An investment agreement spells out specific rights and responsibilities of both the foreign firm and the host government. What are the main financial policies that should be included in an investment agreement?

Question

What will be an ideal response?

Answer 1

Answer: An investment agreement spells out specific rights and responsibilities of both the foreign firm and the host government. The presence of MNEs is as often sought by development-seeking host governments as a particular foreign location is sought by an MNE. All parties have alternatives, and so bargaining is appropriate. An investment agreement should spell out policies on financial and managerial issues, including the following:

- The basis on which fund flows, such as dividends, management fees, royalties, patent fees, and loan repayments, may be remitted.
- The basis for setting transfer prices.
- The right to export to third-country markets.
- Obligations to build, or fund, social and economic overhead projects, such as schools, hospitals, and retirement systems.
- Methods of taxation, including the rate, the type of taxation, and means by which the rate base is determined.
- Access to host-country capital markets, particularly for long-term borrowing.
- Permission for 100% foreign ownership versus required local ownership (joint venture) participation.
- Price controls, if any, applicable to sales in the host-country markets.
- Requirements for local sourcing versus import of raw materials and components.
- Permission to use expatriate managerial and technical personnel, and to bring them and their personal possessions into the country free of exorbitant charges or import duties.
- Provision for arbitration of disputes.
- Provisions for planned divestment, should such be required, indicating how the going concern will be valued and to whom it will be sold.