VII. INVESTMENT CLIMATE OPENNESS TO FOREIGN INVESTMENT The Menem administration warmly welcomes foreign investment, which it views as necessary to Argentina's continued economic growth. The government encourages investment through national treatment in most cases under a free foreign exchange regime without price controls. Foreign investors, including many American firms, operate in every major sector of the economy. Decree Law 1853 of September 1993 governs foreign investment in Argentina, combining in one piece of legislation the liberalization measures contained in the Economic Emergency and State Reform Laws of 1989 and the Foreign Investment Law of 1993. This Law stipulates that foreign companies may invest in Argentina without prior government approval on an equal footing with domestic firms. Separate legislation (Law 24,196 of May 1993), designed specifically to generate foreign participation, governs the mining sector. A Bilateral Investment Treaty is nearing final ratification as well. Investors are free to enter the market via the most convenient vehicle, be it through merger, takeover, greenfield or joint venture. Foreign firms have also participated extensively and without discrimination in the Government of Argentina's ambitious privatization program, becoming most involved in the oil, gas, telecommunications, transportation, electric power and water and sewer sectors. Foreign firms may also participate in publicly financed research or subsidized research and development programs on a national treatment basis. Foreign investors face the same tax liabilities as local firms. The bulk of taxes are assessed on consumption and importation; others are assessed inter alia on income, value-added, wages (social security), assets and other property. There is no tax on dividends. Foreign firms are eligible for the government's various export promotion schemes, including one which provides for lower import duties or restrictions on inputs to production tied to increased exports in non-traditional areas. Under legislation elaborated last year, mining investment will enjoy: guaranteed tax stability for the coming 30 years; exemption from taxation on assets; deductions for prospecting and exploration expenses and environmental conservation expenses; accelerated depreciation; and, exemptions from import duties and the statistical tax on equipment and parts. Notwithstanding the highly favorable investment climate, there remain a few sectors where national treatment is denied. Foreigners cannot invest directly in uranium mining and nuclear power generation. (We understand the prohibition on uranium mining may be lifted in late 1994.) Foreigners have been denied broadcasting licenses as well, although their participation is not expressly prohibited by law. Foreigners can only enter the fishing and insurance industries by purchasing control of existing firms; no new licenses are being issued. Foreigners require permission from the National Superintendent of Frontiers, within the Ministry of Defense, to invest in non-mining activities in frontier areas; no permission is required for mining investments in these areas. Foreign investors enjoy much the same treatment as do Argentines throughout the system, to the point that they occasionally suffer from the same inconsistent application of laws and regulations and alleged cases of favoritism that Argentine businesses face. These problems of "seguridad juridica" (juridical security or the rule of law) are the result of a variety of factors, including the sheer speed of change Argentina has undergone in recent years. In its rush to break down all the controls and barriers which had been erected over the years, the Argentine government has at times compromised the stability of law enforcement which provides the best environment for long-term investors, be they Argentine- or foreign-based. CONVERSION AND TRANSFER POLICIES. All restrictions on the movement of capital in or out of Argentina were eliminated in 1989. There are also no reporting requirements, which results in virtually no solid data existing as to the nature of capital flows into and out of the private sector. The exchange rate is market-determined, although it is maintained at virtual parity between the Argentine peso and the U.S. dollar through interventions by the Central Bank (BCRA). (Under the Convertibility Law (March 1991), the BCRA is obligated to exchange one dollar for one peso to all comers. It has done so on numerous occasions. It has maintained an intervention range of 0.998/1.00 since December 1992. All currencies are readily available for use, although the U.S. dollar is preferred. U.S. businesses active here say that there are no effective delays in transmitting funds associated with investment abroad. The estimated value of the annual needs of the Embassy and other U.S. Government entities operating in Argentina is US$15 million. The Embassy and its staff principally purchase local currency through an exchange house at the free market rate. We project that there is virtually no risk of a devaluation occurring in the coming 