An Analysis of the Restrictions on Foreign Direct Investment in Free Trade Agreements

Author Name URATA Shujiro  (Faculty Fellow, RIETI) /John SASUYA  (Waseda University)
Creation Date/NO. March 2007 07-E-018
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The paper analyzes the quality of rules on foreign direct investment (FDI) for seven free trade agreements (FTAs): US-Australia, US-Singapore, Japan-Singapore, Korea-Singapore, NAFTA, Korea-Chile and Japan-Mexico, involving eight countries. We examine the quality of FDI rules in terms of their liberalization or restrictiveness in the following six areas: (a) restrictions on foreign ownership and market access, (b) national treatment, (c) screening and approval, (d) management and composition of board of directors, (e) entry of foreign investors, and (f) performance requirements. The results of our analysis revealed the following ranking from high to low quality, (1) US-Australia, (2) US-Singapore, (3) Japan-Singapore, (4) Korea-Singapore, (5) NAFTA, (6) Korea-Chile and (7) Japan-Mexico. Our analysis also revealed differences in the quality of FDI rules between and among the countries belonging to the same FTA, leading us to further investigate the quality at country levels. The analysis showed the following rankings, (1) US, (2) Singapore, (3) Australia, (4) Japan, (5) Korea, (6) Chile, (7) Mexico, and (8) Canada. The most salient feature of restriction was found on foreign ownership or the degree of participation that foreign investors can influence the enterprise. Among the sectors, the primary sector (especially, mining and agriculture) and services sector (especially, transportation, communications, electricity, financial and insurance) are very restrictive, while there are only a few restrictions on manufacturing sectors.