This paper will discuss the policies that require foreign investors to enter into joint ventures with local firms, and the institutions used by host countries to promote, screen, and service foreign direct investment. These are related topics because the kinds of institutions that host countries need to put in place to deal with foreign investors will depend on the policies they are trying to implement. If the host country does not intend to screen foreign investors, or require them to enter into joint ventures with local investors, there may be no need to establish a procedure or an institution to deal with foreign investment. Brazil, for example, has had a very open attitude toward foreign direct investment, and therefore has not established a specific institution to regulate an investment approval process.

This paper will discuss the policies that require foreign investors to enter into joint ventures with local firms, and the institutions used by host countries to promote, screen, and service foreign direct investment. These are related topics because the kinds of institutions that host countries need to put in place to deal with foreign investors will depend on the policies they are trying to implement. If the host country does not intend to screen foreign investors, or require them to enter into joint ventures with local investors, there may be no need to establish a procedure or an institution to deal with foreign investment. Brazil, for example, has had a very open attitude toward foreign direct investment, and therefore has not established a specific institution to regulate an investment approval process.

Joint venture policies and investment authorities are specific aspects of the panoply of policies and institutions that regulate foreign direct investment in most developing countries. These investment policies and the institutions that administer them should be consistent with the objectives the host country hopes to achieve through the use of foreign direct investment. For example, if direct investment is expected to increase the country’s exports, then policies at all levels must make exports attractive. If a country wants foreign investors to participate in a broad range of activities, then macroeconomic policies, as well as specific policies affecting foreign investors, must be directed toward this end. Policies inconsistent with the objectives and inherent characteristics of a country result in frustration both for the country and for the foreign investor. Likewise, the objectives of policies may be frustrated by institutions that are not consistent with those policies.

That governments of developing countries have had a wide range of objectives, policies, and institutions governing foreign direct investment is suggested by Table 1.1 The wide variation in the stock of foreign direct investment in relation to GDP among the 22 developing countries shown in the table reflects not only differences in investment opportunities but also differences in their objectives, and their success in translating objectives into effective policies and institutions. Some countries have not wanted much foreign direct investment (for example, India). Others have wanted it (for example, Yugoslavia), but have not been successful in formulating policies, or establishing institutions to get the amount or type of investment desired. Still others (for example, the Republic of Korea) have envisioned a limited role for foreign direct investment, but have been reasonably successful in putting appropriate policies and institutions in place to achieve these objectives.

Table 1.

The Stock of Foreign Private Investment in Relation to GDP

(Data for 1979)

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Sources: Organization for Economic Cooperation and Development Development Cooperation Review; World Bank, World Bank Atlas, 1981.

The remainder of this paper discusses a particular set of policies—those to require joint ventures between foreign and local investors—and alternative institutional arrangements to administer investment policies. In the course of this discussion, it will be helpful to bear in mind that these policies and institutions should be evaluated in the broader context of the opportunities for foreign investment as well as the objectives of the host country in relation to such investment.

Policies Requiring Joint Ventures

Among developing country governments, and the international development community, it is almost taken as an axiom that joint ventures between foreign and local firms are more beneficial to the host country than are wholly owned foreign ventures. International development institutions act on this belief and actively encourage joint ventures. The International Finance Corporation (IFC), for example, has a policy of helping to finance projects involving foreign investors only when a substantial local partner is involved in the project as well.

Many developing countries introduced measures to require joint ventures and other ownership restrictions during the late 1960s and 1970s. Some countries also introduced provisions that required foreign firms to divest shares to local owners over a specific period of time. The phase-out provisions of Decision 24 of the Andean Common Market were the most famous divestment requirements, but similar measures were introduced in other countries such as Indonesia and Malaysia.

These restrictive provisions were aided and abetted by the increasing availability of foreign loans to developing countries in the 1970s. With the increasing availability of loans, there was both increased desire, and the ability to “unbundle” the package of capital, technology, and management that is direct investment. With capital being available at low, and sometimes negative, interest rates, developing countries tried to get foreign firms to provide the complementary technology and management skills in “new forms” of investment with reduced ownership and reduced control of the resulting ventures.

Host Country Views of Joint Ventures

There are a number of reasons why developing countries have favored joint ventures when foreign direct investment is allowed at all. One is simply a desire to protect sovereignty: to ensure that foreign firms will not control key decisions in the economy. This desire is particularly strong in countries that have recently gained their political independence.

In addition, it is thought that joint ventures are a good way to encourage the transfer of technology and to train local business people in the operation of a modern firm. By being a part of a joint venture with foreign partners, it is expected that local engineers and managers will learn from their foreign counterparts. (It is curious in this context that many countries that require joint ventures also restrict the numbers of foreign managers and technical people who can be employed.)

Another rationale for forcing joint ventures is more complex—they are viewed as a way in which the local economy can participate in what are thought to be monopoly profits of multinational firms operating in the host country. It is recognized in this context that most firms making international investments are large and operate in oligopolistic industries. These firms have certain skills and technologies that are the basis of their size and profits. Developing countries think that by forcing these firms to enter into joint ventures, they will be able to capture some of these “monopoly” profits for the country, either for the government or for local investors who are in the joint venture.