12 months. EXPROPRIATION AND COMPENSATION Expropriation has virtually disappeared as a policy option since the Argentine government began its far-reaching economic reform program in 1989. We are not aware of any cases since the 1970s in which the property of an American firm was expropriated. DISPUTE SETTLEMENT There are a variety of business disputes involving American firms which remain unresolved, despite their sometimes long periods of controversy. Two cases in particular -- one involving the unjust seizure of an aircraft and another involving the expropriation of a meat exporting firm -- have been particularly long and drawn- out. Both cases date from a period when state intervention in the economy was pervasive, something which today is a thing of the past; both also remain in local courts. Investment disputes in general are adjudicated through local courts or administrative procedures. The government of Argentina now accepts the concept of international arbitration, which is a major change from its prior adherence to the Calvo Doctrine. Bilateral agreements with the United States make use of this possibility: the agreement governing the Overseas Private Investment Corporation (OPIC) and the Bilateral Investment Treaty, whose ratification is expected as soon as an amendment on mining is ratified by the Argentine Congress. The Argentine Government also adheres to the World Bank's Multilateral Investment Guarantee Agreement (MIGA), which also provides for international arbitration. It recently submitted a modern bankruptcy law to Congress as well. Argentina is a member of the International Center for the Settlement of Investment Disputes. PERFORMANCE REQUIREMENTS/INCENTIVES There are no performance requirements aimed directly at foreign investors. Rather, the government maintains a system of incentives which can be enjoyed by either national and foreign firms. These consist inter alia of reductions in import duties when there are related increases in exports. Auto manufacturers -- which are predominantly foreign multinationals -- operate behind a highly protected import scheme that offers various tax and barrier reduction incentives related to the rate and destination of exports. Auto manufacturers also adhere to "voluntary" local content requirements. The Industry Secretariat within the Ministry of Economy approves and monitors these performance incentives. RIGHT TO PRIVATE OWNERSHIP AND ESTABLISHMENT Foreign and domestic private entities have the full right to establish and own business enterprises and engage in all forms of remunerative activity. Private entities may also freely establish, acquire and dispose of interests in business enterprises. Competitive equality is applied to private enterprises vis a vis public firms in access to markets and credit. PROTECTION OF PROPERTY RIGHTS Argentina officially adheres to various treaties and international agreements on intellectual property and belongs to the World Intellectual Property Organization (WIPO). Argentina signed the Uruguay Round Agreements under the GATT in December 1993, which include sections on intellectual property. While legal intellectual property protection exists for books, music, and software, the same patent law is seriously inadequate for pharmaceuticals and other industrial products. Patents: Argentina's present patent law was enacted in 1864. It is the weakest component of the country's IPR regime. The law specifically excludes pharmaceutical "compositions" from patent protection, which has denied U.S. drug firms adequate protection and cost them hundreds of millions of dollars in foregone revenues. Furthermore, the law contains stringent working requirements and allows a maximum patent term of only 15 years. The Menem Administration submitted a new draft patent law to Congress in 1991. The bill greatly improves patent protection and extends it to pharmaceuticals but, as of July 1994, the bill was still not acted on. Copyrights: Argentina's present copyright law was enacted in 1933 and is adequate by international standards. Recent amendments and decrees conferred protection to computer software and extended the term of protection for motion pictures from 30 to 50 years after the death of the copyright holder. As in many countries, however, copyright piracy has become a serious problem for U.S. industries. Important efforts are underway to combat piracy, including arrests, seizure of pirated material and introduction of security stickers for cassettes. Trademarks: Trademark laws and regulations in Argentina are generally good. The key problem is a slow registration process. The government has moved to rectify this, and the situation has improved recently. Trade Secrets: Argentina has no trade secret law per se, but the concept is recognized and encompassed by a law on contracts, labor and property. Penalties exist under these statutes for unauthorized revelation of trade secrets. Semi-conductor Chip Layout Design: Argentina has no law dealing specifically with the protection of layout designs and semi- conductors. This technology conceivably could be covered