2.2-Las mieses (terrazgos del foras)

Barriers to foreign investment can take many forms. Barriers to international investment can be separated into:

• foreign equity limits

• screening and approval (approval required for new foreign direct investment or acquisitions, as in the Australian foreign investment review framework)

• restrictions on key foreign personnel or requirements to engage local directors

• restrictions on the form of commercial presence, such as compulsory joint ventures with domestic investors

• other restrictions, including restrictions on establishment of branches, local incorporation requirements, restrictions on acquisition of land, and reciprocity requirements (whereby foreign companies are only allowed to invest in a particular sector if an agreement exists with the foreign company’s host country) (based on Kalinova, Palerm and Thomsen 2010).

Some restrictions to foreign investment are based on national security concerns. The OECD has recognised the right of countries to restrict foreign investment based on national security concerns and developed guidance to help countries to design and implement policies that are narrowly focused on the achievement of national security goals, with the smallest possible effect on investment flows (OECD 2009b). Ownership of key infrastructure, telecommunications, defence-related assets and technology may raise national security concerns (Kirchner 2014). For example, in 2013 the Canadian Government rejected Egyptian investment group Accelero Capital’s proposed takeover of the Allstream division of Manitoba Telecom Services on the basis of national security concerns from foreign ownership of a national fibre optic network that provided critical telecommunications services (Frigon 2014).

In many cases, concerns that lead to investment barriers could be addressed in a more direct manner. For example, foreign education institutions have historically not been allowed to establish a commercial presence in Indonesia, due in part to concerns about quality assurance (Institute for International Trade 2009). Concerns about issues such as quality assurance would be better addressed more directly by non-discriminatory measures that apply equally to foreign and domestic providers. This may require capacity building to strengthen domestic regulation (chapter 9). Where national security concerns are a relevant consideration, these can be addressed through more targeted measures, such as screening and approval of foreign investments.

Analysis in this section is limited to barriers to establishing a commercial presence in another country. Restrictions on licensing and standards (which often apply to individuals as well as businesses) are considered in section 5.4.

The effect of investment barriers on service exports

Investment barriers can prevent firms from entering particular markets altogether or impose costs through constraining how service providers operate. For Australia, the majority of financial service exports occur via establishing a foreign commercial presence, and such a presence is also important to some other service exports, including education, professional services and health (chapter 3).

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In some cases, stringent foreign equity limits or outright bans on foreign investment severely restrict the provision of service exports or preclude outward foreign investment altogether. For example, the provision of accounting and auditing services using a foreign affiliate is not permitted in India (World Bank 2015). Indonesia prohibits foreign ownership for health research centres, private maternity hospitals, and general or public hospitals (but does allow foreign ownership of private specialist hospitals) (USTR 2015a).

Insurance companies are not permitted to establish branches in several countries, including Indonesia, India and Russia (Rouzet et al. 2014).

ANZ stated that foreign equity limits are the primary barrier to accessing Asian banking markets (ANZ, sub. 23). Foreign equity limits and related regulation restricts ANZ from acquiring full ownership of established domestic banks in countries such as China, Indonesia and Malaysia. This affects the opportunity for competing and growing in these countries. Partial ownership also creates additional costs through duplication of functions and systems, and additional capital requirements (ANZ, pers. comm., 23 July 2015).

In some cases there might be potential to get around investment barriers by exporting through a different mode. For example, an education provider may respond to barriers to establishing schools or other education institutions in a foreign country by delivering courses to students from that country online or within Australia. In countries where regulations preclude them from establishing branches, insurance providers might offer services through cross-border supply, which will limit the extent to which they can engage directly with their customers. As these examples suggest, delivering services through different modes has the potential to lead to markedly different business models and costs.

Requirements to establish a joint venture can impose substantial costs if this imposes a non-preferred business model. Insurance Australia Group (sub. 10) highlighted mandatory joint ventures as the main restriction on foreign investment in China.

In other cases, requirements to establish a joint venture or to have local representation on the board of directors might not have a substantial effect on costs if a business would have done something similar anyway. There can be good commercial reasons for entering into joint ventures with foreign partners in order to overcome foreign investment challenges.

For example, the Royal District Nursing Service has found a joint venture to be a valuable way to export services to China (chapter 7).

Investment barriers are particularly high in several developing Asian countries Many barriers to investment are behind-the-border measures and as such information on investment barriers across countries lacks transparency and is difficult to compile. For example, the General Agreement on Trade in Services (GATS) schedules provide an incomplete picture of barriers to investment in service sectors. ANZ (sub. 23) noted that limitations on the number of products approved, or the time in which they are approved, restrict the ability of a financial institution to access new or different sectors of a foreign market in a short timeframe.

The OECD index of restrictions on foreign direct investment (figure 5.3) and information underlying the World Bank index of restrictions on establishing a commercial presence (World Bank 2015) both indicate that, in general, investment barriers tend to be more restrictive in developing countries. These indexes should not be used in isolation — in particular because they have limited sectoral coverage, do not incorporate the effects of preferential trade agreements and require significant assumptions to combine different investment barriers into a single index — but do provide a heuristic approach by which differences in investment barriers across countries can be analysed.

