VII. INVESTMENT CLIMATE Country Policies and Practices Openness to Foreign Investment A key feature of the government of Chile's development strategy is a welcoming attitude towards foreign investors, which is embodied in the country's foreign investment law, known as D.L. (for Decree Law) 600. D.L. 600 was promulgated in 1974 and has frequently been liberalized, both by the military regime and the civilian governments that have followed. Since "Chapter 19" debt-equity swaps ceased in 1991, nearly all foreign direct investment in Chile has taken place through D.L. 600. Under this law, foreign investment must be approved by the government's Foreign Investment Committee, but approval procedures are expeditious and not burdensome. Typically, applications are approved within a matter of days, and almost always within one month. The rare cases in which applications were rejected have been said by the Foreign Investment Committee to involve fraud. Under D.L. 600, investors sign standardized contracts giving them the rights: -- to receive non-discriminatory treatment; -- to participate in any form of investment; -- to hold assets indefinitely; -- to remit or reinvest earnings immediately and remit capital after one year; -- to opt for either national tax treatment or a guaranteed rate (currently set at 42 percent) for the first ten years of an investment; and -- to acquire foreign currency at the inter-bank rate of exchange. This welcoming attitude to foreign investment, along with the country's wealth of natural resources, has led to over 11 billion dollars of foreign investment in the 1986-1993 period. Foreign investors have purchased many of the assets privatized by the Chilean government over the last decade. The major sectoral exception to the government's openness to investment is in the fisheries sector. According to 1991 amendments to the navigation law (D.L. 222), vessels fishing in Chile's 200-mile exclusive economic zone (EEZ) must have majority Chilean ownership. The law permits bilateral agreements to allow foreign-owned vessels to fish in Chile's EEZ, but no such agreements have been concluded. Other areas in which national treatment is not granted include cabotage and purchase of land in border areas. Top management (but not ownership) of radio and television broadcasting firms is reserved for Chilean nationals. Finally, D.L. 600 gives the Central Bank the authority to restrict foreign investors' access to internal credit. This authority has not been exercised. Chile does not subsidize or offer incentives to attract specifically foreign investment, although corporate tax exemptions are available to both foreign and Chilean firms investing in the extreme northern or southern areas of the country. The only performance requirements are incentives for automotive assembly plants, which may receive tax advantages linked to domestic content and export levels. One macroeconomic policy that raises the cost of investment financed abroad (some of which is Chilean) is the government's requirement that 30 percent of all external credits be placed in a non-interest-bearing reserve account, known as the "encaje," at the Central Bank for one year. (Alternatively, investors may pay the Central Bank an amount equal to the interest that would be foregone.) Supplier credits are exempt from the encaje requirement. Conversion and Transfer Policies Firms that invest via D.L. 600 may remit earnings immediately and may remit capital after one year. Investors are guaranteed access to foreign exchange in the inter-bank currency market. Firms that invested via the Chapter 19 debt-equity swap program may remit capital and profits after five years at the prevailing inter-bank exchange rate. (Chapter 19 investments ceased in 1991 after the rise in price of Chilean debt to near-par eliminated the incentive for such investments. The five-year limit will expire by end-1995 on all but a handful of investments.) Delays in repatriation are brief. The Frei government, which took office in March of 1994, has announced its intent to continue its predecessors' gradual liberalization of capital controls. Its first such steps, taken in April, made it easier to raise funds abroad by placing securities and reduced the percentage of export earnings that must be repatriated to Chile. The Central Bank reserves the right to disallow access to the inter-bank market for royalty payments in excess of five percent of sales. In such cases, firms would have access to the informal market, which generally has a rate within two percent of the inter-bank rate. Also, the Chilean internal revenue service reserves the right to prevent royalties of over five percent of sales from being counted as expenses for domestic tax purposes. In general, foreign investors enjoy non-discriminatory access to local capital markets. In the event of a local credit shortage, however, D.L. 600 gives the Central Bank the right to impose restrictions on the access of foreign investors to credit. No such credit shortage has been declared. Expropriation and Compensation Chilean law grants the government broad authority to expropriate the property of foreign investors. The 1973-1990 military regime and the two democratic governments that have followed it have foresworn any intention to nationalize private firms. All outstanding expropriation cases of foreign firms were resolved by the military government, which provided compensation, and there have been no recent actions to suggest that expropriation or "creeping expropriation" is likely in the foreseeable future. Dispute Settlement Except for U.S. investment covered by Overseas Private Investment Corporation insurance (see "OPIC and Other Investment Insurance Programs"), disputes involving U.S. investors typically are settled informally in negotiations between the investor and the concerned government agency. Any dispute not resolved in this way is referred to local courts for adjudication. Recourse to the courts is generally not an attractive alternative for foreign investors, because