Most, if not all, developing countries prohibit foreign investment in some sectors and require joint ventures in others. For example, the appendix shows the ownership restrictions of the countries of the Association of South East Asian Nations, a group that is generally regarded as following liberal policies toward foreign investors.

The ownership restrictions imposed by Arab countries vary widely. A recent study ranked the degree of restrictiveness of these measures, as shown in Table 2.2 A value of 1 denotes very stringent restrictions on ownership (for example, Iraq), while 5 indicates very liberal ownership policies (for example, Morocco). While it is possible to take issue with these rankings, they reflect how an outside observer views ownership policies of Arab countries in relation to those of other developing countries at the time the study was completed.

Table 2.

Foreign Ownership Restrictions—Rankings of Arab Countriesa

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1 = very restrictive; 5 = very liberal.

Foreign Investors’ Views of Joint Ventures

Multinational enterprises also see benefits in joint ventures and voluntarily enter into them in some circumstances. This is a trend in developed countries, where even the largest firms are seeking alliances to develop technology, enter markets, and improve production techniques. In developing countries, some firms enter into joint ventures voluntarily with local firms to incorporate their knowledge of managing the local labor force, the market, and to help in interactions with the government.

Involuntary joint ventures, however, are viewed by foreign investors as a major disincentive to investment. A recent survey of 300 of the largest U.S. multinational corporations showed that 65 percent of these firms view ownership restrictions as being a critical negative factor in assessing the viability of an investment.3 Econometric evidence also shows the negative impact of ownership restrictions on investment decisions.4 That developing countries appreciate the disincentive effect of ownership restrictions is shown by their actions—almost without exception, when they decide that they want to encourage more foreign investment, one of the first things they do is to liberalize their ownership restrictions.

Liberalizing Ownership Restrictions

Developing countries in ever greater numbers have been liberalizing ownership restrictions in the 1980s. Since 1982 the Andean Pact countries have taken back the power to conduct their own negotiations with foreign investors, and in many of these countries the ownership phase-out requirements of Decision 24 have been modified or dropped. In Indonesia, initial foreign ownership percentages have been increased, phase-out periods have been extended, and in some industries they have been eliminated. Malaysia has relaxed its laws requiring a progressive increase in ownership by ethnic Malays. Many African countries have opened up a larger number of sectors to foreign investors, as has the Republic of Korea.5 Most striking, a number of socialist countries that had previously excluded foreign direct investment altogether, now encourage it. In fact, recent laws passed in Hungary, Poland, and Yugoslavia are among the most liberal in the developing world, allowing wholly owned foreign ventures in a wide range of circumstances. China has taken the unusual step of setting a minimum share that the foreign investor has to provide.

In May 1989, Mexico was the most recent country to announce a liberalization of its ownership policies. These policies previously had required foreign investors to enter joint ventures and take a minority position in ventures with Mexican firms. The liberalized Mexican policies, like those in many other countries, allow foreign investors to have a majority in export-oriented ventures, in those bringing advanced technology, and in those investing outside the more developed regions.6

There are several reasons for this historic change in the policies of so many developing countries. One is their need to encourage foreign capital inflows of all types after the worldwide recession of 1980–82 and the world debt crisis both increased the need for, and reduced the supply of, foreign resources. The trend toward liberalization, however, began before the debt crisis and may also reflect a disenchantment with the supposed benefits of joint ventures. There is evidence, for example, that forced joint ventures are less efficient than majority or wholly owned firms in the same industry.7 Moreover, if forced joint ventures allow greater local participation in monopoly profits of foreign firms, it is usually only a few privileged individuals who participate, not the society as a whole. Finally, the usefulness of joint ventures as a vehicle for technology and managerial transfer depends on the capabilities of the local partners. The more capable they are, the more transfer will occur. On the other hand, the more capable the local partner, the less need there will be to force a joint venture—it will be undertaken voluntarily.

We can conclude that developing countries are re-examining the role of forced joint ventures between foreign and local investors. The trend is clear—to allow foreign and local firms increasingly to make their own arrangements.

This is a trend that should be encouraged. Many of the reasons for ownership restrictions have been lost in history while the costs of ownership restrictions in terms of loss in investment have become clearer. If sovereignty is an issue, it can be dealt with by the use of government power to regulate, tax, exclude undesirable investment, and prosecute abuse. Virtually all countries of the Organization for Economic Cooperation and Development (OECD) follow this approach. More developing countries are doing so as they realize that requiring joint ventures does not bring the control they hoped for, and as they gain increasing confidence in their ability to exercise normal government power in relation to foreign investors.

The Role of Investment Authorities

The trend toward liberalizing ownership restrictions is only one aspect of a more general trend of liberalizing foreign investment regulation in developing countries. Moreover, developing countries are increasingly focusing on the need actively to promote foreign direct investment to increase the flow of foreign capital, technology, management, and access to foreign markets that they deem essential for their development.

It is in the context of these changing policies that developing countries are reconsidering the nature and functions of the institutions that deal with foreign investors. These institutions have typically had a number of functions, including screening and monitoring on the one hand, and promoting and providing services to investors on the other. Developing (and developed) countries have tried a wide range of institutional arrangements to carry out these functions, sometimes combining all of the functions in one institution, and at other times dispersing them to several organizations. Individual activities, such as screening, have also been handled in different ways, in some cases being centralized in a single organization, and in others being decentralized in various ways to existing government departments and ministries. This section describes some of the alternative approaches to the screening of foreign investment, and then considers whether it is desirable to combine the screening and promotion functions.