by existing legislation on patents or copyrights, but this has not been verified in practice. Nevertheless, Argentina has signed the WIPO Treaty on Integrated Circuits. REGULATORY SYSTEM: LAWS AND PROCEDURES To reduce production costs and thus encourage competition throughout the economy, the Government of Argentina has vigorously pursued a policy of deregulation to eliminate the manifold controls once imposed by the government. This effort was propelled forward with the passage of the Deregulation Decree in November 1991. The decree eliminated most restrictions on internal commerce in goods and services, foreign trade, the social security system, capital markets and collective labor bargaining. It also created a Deregulation Technical Advisory Committee. Argentina has a comprehensive system of tax, labor, health, safety and environmental protection laws, which are irregularly enforced and frequently work against an efficient allocation of resources. Many of these laws are a remnant of Argentina's paternalistic past and today add to the matrix of structural inefficiencies which are often referred to as the "Argentine cost." Many of these costs are the result of the country's antiquated labor regime, which adds on various social charges and taxes equalling on average 60 percent to the base wage, with little value-added to show for the expenditure. Although much has been achieved to date in addressing the multi- layered network of statist controls which built up over many decades, several key reforms remain to be implemented. The launching of the private pension system in mid-1994 will help ensure the resource base needed to sustain Argentina's rapidly aging population once it is fully implemented. The still largely undefined move to reform the constraining labor laws is not progressing, while the question of constitutional reform absorbs the attention of most of Argentina's politicians. EFFICIENT CAPITAL MARKETS AND PORTFOLIO INVESTMENT. The Government of Argentina has eliminated most of the once- highly "dirigiste" credit policies which directed finance to a variety of favored sectors. Today, efforts by the Government to direct credit are similar to those employed by many members of the OECD to support selected sectors, such as housing, small/medium-sized businesses and exporters. The vast bulk of credit is directed to the private sector by both private and public banks. There is no apparent bias in credit allocation vis a vis foreign entities. (In fact, many of Argentina's largest companies and most sought-after users of credit are local subsidiaries of multinational corporations.) The private sector has access to a growing number of credit alternatives. Recent legal changes unleashed record growth in the issuance of corporate bonds. Leasing is becoming more common as well. Markets in derivatives of financial instruments are also developing, albeit slowly. The transparency of local legal, regulatory and accounting systems remains less than what might be found in a more developed capital market with a more stable history. The Government is working to address these limitations, even as its own rush to achieve other needed sectoral reforms has at times contributed to the problem. Information requirements for the issuance of stocks and bonds are less exacting than would be found, for instance, in the United States, although today the requirements are much more rigorous and credible than just a few years ago. The Government is working to increase the efficiency and transparency of the market in a variety of ways. The Comision Nacional de Valores (National Securities Commission - CNV) is the independent body empowered to regulate these otherwise self- regulated markets. The CNV was recently reorganized to strengthen investor protection and capital market development functions. The U.S. Securities and Exchange Commission is supporting the CNV's on-going institutional development through a regular exchange of information and technical assistance. The legal framework governing the issuance of stocks and bonds has been revised as well. The banking system is highly concentrated: the total assets of the five largest banks at end-1993 was the equivalent of US$29 billion, or 35 percent of all assets. It is also dominated by public sector banks: the top three banks are state-owned and control US$22 billion in assets. The total assets of the five largest privately owned banks at end-1993 was the equivalent of US$14 billion. At end-1993 eight percent of the total asset base was "non- performing." The system is perceived to be basically sound, with capital requirements which exceed in several respects those set in the Basel accord. Any failures in the near-term will likely be seen in provincial banks or some smaller privately owned "boutique" banks. There are no apparent constraints on mergers or acquisitions by foreign-owned firms through "cross share holding" or "stable share holding." In fact, today many local firms actively seek foreign participation to increase their capital or to benefit from technology transfers; many others are being purchased