civil suits often take years to resolve, and litigants often choose to settle out of court. Chile's bilateral investment protection agreements with several countries (see "Bilateral Investment Agreements") allow for binding international arbitration between the government and investors. Different agreements contain varying procedures -- some allow the investor to choose either the host country's legal system or international arbitration but not both, while others specify that disputes must pass through the host country legal system before recourse to international arbitration. Chile joined the International Center for the Settlement of Investment Disputes in 1991, and the U.S. and Chile began consultations on a possible Bilateral Investment Treaty negotiation in 1994. The Central Bank's imposition in 1991 of the "encaje" reserve requirement on external debt (see "Openness to Foreign Investment") raised concern in the investment community. Although it applies to foreign and domestic investors alike, the measure was of greater concern to foreign firms because of their reliance on external credit. Claiming that the central bank lacked the authority to impose the measure, the local subsidiary of a U.S. investor unsuccessfully challenged the encaje in court in 1992. Performance Requirements/Incentives There is only one provision for performance requirements, pertaining to automobile assembly operations (See "Openness to Foreign Investment"). The Foreign Investment Committee does not apply any special performance requirements in its review of projects. Right to Private Ownership and Establishment Chile conducts pro forma screening of foreign direct investment, as described in section "Openness to Foreign Investment"). Except for the fishing sector and others noted above (see "Openness to Foreign Investment"), Chile does not restrict the right of establishment. Private enterprises compete on terms of competitive equality with public enterprises. Protection of Property Rights Chile's intellectual property regime is generally compatible with international norms, but its protection of patents remains deficient. Efforts to enforce intellectual property rights in Chilean courts have been successful. Chile does not have a sui generis statute for protecting the design of semiconductors, nor does it have comprehensive trade secret protection. Chile belongs to the World Intellectual Property Organization. The Industrial Property Law promulgated in 1991 substantially improved Chile's protection of industrial patents, but falls short of international standards. The law provides a patent term of 15 years from the date of grant (the term in the United States is 17 years). The law also does not consider plant and animal varieties as patentable subject matter. Finally, the law does not provide transition (or "pipeline") protection for pharmaceutical patents filed before the law's promulgation. Because of the long lead times involved in the marketing of new pharmaceutical products, the law will not prevent local companies from pirating foreign pharmaceutical patents for several more years. In addition, the registration procedures required by the health ministry to market new drugs are more onerous for the first-to-file, which tend to be foreign firms. Finally, the Central Bank reserves the right to disallow access to the inter-bank foreign exchange market for payments for the use of patents that exceed five percent of sales. Chile's copyright law grants recording companies the right to authorize the use of a work for 50 years. U.S. recording industry representatives have said that the law grants more power to authors relative to producers than is the industry norm. Chilean law provides for the protection of registered trademarks and prioritizes trademark rights according to filing date. Local use of the mark is not required for registration. Payments for use of trademarks may not exceed one percent of sales. Regulatory System - Laws and Procedures Chile has an anti-monopoly law, different elements of which are administered by three quasi-judicial commissions. These commissions have the authority to issue judgments concerning trade remedies, price regulation, and ownership structure. Their judgements can be appealed to the courts. Under the law, size alone is not objectionable, but the abuse of dominant position is. Recent decisions by the commissions and the courts have blocked anti-competitive behavior in telecommunications and civil aviation. Despite this record, enforcement is uneven, and several industries are characterized by high concentration and oligopolistic behavior. Efficient Capital Markets and Portfolio Investment The Chilean financial market is sophisticated by developing world standards. A wide array of credit instruments are allocated on market terms to both national and foreign investors. Foreign investors have access to credit, although the law gives the Central Bank the right to restrict access in the event of credit shortages (see "Conversion and Transfer Policies"). Interest rates and financial prices are set by the market. Financial market regulations segment different activities by type of institution and govern the composition of the assets and liabilities of financial firms. Regulatory authorities have a high level of technical expertise. In the past few years, the government and the (independent) Central Bank have given investors more freedom to invest and raise funds abroad. A 1994 capital markets law widened the range of investments, both foreign and domestic, available to pension funds and insurers. Nonetheless, many restrictions on institutional investment remain in force. The country's five largest banks, including the state-owned Banco del Estado, had assets totalling some 21 billion dollars as of end-1993. The banking system as a whole is sound, and banks are limited as to the percentage of their assets that can fall within various levels of risk. Nine banks owe subordinated debt totalling over 3 billion dollars to the Central Bank as a