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Investing Across Sectors Methodology

The Investing Across Sectors indicators measure overt statutory restrictions on foreign ownership of equity in new investment projects (greenfield FDI) and on the acquisition of shares in existing companies (mergers and acquisitions, M&As). The indicators are based on the text of investment codes, commercial laws, merger and acquisition laws, and other related statutes.

The indicators focus on 33 sectors, aggregated into 11 broader sector groups that conform with economic classifications and aggregation, in order to facilitate data presentation and analysis (shown in the table below).

Investing Across Sectors indicators cover 33 sectors, aggregated into 11 sector groups

	Sector group	Sector	Details
Primary sectors	Mining, oil and gas	Mining	A foreign company seeking to develop and exploit a medium-sized deposit of metal ore (for example iron, copper, nickel, gold, and silver). Note: The following types of mining activities are excluded from the definition: (1) oil and gas extraction, (2) diamond mining, (3) coal / lignite mining, and (4) exploration of a deposit.
	Mining, oil and gas	Oil and gas	A foreign company seeking to develop and exploit a medium-sized gas or oilfield.
	Agriculture and forestry	Agriculture	A foreign company seeking to own a commercial farm. Note: It is assumed that the foreign company is able to acquire a long-term lease on the land, and that the raising and hunting of animals is excluded from the definition.
	Agriculture and forestry	Forestry	A foreign company seeking to own a commercial forestry or logging operation.
Manufacturing sectors	Light manufacturing	Light manufacturing	A foreign company seeking to own a factory for manufacturing a variety of consumer products (for example, electric household appliances).
		Manufacturing of food products	A foreign company seeking to own a manufacturing plant for processing the primary products of agriculture, forestry, and fishing into food (for example, meat, fish, fruits and vegetables, oils, milk products, grain mill products).
		Pharmaceutical products	A foreign company seeking to own a manufacturing plant to produce finished medicines. Note: Excluded from the definition are (1) medicinal chemicals, (2) active pharmaceutical ingredients, and (3) research and development (R&D) activities.
		Publishing	A foreign company seeking to own a publishing business for books, brochures, dictionaries, maps, periodicals. Note: Excluded from the definition are (1) software publishing, (2) publishing of films and music, and (3) printing services. The content of the literature is not political in nature.
Services sectors	Telecommunications	Fixed-line infrastructure	A foreign company seeking to own and operate a wired telecommunications infrastructure for the transmission of voice, data, text, sound, and video (switching and transmission facilities to provide point-to-point communications via landlines or cable distributions systems).
		Fixed-line telephony services	A foreign company seeking to provide fixed-line telecommunication services using available infrastructure, which the foreign company does not own or operate.
		Wireless/mobile infrastructure	A foreign company seeking to own and operate a wireless telecommunications infrastructure for the transmission of voice, data, text, sound, and video (cellular or other wireless telecommunication networks). Note: Provision of satellite telecommunications services is excluded from the definition.
		Wireless/mobile services	A foreign company seeking to provide wireless/mobile telecommunication services using available infrastructure, which it does not own or operate.
	Electricity	Electric power generation – coal	A foreign company seeking to own a coal-fired power plant.
		Electric power generation – hydro	A foreign company seeking to own a hydroelectric power plant (for example dams on rivers).
		Electric power generation – biomass	A foreign company seeking to own a biomass-fueled power plant (for example using plants, trees, but not coal or petroleum).
		Electric power generation – solar	A foreign company seeking to own a solar power plant.
		Electric power generation – wind	A foreign company seeking to own a wind power plant.
		Electric power transmission	A foreign company seeking to own transmission systems that transmit electricity from the generating facility to the distribution centers/substations.
		Electric power distribution	A foreign company seeking to own distribution systems that convey electricity from the distribution centers/substations to the final consumer.
	Banking	Banking	A foreign company seeking to provide retail banking services to public and commercial clients through establishing a subsidiary or investing in a local bank. Note: Excluded from the definition are (1) equity restrictions on opening foreign bank branches (as opposed to subsidiaries), (2) investment banking, and (3) other specific types of financial services.
	Insurance	Insurance	A foreign company seeking to own a provider of health and/or life insurance services. Note: Excluded from the definition are (1) reinsurance, (2) property insurance, (3) social security/pension insurance, and (4) other forms of insurance.
	Transportation	Railway freight	A foreign company seeking to provide railway freight transport using its own rolling stock (wagons and locomotives). Excluded from the definition are (1) passenger transport, (2) ownership and/or operation of railroad infrastructure, and (3) ownership and/or operation of terminals.
		Domestic air	A foreign company seeking to own an airline providing passenger transportation on scheduled domestic flights. Note: Excluded from the definition are cargo transport and charter flights.
		International air	A foreign company seeking to own an airline providing international passenger transportation. Excluded from the definition is cargo transport.
		Airport operation	A foreign company seeking to own and operate a commercial airport facility.
		Port operation	A foreign company seeking to own and operate container terminals at the country’s main commercial port(s). Note: Excluded from the definition are maritime auxiliary services (for example cargo handling services, storage and warehousing, customs clearance services, freight forwarding services).
	Media	Television broadcasting	A foreign company seeking to program and broadcast a complete television channel on a countrywide scale. Note: Excluded from the definition are production of mere television program elements and radio broadcasting.
	Media	Newspaper	A foreign company seeking to own a daily or weekly newspaper. Note: Excluded from the definition is publication of issue-specific magazines, monthlies.
	Sector group 1 - Construction, tourism, and retail	Construction	A foreign company seeking to provide construction and development of residential real estate. Note: Excluded from the definition is the construction of (1) commercial and industrial real estate, and (2) public works/civil engineering projects.
		Tourism	A foreign company seeking to own large high-end resorts or business hotels to provide short-term accommodation. Note: Excluded from the definition is ownership of restaurants, bars, and travel agencies.
		Retail distribution services	A foreign company seeking to own medium or large- retail outlet stores (for example department stores, supermarkets, hypermarkets) in order to sell a variety of consumer goods. Note: Excluded from the definition is wholesale distribution.
	Sector group 2 - Health care and waste management	Health care	A foreign company seeking to own and operate hospitals or clinics. Note: Excluded from the definition are ownership of pharmacies and drug distribution. It is assumed that health care facilities will only employ properly licensed local medical staff.
	Sector group 2 - Health care and waste management	Waste management and recycling	A foreign company seeking to own a provider of solid waste collection, disposal, and recycling services. Note: Toxic waste is excluded from the definition.