Organization of Screening

Developing countries screen and monitor foreign investment to try to assure that it both conforms to established policies, such as those on ownership discussed above, and contributes to the achievement of development objectives. Screening is thus meant to keep out those investments that would not benefit the host country, including inefficient firms that benefit from high levels of protection.

Governments use a wide range of organizational approaches to carry out the screening function. Some countries have not coordinated their policies and insist that investors deal with a whole network of government agencies. Others have sought to coordinate government policies by establishing some kind of a central authority to screen and evaluate foreign direct investment, to negotiate transactions with foreign investors on behalf of the government, and to monitor their activities.8 In some cases, this centralization applies only to projects in certain zones, such as export-processing zones, or in specific sectors. Other countries have entrusted this regulatory function to an already existing government ministry.9

Absence of a Comprehensive Institutional Structure

Some countries have no comprehensive institutions for screening and monitoring foreign direct investment. Foreign investors are generally free to invest, with some exceptions that may be adopted from time to time reflecting the country’s development priorities. The basic attitudes of these countries can be described by three characteristics: an essentially favorable disposition toward foreign direct investment; a system where treatment of foreign direct investment has been clear and fairly constant over time, but also flexibly and informally applied; and a set of sectoral priorities for foreign direct investment.

Brazil is the example of a major host country without comprehensive foreign investment legislation and institutional infrastructure for screening foreign investment proposals. No government approval is needed for foreign direct investment unless a foreign investor wants to take advantage of investment incentives (industrial or regional), and no government body evaluates foreign direct investment.10 A foreign investment must be registered by the Central Bank, which satisfies itself that the basic laws are complied with and that the value of the requested investment is accurately stated.11 Among the benefits of this approach is the greater predictability of the outcome of the approval process for both government and investor compared with the inevitably more ambiguous outcome associated with selective policies. Consequently, the potential costs for an investor considering entry are likely to be low. On the other hand, in the presence of large price distortions resulting from tariffs, subsidies, and limited competition, an “open door” policy, such as that followed by Brazil, may result in the entry of those investments that may not necessarily be economically desirable for the host country.

Decentralized Mechanism

Some countries adopt a decentralized screening process that is dispersed across several government ministries and agencies whose interests could be affected by an investment. Usually, the agencies participating in the screening include ministries of finance, industry, or trade, the central bank, as well as other functional government bodies. This direct involvement of many government bodies and entities can have the advantage of bringing to bear the technical expertise necessary for evaluating proposals for a specific industry. On the other hand, many of the agencies and ministries involved in screening may have little technical knowledge or limited experience with a particular industry. Diffuse units operating autonomously may also have little ability to evaluate overall net benefits of foreign direct investment in light of larger policy objectives. Moreover, each agency involved in screening may be pursuing its own narrow objectives, and these may be inconsistent with each other, and with broader policy objectives.

As a result of these considerations, a decentralized approach is likely to be costly to the foreign investor because the period of negotiation is likely to be longer and the results unpredictable at the outset. The potential investor with only marginal interest may possibly go elsewhere, while other investors, responding to the conflicting demands of approval agencies, may reshape investments in ways that are inconsistent with broad national objectives.

Interministerial Mechanism

In recognition of the potential costs that a diffused decision-making process can impose on foreign direct investors, some host countries have developed interministerial mechanisms to coordinate the foreign investment approval process. Such coordination entails the creation of decision-making structures whose operations cut across the existing functional divisions of government and whose membership comprises representatives of affected government agencies.

Many of the disadvantages associated with diffusion of the decision-making process may be overcome by coordinating bodies. Such entities provide a single focal point for foreign investors in all their dealings relating to a particular venture and avoid, to some extent at least, investors tramping from department to department to secure the necessary approvals. Coordinating mechanisms also can recognize the necessary link through planning, promotion, screening, approval, and monitoring of ventures—they can ensure that what is being planned, for example, is reflected in the screening criteria, and what is being monitored reflects the key considerations that have arisen during the screening and approval process. Finally, coordinating mechanisms can allow a streamlining of decision making by avoiding the need to involve government agencies that are only peripherally concerned with a particular investment decision.

Gaining these advantages may entail serious internal political costs, however, since a participating ministry may feel its influence is diminished if it cooperates fully with a coordinating body. To preserve influence, politically powerful ministries may be tempted to send only low-level people to meetings and later impose their power over the investor administratively.

As a result of such political considerations, the power of a coordinating agency in relation to individual board members can vary greatly from country to country. In some countries, coordinating bodies serve only as a clearinghouse for information, while the real power rests with individual ministries. In other countries, a board may have final decision-making authority and truly serve as a one-stop agency, at least for the major negotiating issues. Coordinating boards may be dominated by one or a few members, or power may be diffused among all members. Whatever the specific span of control and authority of a coordinating agency, its existence in a country indicates that the government is attempting to emphasize foreign investment issues, whether the government’s interest lies in attracting or in controlling foreign investors.

