Limitations on Foreign Investment

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Foreign investment laws often limit the percentage of equity that foreigners may own in local businesses. Even when this is the case, however, exceptions are sometimes made to attract capital to selected industries, and sometimes as a matter of administrative discretion. Foreign investment is commonly restricted by economic sector, including closing certain sectors to all but the state or its nationals, restricting the percentage of foreign capital participation in certain sectors, or defining others as foreign priority sectors. This type of limitation is called a sectoral limitation.

Foreigners are often forbidden from investing in sectors that host governments consider important to their national independence and security. Foreigners are often encouraged to invest in sectors where local development resources are limited, where foreign investment will increase the number of local jobs, or where the foreign export trade will grow. A few countries limit the geographic areas in which foreign investors may conduct business or own land. This is done for security or economic reasons.

A free zone is a geographical area wherein goods may be imported and exported free from customs tariffs and in which a variety of trade-related activities may be carried on. Free zones vary in size. Free trade areas (like NAFTA or the EU) are zones made up of two or more states that have agreed to let some or all of each others’ enterprises carry on their trade across and within each state’s borders free from customs tariffs and other restrictions.

A state may open up its entire territory (as Singapore has done), a region (such as China has done in its Special Economic Zones or Latin America’s free perimeters), or a city (called a free city) to international trade.

A free trade zone (or a foreign trade zone in the U.S.) is an area within a city or near a city that is open to international trade. Subzones are special-purpose free trade areas near a free trade zone. Free zones also vary according to their activities. Export processing zones are area in which manufacturing facilities may process foreign goods and materials for export without paying tariffs or duties. Materials and parts brought into these zones are not subject to local customs laws. No tariffs or other duties are paid at the time of importation or reexportation. Mexico’s maquiladora program is an example of a free zone.

Free retail zones are areas at international airports and harbors where travelers can buy goods free of local sales and excise taxes. Bonded warehouses are places in ports of entry where shippers can store goods until they clear customs. They are privately owned by transportation firms.

Host countries provide a variety of guarantees designed to attract foreign investors. These include

• commitments to compensate a foreign owner in the event its enterprise is nationalized.
• assurances that capital, profits, dividends, interest, and other forms of current income can be repatriated.
• guarantees of nondiscriminatory treatment.
• promises that taxes and other regulations will not be significantly changed for certain periods of time.