Foreign equity ownership indexes are constructed for each of the 33 sectors, aggregated into 11 sector groups. The indexes take values from 0 to 100, where 100 denotes the absence of statutory ownership restrictions to FDI, and 0 means that foreign companies are not allowed to own equity in a sector or sector group.

At the most disaggregated level, restrictions on foreign ownership are measured separately for greenfield and M&A investments in each of the 33 sectors covered. The equity restrictions expressed in percentages are converted to index scores linearly. For example, a score of 49 denotes that a foreign company can own up to 49% of shares in a business in a particular sector in a particular economy, meaning that it can only be a minority shareholder. The Foreign equity ownership indexes for each of the sectors are calculated as the simple average of the greenfield and M&A scores, because in most countries and sectors the restrictions for those 2 investment types are identical.

The 33 sector scores are aggregated to 11 sector group scores using equal weights. Each sector group (with the exception of banking and insurance) comprises several sectors (table 7.2). Alternative systems of weights were also considered and tested: Different weights were assigned to the individual sectors and extracted on the basis of their economic importance (in GDP and FDI, tested separately). Factor Analysis was used to exploit variations in the data to account for cross-country performance. The results obtained by using each of the methodologies were highly correlated with each other. In the interest of simplicity, consistency with the other IAB topics, and ease of replicability, equal weighting was selected as the preferred methodology.

The table below illustrates the scoring and aggregation methodology of the Foreign equity ownership indexes utilizing sample data for Indonesia.