Interministerial bodies may either be permanent or ad hoc in nature. The National Commission on Foreign Investment in Mexico, the Board of Investment in Thailand, and the Malaysian Industrial Development Authority are examples of permanent, interministerial bodies.12

Centralized Authority

To overcome some of the costs associated with the operation of coordinating bodies, several countries have centralized the foreign investment decision process in a single government ministry or department or, in a case of a particular sector, have given screening authority to a state enterprise. In Korea, for example, approvals are handled by the Ministry of Finance, in Colombia by the National Planning Department, and in Yugoslavia by the Ministry of Foreign Economic Relations.

Some countries, to take advantage of available technical expertise in a single industry and to optimize organizational learning with regard to that industry, have delegated the screening of foreign investment proposals in that industry to specialized government agencies or state-owned enterprises. In Indonesia, for example, foreign petroleum firms have dealt primarily with Pertamina, the national oil company. By contrast, in the Philippines, such negotiations are the province of the Ministry of Energy. In this way, the costs of negotiating and of interministerial conflict are likely to be reduced, while organizational learning is enhanced. However, while obtaining these benefits, certain costs are incurred. By delegating authority to state-owned enterprises and other agencies that possess knowledge of the industry, many of the same shortcomings of diffuse decision making may be experienced; larger policy issues such as the net national benefit of investment and the spillover of negotiations on other investors will likely be ignored.

Delegation of Centralized Decision Making

The entry control function, regardless of the form it takes (diffused ministerial approach, single authority, interministerial bodies), is carried out in almost all cases by the central government authorities only. However, some exceptions to this general practice hold for fully export-oriented projects. Export-oriented firms can locate their plants in any of a number of countries that offer cheap production resources. In most cases, they need only inexpensive labor, sufficient infrastructure, and good transportation and communication facilities. Given this common perception, the competition for these “footloose” investors is usually quite intense. Fearful of losing the battle for such investors, a number of countries have delegated powers to approve investments in export projects to authorities separate from the central investment agency. The goal is to create an organization that can act quickly and decisively, thereby increasing the attractiveness of the country to such investors.

Accordingly, in some countries potential investors for export plants have had the option of investing in export-processing zones. Not only do these zones offer infrastructure, but they generally are run by an organization that is fully vested with authority to reach agreements quickly with foreign investors. In the Philippines, for example, a firm producing wholly for export may choose to negotiate with either the Board of Investment or the Export Processing Zone Authority, or both, depending upon where it seeks to locate and what incentives it seeks to enjoy. In Sri Lanka, the Greater Colombo Economic Commission Authority is the sole agency for approving any investment in the export-processing zones. Indonesia is currently considering the establishment of four export-processing zones and the creation of an Export Processing Zone Authority that will be relatively autonomous from the Capital Investment Coordinating Board of Indonesia.

Sometimes, the authority for specific functional issues, such as taxation and investment incentives, may be delegated to regional governments. In Brazil, for example, investment located in one of the less developed regions (North-East and the Amazon) can apply to regional agencies for specific regional ventures.

Selecting the Form of Investment Organization

The preceding discussion illustrates the wide range of alternative institutional forms a host government can employ to screen foreign investment, and provides a basis for determining the most appropriate form in particular circumstances. It is in this context that centralized investment authorities, popularly known as “one-stop shops,” can be evaluated. It is also possible to evaluate the desirability of combining the screening function with investment promotion and investment service activities.

The Role of Centralized Investment Authorities

The main issue in selecting the most appropriate organizational form for investment screening is the extent to which decision making within the government can and should be centralized. The most important point to remember in this context is that there is no need to centralize investment decision making if there are liberal and automatic investment policies—there is no need for a central authority if, in fact, there are few decisions to be made. The example of Brazil discussed above is a case in point, as is the practice in almost all OECD countries.

Centralized investment authorities are useful to cut through a myriad of regulations. If there are relatively few regulations, or if decisions are based on transparent criteria, the role of an investment authority is much less apparent. Moreover, it needs to be remembered that central investment authorities can serve to block foreign investments just as easily as they can facilitate them. Some of the countries that have been the most active in restricting foreign investment have done so through the mechanism of an intransigent central investment authority. Such authorities, therefore, are not inherently facilitators of investment and, if that is the intent, their activities will have to be carefully monitored by the political authorities.

A second point to be borne in mind when evaluating the feasibility of establishing a true centralized investment decision-making authority is that the various parts of government that normally participate in these decisions will yield authority to a central body only reluctantly. It is for this reason that true one-stop shops are quite rare. They are found almost exclusively in small countries. Most countries that claim to have a central investment authority in fact have a coordinating agency with limited decision-making power. These bodies sometimes have difficulty in cutting through the investment regulations that were the reason for their establishment in the first place.

Rather than establishing a compromise investment authority, it may be more productive to work on the investment policies, making them more transparent and less restrictive. In that way, the need for a central agency can be reduced, and a more decentralized mechanism might suffice.

Organizing for Investment Promotion

The main task of a centralized investment authority may be investment promotion rather than investment screening. Investment promotion is an activity that demands a central focus to present the country to the foreign investment community. It is not an activity that can be easily decentralized either bureaucratically or geographically.

Investment promotion consists of three main activities:

  • country image building;

  • investment generation; and

  • service to investors.

A complete investment promotion program will contain all three elements, but the main focus will be given to one of them at different stages in the life of the program. At an early stage, priority may be given to servicing existing foreign investors so that they will be happy and can serve as ambassadors for the country. As the program develops, greater attention will be given to country image building, assuming that the reality is consistent with the image that is being projected. Finally, the focus should shift to targeted investment generating activities.