Figure 5.3 OECD index of restrictions on foreign direct investment^a,b

Countries in the OECD database that are in Australia’s top 40 trading partners, and Australia

a Countries are ordered using a five year average of the level of Australian direct investment in each country, based on ABS data. Separate estimates are not available for the other four sectors that are the focus of this study (education, health, IT and tourism). b The index does not account for specific concessions such as bilateral and regional trade agreements or MRAs. c Includes legal, accounting, architectural and engineering services.

Sources: ABS (International Investment Position, Australia: Supplementary Statistics, 2014, Cat. no.

5352.0); OECD (2015a).

Barriers to investment are particularly high for financial services in several large Asian developing countries, most notably in India and China. Barriers to investment in financial services in Indonesia are also among the highest applying in Australia’s major trading partners.

By comparison, barriers to investment into Australia are lower than in these developing Asian countries, but relatively high compared with other developed countries. Australia

0 0.25 0.5 0.75 1

Australia United States United Kingdom New Zealand Canada Germany Brazil China Switzerland Netherlands Malaysia Indonesia Mexico Chile India France South Korea South Africa Belgium Japan Sweden Italy Spain Ireland Denmark Norway Russia Turkey Saudi Arabia

Index

Total FDI Index Professional servicesc Financial services

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has the 6th highest level of restrictions on foreign direct investment of 34 OECD countries, primarily due to screening processes under Australia’s foreign investment framework (Kalinova, Palerm and Thomsen 2010; OECD 2015a).

Initiatives to address investment barriers

Investment barriers have predominantly been addressed as part of trade agreements — on a multilateral basis through the GATS and on a preferential basis through bilateral and regional agreements (chapter 9). The GATS explicitly covers investment barriers, but in practice the effect of the GATS on investment barriers has been small. Countries have excluded many sectors and, even where commitments were made, restrictions on market access or national treatment for commercial presence were frequently listed as unbound or exempt (Hardin and Holmes 1997). Almost two decades have passed since commitments were made under the GATS and in many cases policies now in place are significantly less restrictive than commitments under the GATS (OECD 2014b).

Australia has completed trade agreements with many of the countries that OECD summary data suggest have the highest generally applicable barriers to foreign direct investment, in particular China and New Zealand (through bilateral agreements), and Indonesia and Malaysia (through the ASEAN-Australia-New Zealand Free Trade Agreement). Trade agreements can go some way to addressing barriers to Australian investment in these countries (discussed in chapter 9). For example, the ASEAN-Australia-New Zealand Free Trade Agreement requires national treatment of investments and prohibits performance requirements. However, the FSC (sub. 20) has suggested that trade agreements do little to alleviate regulatory impediments associated with establishment and operation in the market for financial services and barriers to investment still remain in countries with which Australia has trade agreements (box 5.6).

Costs and benefits of reducing investment barriers

Reducing investment barriers in foreign countries would have benefits for Australian firms that export, or seek to export, by establishing a commercial presence in another country.

Investment barriers are particularly costly for exporters of financial services, as financial services are often supplied via commercial presence abroad and there are substantial restrictions to financial services investment in potentially large markets such as China, India and Indonesia (Rouzet et al. 2014).

There can also be benefits for importing countries from reducing investment barriers.

Through increasing capital stocks, supporting access to foreign technology and promoting competition, foreign investment can deliver economywide benefits (chapter 4).

Costs of reducing unnecessary investment barriers are likely to be small in comparison and largely short term. Costs for Australia will primarily relate to negotiating greater market access through trade agreements, and there could be administrative costs in foreign

markets from creating new regulatory regimes that more directly address any national security concerns relating to foreign investment (chapter 9).

Box 5.6 Examples of investment barriers faced by Australian service providers

• Australian life insurance providers face caps on foreign equity participation (which also apply to funds management providers) and nationality requirements in Thailand, and foreign direct investment approvals in Japan. Thailand and Japan are two key markets for the Australian wealth management industry (FSC, sub. 20). (Australia has free trade agreements with both of these countries.)

• Foreign equity caps exist in many forms across the Asia-Pacific region, and vary in their effect.

For example, in China, there is a 20 per cent cap on foreign ownership of a domestic bank and foreign banks can only hold an interest in up to two domestic banks. While Indonesia has recently implemented a 40 per cent cap unless a bank is deemed to be ‘fit and proper’.

Countries often apply a limit on the number of new branches for which a foreign bank may apply (ANZ, sub. 23).

• In the United Arab Emirates, substantial fees can be required to establish an architectural practice and an Australian business is required to be sponsored by another party to establish a business, adding another cost (Cox Architecture, sub. 2).

• South Korea has proposed that foreign law firms must establish joint venture law firms under Phase 3 of its Free Trade Agreements. A joint venture law firm would be a new legal entity, similar to a law firm but requiring the principals to be foreign and South Korean law firms, not individual partners (Law Council of Australia, sub. 26).

Joint venture requirements and restrictions on key foreign personnel are common in developing countries in Asia. For example:

• banks in India must have a minimum of 50 per cent Indian nationals on the board of directors (World Bank 2015)

• foreign higher education institutions in China must be established as a joint venture where the head of the institution holds Chinese citizenship and at least half of the members of the administrative council, board of directors or joint management committee must come from the Chinese parties (NDRC and MOFCOM 2015; State Council of the People’s Republic of China 2003)

• foreign higher education institutions in Indonesia must operate in partnership with an approved Indonesian higher education institution (DET 2012).