World Bank Document

ecognition of the relevance of this institution to
the investors and the countries that wish to attract
them. The Bank's management has also proposed
subscriptions would be paid in; the rest would be call- a multilateral investment guarantee agency (see
able in case of need. MIGA's underwriting capacity Box 9.5).
would be subject to ceilings that would maintain a sound
ratio between its capital and its liabilities under issued Foreign portfolio investment
guarantees. In addition to its own guarantees, MIGA
would be authorized to issue guarantees on behalf of Portfolio investment has not yet provided much
"sponsoring members," which would recommend such finance for developing countries, though its contriguarantees
and share in the risks on a pro rata basis. bution is growing. An attractive feature is that it
Under this additional window, guarantees of sponsored can provide equity finance for developing couninvestments
would have no ceiling.
In accordance with the proposed draft Convention, tries with fewer of the difficultes about foreign
MTGA would be subrogated to the relevant rights of control that are associated with direct investment.
indemnified investors against host countries. Disputes However, many developing countries have been
between the agency and host countries concerning such skeptical of the benefits of portfolio investment
rights would be settled by negotiation and, ultimately, and so have restricted and regulated it. For their
intemational arbitration. Host countries' sovereignty part, investors in the industrial countries have
would be safeguarded by the principle that both the known little about the securities markets in develinvestment
and the agency's guarantee must be ap- oping countries and have been concerned about
proved by the host country concerned.
the perceived risks involved.
The experience of host countries
In many developing countries, companies have
assistance show the range of the services that go outgrown their domestic capital markets and
with its financing:
would benefit from an injection of foreign equity.
e It has arranged project technology agreements By the same token, more foreign investors would
so that the foreign suppliers of technology bear a increase the demand for stocks in domestic capital
larger share of the risk when their technologies are markets. Greater market activity could ultimately
unproven.
lead to new stock issues and perhaps new invest-
* In helping to draw up management agree- ment. The secondary market would gain some
ments between foreign companies and develop- much needed stability if purchases and sales by
ing-country companies, it has insisted that man- foreign investors helped to offset the cyclical
agement fees be related to performance-related behavior of domestic investors.
indexes, such as profitability, rather than to the If developing countries are to obtain portfolio
value of sales or similar less relevant yardsticks. capital, they must take steps to attract it. At
& It has discouraged some developing-country present, many have barriers against it, including:
governments from putting uneconomic perfor- * Capital gains taxes and unduly high withholdmance
criteria or other restrictions on foreign com- ing taxes on dividend income.
panies, where such measures might reduce the * Minimum periods during which foreign funds
benefits from the projects.
must remain invested.
The World Bank has also taken some interna- * Foreign exchange restrictions on foreign porttional
initiatives over foreign investment. The folios.
establishment of the International Center for the * Restrictions on the types of shares that can be
Settlement of Investment Disputes (ICSID) in 1965 bought or held by foreign investors.
has helped to improve the framework for direct * Discriminatory treatment of foreign investors
investment by providing acceptable procedures for compared with domestic investors.
the settlement of disputes between foreign inves- The removal of these barriers could facilitate a
tors and their host countries. It has thereby built a growth in portfolio investment.
greater measure of confidence in the relationship
between these two parties. The increasing mem- The perspective of international investors
bership of ICSID, now totaling seventy-eight
countries, with four other signatories expected to Portfolio investment offers the investor long-term
become members soon, is evidence of the growing returns and diversified risk without the responsi-
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