The organization that carries out the investment promotion program can be in the government, in the private sector (although supported by the government), or in between the two as a quasi-government organization. The most successful promotion organizations have been of the latter type, with links to government, but with freedom particularly in hiring and setting salaries to attract the kinds of aggressive marketing people who are usually found in the private sector.

Combining Promotion and Screening

It is difficult to combine a vigorous screening organization with an aggressive promotion function. One or the other of these functions will dominate. If it is screening, the promotion function will most likely be neglected. On the other hand, if promotion dominates, the screening function is unlikely to be independent—promoters are unlikely to be willing to see the fruits of their efforts rejected by the screening process.

Screening and promotion have been successfully combined in a single central investment authority when liberal investment rules are in effect. In that case, foreign firms are relatively free to establish, and screening is carried out mainly to determine eligibility for investment incentives. Targets for investment promotion, however, are in a sense pre-screened, being selected for the contribution they can make to the development of the country. The promotion function dominates the investment organization, but screening criteria are taken into account in selecting targets for promotion.

Countries approaching investment promotion in this way generally are considered to have investment authorities that are one-stop shops. They provide a wide range of services to investors and grant incentives, as well as carrying out investment promotion. Good examples of such institutions are the Industrial Development Authority of Ireland and the Economic Development Board of Singapore. These organizations flourish in countries with liberal policies toward foreign investment. They would be difficult to conceive in more restrictive environments.


This paper has suggested several conclusions that can be the subject of further discussion. The first is that the role of an investment authority is linked to the policy framework the authority is expected to administer. In many developing countries these policies are being changed to open more sectors to foreign investment and to allow greater involvement of foreign investors in individual enterprises. An increasing number of developing countries are abandoning requirements that foreign investors participate in joint ventures with local investors.

These changes are taking place as developing countries have come to doubt the benefits of joint ventures and have seen their costs. As they redefine their economic goals, and as they gain confidence in their ability to control the activities of foreign investors regardless of their share in the ownership of individual enterprises, developing countries see less value in earlier policies to require joint ventures.

In these circumstances, investment authorities are becoming more concerned with promotion and allocation of incentives, and less with screening and control. It is difficult to contemplate the coexistence of rigorous screening and promotion functions in the same organization. These functions require different types of people, and a different mentality.

The evolution of the single investment authority is thus predicated on liberalization of investment policies that makes it possible to de-emphasize the screening function and give greater attention to promotion. This is now the trend in many developing countries. The challenge faced by these countries, of course, is to put in place a general policy framework that encourages beneficial foreign investments, and to identify specific investments as targets for the promotion effort.


Abdulaziz M. Al-Dukheil

Before commenting on Mr. Weigel’s paper, I would like to present a condensed summary of the main points in his paper. The reason for this is to make sure that I have read it carefully and to take the reader through the basic structure of Mr. Weigel’s paper before going through my own comments.


Policies and institutions required to manage foreign direct investment (FDI) in the context of developing countries is the subject of Mr. Weigel’s paper. In most developing countries, policies mean objectives of joint ventures, and institutions mean investment authorities. The form of institution is influenced by the policies pursued.

Both policies and institutions should be consistent with the goals to be achieved from FDI. For example, if export promotion is the main economic objective, then FDI policies should be directed to achieving this goal. Likewise, institutions and objectives ought to be consistent.

Joint Venture Policies

Mr. Weigel has rightly mentioned that there is no uniformity among developing countries regarding their need for FDI. Some countries need it (for example, Yugoslavia), some do not (for example, India), and some need it in a limited amount (for example, the Republic of Korea).

The author then deals with policies required to promote joint venture relationships between foreign investors on the one hand and local investors and institutions on the other. On the policy side, it is almost taken as a rule by developing countries that a joint venture is the most beneficial policy for them. Sovereignty is one of the reasons for restricting ownership by foreign investors. Transfer of technology, profit sharing, and keeping some sectors out of the hands of foreign investors are the other reasons. Table 2 lists the foreign ownership restrictions of some Arab countries. Morocco is ranked very liberal and Iraq very restrictive.

Foreign investors favor unrestricted (voluntary) over restricted foreign investment. Many developing countries are taking a more liberal attitude toward joint ventures and, thus, are either minimizing the restriction or dropping it completely. The trend now seems to favor a position where it is left to foreign and local parties to decide on the issue of joint ventures. This is a trend that Mr. Weigel suggests should be encouraged.

Institutions: The Investment Authority

Screening and promotion of foreign investments are the two important functions of the investment authorities.


Screening keeps out the investments that would not benefit the host country. The organization that deals with this policy usually takes one of the following forms:

  • No comprehensive institutional structure is needed if the government is taking a flexible and liberal attitude toward foreign investment.

  • A decentralized form of organization is adopted if many agencies are involved.

  • An interministerial commission is established when it becomes too complicated to coordinate among these agencies.

  • A centralized form is used when the problems associated with coordination among the government agencies become complicated.

Regardless of the form screening takes, the control function is usually handled by a single authority. A centralized investment authority is needed if investors have to deal with many regulations. Otherwise, there is no need for any organization, the paper suggests. The other point in evaluating the need for a centralized investment authority is that government agencies do not actually delegate real power.