Methodology of the Foreign equity ownership indexes

		Max. foreign ownership allowed by law or policy (%)		Example: Indonesia
Sector group	Sector	In greenfield FDI	In mergers and acquisitions	Foreign equity ownership indexes
Mining, oil and gas	Mining	100	100	97.5
Mining, oil and gas	Oil and gas	95	95	97.5
Agriculture and forestry	Agriculture	95	95	72.0
Agriculture and forestry	Forestry	49	49	72.0
Light manufacturing	Light manufacturing	100	100	68.8
	Manufacturing of food products	100	100
	Pharmaceutical products	75	75
	Publishing	0	0
Telecommunications	Fixed-line infrastructure	49	49	57.0
	Fixed-line telephony services	49	49
	Wireless/mobile infrastructure	65	65
	Wireless/mobile services	65	65
Electricity	Electric power generation – coal	95	95	95
	Electric power generation – hydro	95	95
	Electric power generation – biomass	95	95
	Electric power generation – solar	95	95
	Electric power generation – wind	95	95
	Electric power transmission	95	95
	Electric power distribution	95	95
Banking	Banking	99	99	99.0
Insurance	Insurance	80	80	80.0
Transportation	Railway freight	49	49	49.0
	Domestic air	49	49
	International air	49	49
	Airport operation	49	49
	Port operation	49	49
Media	Television broadcasting	0	20	5.0
Media	Newspaper	0	0	5.0
Sector group 1: Construction, tourism, and retail	Construction	55	55	85.0
	Tourism	100	100
	Retail distribution services	100	100
Sector group 2: Health care and waste management	Health care	65	65	82.5
Sector group 2: Health care and waste management	Waste management and recycling	100	100	82.5

Foreign equity ownership indexes are based strictly on statutory (that is, de jure) restrictions. As explored in the Investing Across Sectors chapter of this report, any additional actual restrictions that might exist in practice -- that is, de facto restrictions -- are excluded from the analysis.

To ensure consistency and comparability of data across all 86 economies, the Foreign equity ownership indexes are based on a specific set of assumptions about the foreign investor and its home country:

The foreign investor’s home country does not enjoy any special economic, trade, or investment relationship with the host country nor is part of the same economic union or cooperation block, such as the EU, GCC, SADC, or ASEAN. IAB recognizes that in many countries the bulk of FDI flows come from economies that enjoy a preferential trade and investment regime with the recipient country. For methodological reasons, comparisons of preferential investment rules within various economic blocks would not have been an appropriate measure for benchmarking equity restrictions across countries. IAB’s Web site notes cases where equity limits differ for countries inside a customs union or free trade area, where survey respondents provided this information.
The host country enjoys normal political relations with the home country of the investor.
The foreign investor is a private multinational company with no equity interest or management control by the government of its home country (that is, the investor is not a state-owned enterprise, sovereign wealth fund, an individual, or an institutional investor such as a pension fund). IAB recognizes that in many countries sovereign wealth funds have been a significant source of investment flows, and that institutional and private investors have played an increasingly important role in the countries’ capital markets. However, as stated above, to ensure consistency and comparability of data, these types of investments are not included in the IAB indicators.It is also assumed that the foreign company will not be investing in an export processing zone (EPZ), special economic zone (SEZ), or any other zone governed by a special FDI regime in the host country. While IAB recognizes that many developing countries attract significant FDI into their SEZs and that they are growing in importance to FDI competitiveness, the legal regimes for SEZs, EPZs, or any other specifically designated areas governed by a special legal framework are excluded from the scope of the report. The survey examines the host country’s general FDI regime, because IAB’s objective is to measure the treatment of FDI governed by countries’ national legislation, which is most relevant to a large sample of countries and a large share of global FDI.
The foreign company is not yet incorporated or otherwise established in the host country, and it is interested in undertaking a medium- to large-scale investment project in each of the sectors defined.
The respective investment project in the host country has no political affiliations.