result of the financial sector crisis of the early 1980s. In the view of the authorities and the banks' competitors in the financial system, the debt's generous repayment terms constitute a subsidy that lowers the cost of capital to the debtor banks. They fear that blanket deregulation would enable the largest debtors to take advantage of lower capital costs and thus dominate new financial markets like pension funds and insurance. Thus, the government has made a restructuring of the debt a condition for banking system deregulation. Many of the largest Chilean companies are closely held, with only a minority of shares trading on the stock market. Because of this, hostile takeovers, whether by foreign or domestic investors, have been infrequent. Political Violence In the years since the 1990 return to democracy, there have been few major incidents of politically-motivated damage to projects and/or installations. Three terrorist groups are sporadically active in Chile. These groups have primarily targeted the Chilean security forces, but occasionally they have placed bombs at U.S.-related sites, particularly Mormon churches. Such actions are especially common when the U.S. military takes a high profile in international affairs. There have been no occurrences of anti-U.S. mob violence or terrorist acts by international terrorist groups. Bilateral Investment Agreements As of early 1994, Chilean officials have signed bilateral investment protection agreements with several countries, including Argentina, Spain, Germany, Switzerland, France, Belgium/Luxembourg, Malaysia, Brazil, and Venezuela. Most of these agreements are still awaiting ratification by the congress. OPIC and Other Investment Insurance Programs A bilateral investment agreement with the Overseas Private Investment Corporation took effect in 1984. In 1987, the U.S. suspended OPIC operations in Chile because of Chile's failure to recognize internationally accepted standards of worker rights. In October 1990, the U.S. resumed OPIC coverage in Chile after the democratically-elected government reformed Chile's labor code. Chile signed the Convention of the World Bank's Multilateral Investment Guarantee Agency (MIGA) in 1986. MIGA's first project involved Chile, and it has remained active here. Labor Chile has enjoyed generally calm labor relations since the return to democracy in 1990. Strikes are rare in the private sector, although public employees in health, education, and coal mining have held strikes in the last year. Both employment opportunities and real wages have risen steadily in the last few years, and first-quarter 1994 unemployment was 5.2 percent. Union membership is voluntary, and about 13 percent of the workforce is unionized. Multiple unions exist in many companies, and management can negotiate collective agreements with any of the unions or with ad hoc groups of workers. Unions can form confederations or nationwide labor centrals and can affiliate with international labor federations. Although the labor code permits industry-wide bargaining if labor and management agree, it is not common. Most contracts are negotiated at the company level. The labor code does not provide for labor participation in management, but some unions have inserted profit-sharing provisions into labor contracts. The minimum monthly wage was increased to 52,150 pesos (about 122 dollars at the current exchange rate) in June 1994. About 85 percent of workers earn more than the minimum wage. Workers are also paid a family allowance, which employers may deduct from their tax bills. The Chilean government is a signatory to ILO conventions on worker rights. Foreign Trade Zones/Free Ports The government has authorized the establishment of free trade zones to help promote export industries. Free zones are located in the northern town of Iquique and in the southern town of Punta Arenas. A limited free zone exists in the extreme northern town of Arica. Foreign-owned firms have the same investment opportunities in these zones as do domestic entities. Capital Outflow Policy Foreign investors may use the inter-bank rate of exchange to repatriate capital and earnings (see "Openness to Foreign Investment" and "Conversion and Transfer Policies"). Importers and others with recognized need also receive access to the inter-bank rate. Others must use the parallel exchange market. Over the last few years, the exchange rates in these two markets typically have differed by less than two percent. Regulations governing foreign investment by Chilean individuals and non-financial corporations are limited. Chilean investment abroad has increased dramatically in the last few years. The total flow of investment abroad in 1993 was 410 million dollars, and, as of early 1994, the stock of investment abroad exceeded 1.2 billion dollars. Regulations governing investment by financial firms are more extensive, but the Central Bank is gradually liberalizing some of these restrictions. Insurance companies, pension funds, and banks may invest only a limited portion of their assets abroad, in a narrow range of low-risk instruments. The government does not provide any incentives for investment in developing countries. Foreign Direct Investment Statistics From 1974 to 1993, approved foreign investment governed by D.L. 600 amounted to 23.9 billion dollars, in current (nominal) terms. Of this, 9.9 billion dollars actually entered the country. Most foreign investment in Chile is concentrated in the mining, services, and industrial sectors. From 1985 to 1991, approved foreign investment projects financed through Chapter 19 debt-equity swaps amounted to 3.6 billion dollars. Much of this investment was concentrated in the mining, services, and forestry sectors. The total of nearly 14 billion dollars invested by these two routes represents around 32 pct of 1993 GDP, and the realized 1993 D.L. 600 investment was 3.8 pct of GDP. Tables one and two provide sectoral breakdowns of foreign investment effected through D.L. 600 and the Chapter 19 program (See Appendix 4).