Investment Promotion

Investment promotion is best served by a centralized organization of a semigovernmental nature. It is difficult to combine the tasks of screening and promotion under a regime of restricted foreign investment policy. Only under a liberal policy can a combination of both activities under one umbrella work.

In his conclusion, Mr. Weigel says that “… developing countries see less value in earlier policies to require joint ventures” and therefore “investment authorities are becoming more concerned with promotion and allocation of incentives and less with screening and control ….”


I offer the following comments on Mr. Weigel’s paper.

Mr. Weigel has rightly emphasized the point that developing countries should first determine clearly whether they need FDI or not and, if they do, then what purposes are these investments going to serve (that is, objectives). Clear objectives will determine appropriate policies and institutions. Among the major contributions of FDI to the economies of developing countries are foreign exchange earnings, foreign market outlets, and transfer of technology and employment. Developing countries with their different levels of development and resources do associate one or more of these objectives with their FDI policy. Thus, we can say that FDI is needed in one way or another unless a country takes a stand against FDI from an ideological point of view.

In the long-term interests of the host country, a foreign investor should be obliged to structure a joint venture vehicle in which he and a local partner or partners share and run the business. In this regard, I differ with Mr. Weigel, who does not see a strong need for imposing a joint venture policy on foreign investors, if my reading of his conclusions is correct. The percentage of foreign shares in the joint venture may differ from sector to sector, but the various aspects of the joint venture, such as management, the financial structure, and operations, should be left to the share-holders concerned.

The requirement of having a joint venture between foreign and local investors should not be left to the discretion of the foreign investor. Government policy should lend support to local firms in this regard, since local firms are in most cases in a weaker position compared with their foreign counterparts. The latter, in many cases, have the foreign exchange, the know-how, the managerial skills, and foreign market outlets. Therefore, from a practical point of view, a foreign partner may not find himself in need of a local partner. In such an environment, a government policy to enforce joint ventures as a mode of operation for FDI may be necessary. Such a policy will balance the bargaining power in favor of local firms and create a stronger long-term foundation for business activities.

For joint ventures between local and foreign firms to be beneficial to the economy, it is essential that the local partner have a minimum structure of business corporations operating in the same field as his foreign counterpart. Often, foreign companies not interested in transferring technology or managerial skills look for power centers in the host countries with which to form their joint ventures. These power centers act as agents and are not usually interested in developing local institutions to work hand in hand with foreign firms and learn the skills of running a business successfully. This attitude may find large acceptance among the foreign investors who do not have a long-term perspective. The host country agent with his short-term interest and lack of institutional setup is unable to provide genuine and professional services to the foreign firms. Thus, his position in the partnership will depend on his role as a manipulator of the public system and as a user and initiator of corrupt practices as a means of achieving unlawful personal ends.

Local professional firms, especially medium-sized and small ones, are not in a strong position to attract large international corporations. Therefore, government incentives to attract foreign direct investment should be linked to the promotion and development of joint ventures between professionally established local firms and foreign investors.

Many developing countries suffer from the lack of balance between their foreign exchange earnings and foreign exchange expenditures. At the heart of the matter lies the excess of consumption over production. In many cases, the government share in total consumption is the largest and the least efficient. Excessive government spending steered by the forces of corruption and financed through deficit financing contributes much to the shortage of foreign exchange in many developing countries. A successful FDI policy is not only a matter of whether a joint venture is required but, more important, whether a healthy business environment exists that would maximize the economic return from FDI for the benefit of the host economy. Red tape, bureaucracy, corruption, administrative problems, import licenses, and employment of skilled foreign labor could easily handicap the business and minimize its return. What FDI needs is not to be freed from joint venture obligations with a local partner but rather to be freed from:

  • political uncertainty;

  • uncertainty embodied in the lack of clear and sustained application of the law in general and commercial law in particular; and

  • major shocks in fiscal and monetary policy.

Institutions needed to deal with foreign direct investment are mainly affected by the inefficiency of the government management system. In a system where corruption and an absence of accountability are dominant, any organizational structure will not work efficiently. Whether a centralized or decentralized form is adopted, the forces of corruption will be able to twist any system to their own ends. Thus, if the institutional structure to deal with FDI policy is to succeed, a minimum level of efficiency and accountability in the government management system must be accomplished.

In countries of the Gulf Cooperation Council (GCC), or those countries whose foreign exchange earnings and/or employment requirements are not compelling needs in the short run, joint ventures whereby the local firm enjoys a high level of sharing and participation are especially important. What these countries need most are efficient business institutions (corporations) able to absorb foreign skill and the technological capability necessary to create and run a business in a profitable and economically productive manner. This environment is one in which entrepreneurial skills and ability are born, and this is what an economy with a liberal economic strategy needs most.

In summary, Mr. Weigel has concluded his excellent presentation of the various aspects of the two thorny problems of foreign direct investment—joint ventures and the investment authority—by recommending less emphasis on the policy of joint ventures by the host countries and an investment authority whose main concern is promotion of foreign direct investment rather than screening and control.