Limitations of the investing across sectors indicator

The absence of foreign ownership restrictions as measured by the Investing Across Sectors indicators is an important but insufficient condition for attracting FDI. Aside from openness to foreign ownership, other determinants of FDI include market size, infrastructure quality, political stability, and economic growth potential. Restrictions on foreign ownership limit and in some cases prohibit FDI in certain sectors. But abolishing foreign ownership restrictions and having a completely open economy do not guarantee success in attracting more FDI.
The indicators cover a large share of economic sectors but are not all-encompassing. Coverage of the primary and manufacturing sectors is relatively limited given that past studies have shown -- and this report confirms -- that most countries do not restrict foreign ownership in these sectors. The coverage of the service sectors, though more extensive than in past studies, is also not exhaustive. For example, the indicators do not include certain public utilities (such as water or natural gas distribution), professional services (such as legal, accounting, and consulting services), and social services (such as education). These and other service sectors were not included in the survey questionnaire for one or more of the following reasons: FDI plays a small role in the sector, FDI restrictions ( if present) often do not take the form of equity limits, views in the development literature diverge on the appropriate role of foreign capital in the sector, and methodological constraints limited the length of the questionnaire and potential quality of responses. Finally, sectors where countries may have legitimate security, cultural, or religious reasons for prohibiting FDI are omitted from the indicators’ coverage. These include weapons, nuclear power, and manufacturing of tobacco products and alcoholic beverages.
Because one of the underlying principles of IAB is to collect objective, verifiable, quantifiable information, the Investing Across Sectors indicators are currently limited to analyzing legal restrictions on FDI (de jure measures). This is in contrast to other IAB indicators, which also measure how laws are applied in practice (de facto measures). As a result, countries may score higher on the Investing Across Sectors indicators than they would if their actual openness to foreign presence in various sectors were measured by the de facto constraints or by actual FDI. Despite the project’s efforts, capturing actual practices in all the measured sectors proved infeasible with the existing survey instrument given the relatively small sample of respondents in each country and the wide variety of reasons that could prevent FDI in a particular market. These reasons include a sector’s underlying market structure and the discretionary authority of regulatory bodies granting sector-specific licenses (especially in service sectors).
Even in the realm of de jure restrictions, limits on foreign equity are just one among many possible legal and regulatory impediments to FDI. Binding constraints on market access might also include limits on the number of operators allowed, types of legal entities, and minimum values of transactions or assets. Some of this information was collected through the Investing Across Sectors questionnaires and is available on IAB Web site (http://investingacrossborders.org). But given that this information is incomplete, it was not used in the construction of the indicators. The indicators also do not measure the ability of foreign companies to bid on concession contracts.
The indicators focus on restrictions captured in countries’ statutes, and not on commitments to open sectors to FDI captured in international investment agreements (such as bilateral investment treaties or free trade agreements) or WTO commitments (shown in the box below).

IAB and commitments under the General Agreement on Trade in Services

Unlike trade policy, cross-country comparisons of foreign investment regimes have received insufficient analysis. ⁱEarly attempts to quantify national FDI restrictions have been limited to simply counting the number of policies that undermine FDI, without weighing the relative importance of the individual policies. ⁱⁱRecognizing that service sectors are more restricted than primary and manufacturing sectors, other attempts at a numeric presentation of FDI restrictions have mainly relied on the General Agreement on Trade in Services ⁱⁱⁱ.

Most of the IAB Investing Across Sectors indicators deal with FDI in services. There is no international agreement on standardized reporting of policies for FDI in services, with the partial exception of schedules for the General Agreement on Trade in Services (GATS) governed by the World Trade Organization (WTO). But GATS schedules are a weak guide to FDI policies in most countries because they generally underestimate how much countries have opened up services to FDI.

GATS commitments are made in the form of “positive” lists representing official commitments to open markets, in contrast to “negative” lists of exceptions to liberalization. Under GATS, the absence of a positive commitment does not necessarily imply a restriction. To retain policy flexibility, a country may simply have chosen not to list the sector in its schedule. Alternatively, if the sector is restricted, GATS may be silent on the nature of the restriction -- creating ambiguity about the country’s actual policies.

Furthermore, current GATS schedules date from about 2000 and may not capture more recent country-level changes. Thus country policies and practices are typically more open than what countries commit to in international agreements like GATS. For example, India has committed to allowing 51% foreign equity ownership in software, construction, and tourism under its GATS commitments. But in national law and practice, it permits 100%. In telecommunications India’s GATS commitment is 25%, but in national law and practice it is 74% or more. Most tellingly, while India has not even listed commitments in transport, the sector is not closed. Indeed, India allows 100% foreign ownership in road and maritime transport.

The Investing Across Sectors indicators provide an up-to-date and accurate picture of a country’s equity restrictions because they measure the present state of the laws and policies, rather than the country’s commitment to liberalize, now or at some point in the future. The indicators reflect de jure policies on FDI applicable to all countries in a non-discriminatory manner.

i - Christiansen (2004).

ii - Hoekman (1997); Sauvé, Pierre and Karsten Steinfatt, “Assessingthe Scope for Further Investment RegimeLiberalisation: An Analysis Based on Revealed Liberalisation Preferences,” OECD, unpublished.

iii - Pacific Economic Cooperation Council (1995).