outright by foreign-based firms. "Hostile takeovers" are rare, given the traditional reluctance of Argentine firms to cede control of their firms through stock sales. Few local firms sell stock; those that do are, for the most part, closely owned by the original ownership group, which are often families. There are no laws or regulations which authorize firms to preclude foreign investment, participation or control. Foreign firms have been active in Argentina for decades. Foreign firms dominate some sectors and figure prominently in others, despite a long history in Argentina of nationalism, protectionism and virtual autarchy. Foreigners are welcome to participate in the consortia and organizations which set standards; in some cases, they play a leading role in these groups. In sum, Argentina today is an extremely open economy which welcomes--and actively seeks--foreign direct investment. POLITICAL VIOLENCE Argentina has pursued its sweeping economic reforms with a minimum of political violence. Riots by government employees in the provincial capital Santiago del Estero in December 1993 and in the northern provinces of Tucuman and Jujuy in early 1994 were limited affairs. These disturbances were directed against corrupt local administration and the non-payment of wages, not against the government's policy of reform. Large-scale civil disturbances are unlikely in the foreseeable future, despite a rising unemployment rate (as industries are privatized and restructure). The economy is growing overall at an impressive rate and today is producing an historic level of output. Additionally, since 1983 Argentines have had the option of the ballot box to express their political concerns. Argentina has no belligerent neighbors likely to foster insurrection. BILATERAL INVESTMENT AGREEMENTS The Government of Argentina signed a bilateral investment treaty with the United States in 1991. The exchange of ratification instruments will occur and the Agreement will come into force once Argentina's Congress ratifies an amendment extending the treaty's coverage to the mining sector. (Congressional action on the amendment is expected by mid-1994.) Argentina already has bilateral investment agreements in force with Germany, Italy, Switzerland, France, Poland, Spain, Sweden, Egypt and the United Kingdom. Similar agreements with Chile, Canada, Denmark, Hungary, Austria, Rumania, Bulgaria, Venezuela, Finland, Belgium, Luxembourg, Tunisia, Senegal, Turkey, Armenia, Russia, Korea, China, and the United Arab Emirates await ratification. OPIC AND OTHER INVESTMENT INSURANCE PROGRAMS Argentina signed a comprehensive agreement in 1989 with the Overseas Private Investment Corporation (OPIC) covering convertibility and political risk. Argentina is also a member of the World Bank's Multilateral Investment Guarantee Agency (MIGA). LABOR Argentina has a well-trained work force. Yet, skilled labor may be difficult to find in areas experiencing substantial growth. A labor contract law, complemented by additional laws and statutes related to specific activities, regulates employment conditions. (The law does not apply to agrarian workers, who are covered by separate statute.) Although many industrial and office workers are unionized, the unions no longer enjoy the sway they held for most of this century. The need to negotiate collectively across an entire sector was undermined by a decree in late 1991 which allowed negotiations on wages to occur at the level of the firm to take into account productivity changes achieved locally. Parties may now select the type of labor negotiation most convenient to them (e.g., by specific occupational activity, sector, or enterprise). Argentina adheres to the ILO Convention on Worker Rights. FOREIGN TRADE ZONES/FREE PORTS Free ports were authorized by law early this century but not put into action recently. Today, two zones legally exist -- in La Plata and Villa Constitution; neither is active. Potentially, every province will have one. Implementing regulations must still be issued before the law takes effect. CAPITAL OUTFLOW POLICY There exists no explicit policy vis a vis Argentine investment abroad. Much occurs, however, particularly in Brazil. Today, the trend is for a massive amount of foreign savings to flow into Argentina on a net basis. FOREIGN DIRECT INVESTMENT STATISTICS The Government today keeps no records on the movement of direct investment, either Argentine flows abroad or foreign savings coming into Argentina. MAJOR FOREIGN INVESTORS The list of major foreign investors in Argentina is extensive. Without official statistics on the value of the investment, it is impossible to quantify them. Major investors include Amoco, Bank of Boston, Cargill, Citibank, Coca-Cola, Crown Cork, Cyanimid, Dow, Exxon, FMC, Ford, General Motors, IBM, Mercedes-Benz, Merck Sharp & Dohme, Mobil, Occidental Petroleum, Pepsi-Cola, Peugeot, Pfizer, Philip Morris, Schering-Plough, Shell, Swift/Armour, 3M and Volkswagen. In addition, Cadbury, Chrysler, Mazda, Nabisco, Toyota, Walmart and numerous mining companies plan to enter the scene in the near future.