The liberalization of policies and procedures for foreign investment is accepted almost as a general rule by the majority of developing and developed countries. The winds of liberalism have swept over more areas on the economic and political map than has foreign direct investment, which is undoubtedly a move in the right direction. Nevertheless, liberalizing foreign direct investment should not, in my opinion, mean leaving the issue of the linkages between the foreign and local business institutions to the sole discretion of foreign investors or even to both parties. This would be the norm in the more advanced economies where there is some degree of compatibility and comparability between the two parties—the foreign and local investors—or where the host country is well advanced in the institutional, technological, and managerial aspects of investment, and all that is needed is the flow of financial assets to promote local production for local consumption or export. Developing countries, in many cases, have overlooked the importance of the long-term institutional, technological, and managerial benefits in the host country’s long-term development and have concentrated on the short-term returns embodied in increasing production or employment directly. These objectives in a short-run framework would be achieved naturally by the foreign investors having a free hand in the mode of operation. Domesticating and institutionalizing the forces that lead to higher levels of production and employment in the long term is a much different and more difficult task. Liberalizing foreign direct investment in developing countries should be encouraged and directed so as to enhance the long-term benefits to the host country and the foreign investors.

A clear and well-defined government objective coupled with a liberal and market-oriented policy toward foreign direct investment through joint ventures between well-established institutions of the host country’s private sector and those of the foreign investor is, in my opinion, the optimum policy. Though Mr. Weigel and I may differ on the need for joint ventures as a matter of policy we are not far apart on many other issues.

On the institutional side, I do think that a centralized approach in the form of an investment authority entrusted with all the powers to apply the strategy and to issue policies and procedures is a more efficient vehicle than any other. To ensure the success of the investment authority, it should be given all the ingredients in terms of either organization or by-laws that allow it to operate along the lines of the private market institutions. In this way, the authority can understand the problems facing private investors and can offer logical and efficient solutions.

Moreover, the general levels of discipline, accountability, and morality in the public system, as well as in the whole society, have a good deal of bearing on the working of whatever institutional structure is chosen to manage foreign direct investment. Thus, a means of improving the performance of FDI could be found in some areas that may seem at the outset to have no relationship to the issue.

Ezzedin M. Shamsedin1

Mr. Weigel’s paper touches on an important and timely topic in view of the need of developing countries to increase the flow of nondebt resources and technology to compensate for the decline in other forms of capital flows. He is right in stating that policies and institutional approaches to encourage foreign direct investment (FDI) must be consistent with the objectives of host countries and what they hope to achieve through such investments. He is also right in suggesting that foreign investment policies should take into account specific country circumstances and must be evaluated on a case-by-case basis. There can be no general panacea or simple rules that are applicable to all countries across the board.

It is true that mistakes were made by a number of developing countries in the 1960s and 70s when they opted for a more dirigiste or overregulated approach to foreign investment, for a myriad of reasons: whether to protect sovereignty, encourage development of domestically controlled enterprises and technology, or to regulate and control restrictive business practices by multinational corporations in an oligopolistic market setting. Some of the reasons for such a dirigiste approach can be easily explained and may have adversely affected the volume and pattern of foreign investment flows. But I would posit that a majority of developing countries did not fall between the two extremes of very restrictive and very liberal policy regimes, but somewhere in between. I am also not sure that the existence of a very liberal investment regime necessarily guarantees success in attracting FDI.

Mr. Weigel tries to draw a correlation between the stock of foreign investment and the country’s policy stance with respect to FDI and concludes that countries with a hospitable business environment have in general been more successful in increasing the ratio of foreign investment to GDP. I found it difficult, however, to detect such a positive correlation from looking at Tables 1 and 2 of his paper. For example, Morocco and Tunisia are classified in Table 2 as having very liberal foreign ownership requirements, and yet neither of them has been successful in attracting the desired volume of foreign investment. Indeed, the share of FDI in Morocco’s GDP at 2 percent is similar to that of India, which is one of the more restrictive economies with respect to FDI. I believe that in trying to present his evidence, Mr. Weigel has put more weight on the impact of national policies in determining the volume of FDI and too little emphasis on supply-side considerations as manifested by investment decisions of multinational corporations, which are frequently driven by their global strategy. Evidence suggests that irrespective of national policies, multinational corporations prefer to invest in countries that have a large and expanding market, or exploitable natural resources, or a trained labor force that could be used for offshore processing and exports. What all this suggests is that the direction and volume of FDI flows are hard to predict and are frequently determined by a complex of factors on the supply as well as on the demand sides with uncertain effects.

Regarding the influence of ownership policies of host countries and the decisions of foreign firms to invest, it is again difficult to draw firm conclusions. In some cases foreign investors may explicitly seek joint ventures with local partners. In others they may prefer wholly owned subsidiaries. The only empirical evidence of “involuntary” or “forced” joint ventures that Mr. Weigel presents is provided when he draws attention to a recent survey of 300 of the largest U.S. multinational corporations in which 65 percent of the firms interviewed thought that ownership restrictions were a critical negative factor in assessing the viability of an investment. My problem with the interview approach is that it is based on ex ante judgments. How a firm actually behaves when faced with an investment decision may be very different from the way it says it would. For this reason, I would apply a large discount factor to the interview approach and would prefer an ex post assessment when considering investment decisions. Also, some empirical evidence shows that concern with ownership questions may be very much a problem of U.S. corporations while Japanese and middle-sized European firms have generally favored joint ventures over wholly owned arrangements.

