: Investment legislation
Investment codes are useful in the following ways:
must be well implemented and enforced.
As the chief instrument to implement
While well-crafted legislation is essential to
government policy on investment
implementation and enforcement, the
As a binding legal tool for security and
legislation is worthless if administrative
predictability that investors can invoke in court or arbitration proceedings