Even if ownership restrictions on FDI were a concern in the past, foreign investors may take comfort from Mr. Weigel’s paper, which clearly indicates that in recent years an increasing number of developing countries have liberalized their FDI regimes by easing restrictions on ownership requirements and by opening up a large number of sectors to foreign investors. Many of them have also made major adjustments to reform their economies and allow the private sector as well as price signals to play an increasing role. The ball is now very much in the court of foreign investors and the industrial countries that have urged developing countries to have open FDI regimes. Unfortunately, Mr. Weigel does not discuss the policies of industrial countries or their impact on investment flows, nor does he discuss their need to adjust fiscal and tariff regimes and lower restrictions that inhibit FDI flows to developing countries.

In addition, I believe that Mr. Weigel could have used this opportunity to discuss in greater depth the role of political risks in influencing FDI flows and the possibilities of hedging against such risks. This is not an unimportant issue. We now have an institution, in the form of the Multilateral Investment Guarantee Agency (MIGA), as part of the World Bank Group, which is specifically designed to cover investors against such risks. As a member of the MIGA staff and head of its Foreign Investment Advisory Service, he could have thrown at least some light on the role of MIGA in promoting foreign investment and providing political risk cover as well as advice to countries in attracting and screening FDI.

Finally, let me say a few words about the role of national policies and investment authorities in monitoring, screening, and promoting FDI, which is the other question addressed in Mr. Weigel’s paper. I agree that the form and scope of a national authority have to be tailored to fit country circumstances, and that in some cases a centralized arrangement may be more appropriate and in others a decentralized one. I also believe that simplifying approval procedures and avoiding delays in decision making would help attract foreign investment. Equally important would be to ensure that rules for regulating foreign investment are transparent and clearly set out so that there is no uncertainty about where the government stands with respect to FDI and its sectoral priorities for such investments. I would also add that in moving toward liberalization, the sequencing, speed, and depth of this process must be given due attention.

I need not belabor the point that a key challenge to policymakers in developing countries is how to provide sufficient incentives to foreign investors while ensuring that benefits are maximized and are consistent with long-term growth and development objectives. I believe that the World Bank Group can play a valuable catalytic role in this process by assisting countries to strengthen national capabilities for negotiating, absorbing, and prudently regulating foreign investment and technology flows so that they can obtain the best terms and conditions available in the international market.

Let me close by thanking the sponsors for organizing this timely seminar that should contribute to identifying issues and policies of critical importance to development, especially as we prepare to face the challenges of the 1990s.


Foreign Equity Ownership

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Table 1 is taken from Dale Weigel, “Investment in LDCs, the Debate Continues,” Columbia Journal of World Business, Vol. 23, No. 1 (Spring 1988), pp. 5–9.


Frost and Sullivan Inc., “Measurement of the Investment Climate for International Business,” a study conducted for the U.S. Agency for International Development, 1988.


Cynthia Day Wallace, Foreign Direct Investments in the Third World: U.S. Corporations and Government Policy (Washington: Center for Strategic and International Studies, 1989).


Ben Gomes-Casseres, “MNC Ownership Preferences and Host Government Restrictions,” in An Integrated Approach (Harvard Business School, August 1988).


See Sheila Page, “Developing Country Attitudes Towards Foreign Investment,” in Developing with Foreign Investment, ed. by Vincent Cable and B. Persaud (London; New York: Croom Helm, 1987), pp. 28–43.


This is just the latest turn in Mexican policies, which were relatively liberal in the 1950s and 1960s. In 1973, perhaps reflecting the increasing availability of resources from other sources, a new foreign investment law made ownership restrictions more stringent. That law remains in force but its administration has been liberalized.


A study of the efficiency of Mexican firms by the World Bank shows that firms with minority foreign shares in most industries were less efficient than wholly owned Mexican firms and majority-owned foreign firms. Majority-owned foreign firms, in turn, were more efficient than wholly owned domestic firms in most of the industries where both types operated.


Whatever approaches countries may take toward screening foreign direct investment in general, they tend to make special arrangements for investment in a sector of the economy that is of special importance to the country’s development plans and objectives (for example, the petroleum industry).


Some central investment authorities are responsible for dealings with foreign investors (and domestic alike) only when such investors wish to avail themselves of investment incentives (such as the Board of Investment of Thailand), or when, regardless of incentives, foreign investment exceeds prescribed limits (such as the Board of Investments in the Philippines).


Foreign direct investment is excluded from several sectors (for example, petroleum exploration, exploitation, and refining, communications media, and most domestic transport). Furthermore, a significant part of the computer and associated industries have recently been reserved for domestic companies. It is also true that Brazil influences the decisions of investors through the use of incentives and uses government regulations to preclude decisions, such as the establishment of major new investments in congested urban areas.


Investments in mining, insurance, rural land, and financial activities are treated separately. In these areas, prior government authorization is required before a foreign investment can be made.


The government bodies represented on the Board of Investment in Thailand are Industry, Finance, Agriculture and Cooperatives, Commerce, Defense, Interior, Foreign Affairs, Judicial Council, the Bank of Thailand, and the Industrial Finance Corporation of Thailand.


I am grateful to Rumman Faruqi of the World Bank for his very helpful comments on an earlier draft of this paper.

Papers Presented at a Seminar held in Kuwait, December 11-13, 1989