VII. INVESTMENT CLIMATE - Openness to Foreign Investment The Swiss welcome foreign investment and accord it national treatment. Foreign investment is neither actively encouraged nor unduly hampered by barriers. The federal government adopts a relaxed attitude of benevolent non-interference towards foreign investment, confining itself to creating and maintaining the general conditions that are favorable both to Swiss and foreign investors. Such factors include economic and political stability, a firmly established legal system, a reliable infrastructure, and efficient capital markets. The government does not offer large-scale incentives to prospective investors, and those that exist are open to foreign and domestic investors alike. The principal incentives provided by the federal government consist of low- interest loans to promote the hotel and catering/restaurant industry in mountain regions. Somewhat more substantial benefits are offered by cantonal governments of predominantly rural areas which have introduced "economic development laws" covering investment incentive programs open also to foreign investors. In fact, priority is often given to foreign businesses which bring new, high technology product lines. The most common incentives are: subsidies or loans by cantons for the development of industrial sites; cantonal guarantees on bank loans; capital loans at below-market interest rates; grants for facilities conducting research and development projects; subsidies to defray certain investment costs and to finance staff training; exemptions from taxes on profits and capital gains for specific periods; and liberal depreciation allowances. Performance requirements, either linked to incentives or other investment-related conditions, do not exist. There is no screening of foreign investment nor are there any sectoral or geographical preferences or restrictions. With the exception of national security areas, such as hydroelectric and nuclear power sectors, operation of oil pipelines, transportation of explosive materials, operation of airlines and marine navigation, national treatment is granted to foreign investors. Government financed or subsidized research and development programs are open to foreign companies if they have their headquarters in Switzerland. Major U.S. companies, like IBM and DEC, participate in research projects funded by the Swiss government. The Swiss Code of Obligations contains rules for setting up, running and liquidating private companies. A Federal Law on Stock Exchanges is currently being discussed in parliament and should enter into force in 1995. The new law would regulate the authorization of stock exchanges and security dealers. It would also provide rules on takeovers and disclosure of changes in shareholdings. Currently, there are three stock exchanges in Switzerland (Zurich, Geneva and Basel) and an electronic options and futures exchange in Zurich. Only Basel and Zurich have cantonal legislation regulating stock exchanges. These laws are however, outdated, and ill-suited to regulating modern security trading. A major law affecting foreign investment is the 1993 Federal Law on Authorization of Acquisition of Real Estate by Persons with Residence or Headquarters Abroad. This law limits the freedom of foreigners to purchase real estate in Switzerland and makes such purchases subject to local government approval. A new law is under discussion in parliament and should enter into force in 1995. It would remove the necessity for foreigners to have an authorization to acquire property for residential and commercial activity purposes. Authorizations would still be required for secondary residences, and the purchase of real estate by foreigners for investment purposes (real estate business) would still be forbidden. There are no discriminatory or preferential export and import policies, including relevant tariff or significant non-tariff barriers, seriously affecting foreign investors. There are some requirements which could be perceived as non-tariff barriers, mainly in the areas of technical standards and testing requirements for certain industrial products. There is also a requirement for labeling imported products in all three official languages (German, French, Italian). All drugs (prescription and over-the-counter) must be approved and registered by the Intercantonal Drug Office. However, none of these measures can be considered discriminatory, since they apply to all importers and distributors, foreign and domestic. There are no price controls on imported products. Switzerland has liberalized over 90 percent of its imports from GATT countries, to which it extends most-favored-nation tariff treatment. Import duties are generally low, under three percent for most raw materials and industrial products. Preferential duties are offered to a large number of developing countries. However, imports of virtually all agriculture products, regardless of their origin, are subject to import and supplementary duties and to variable import quotas. Under the new GATT agreement, Switzerland will have to tariffy all non-tariff barriers and lower tariffs on most imported agricultural products. Subsidies on cheese exports, the only important area where Switzerland applies export subsidies, will have to be reduced as well. - Conversion and Transfer Policies There is complete freedom of transfer of investment income, royalties, and repatriation of capital. Nor are there any Swiss government policies or laws which would regulate or limit the inflow or outflow of capital. - Expropriation and Compensation In accordance with Article 22 of the Swiss Constitution, property rights are assured. Within the framework of their constitutional powers, the federal and cantonal governments can, through a legal process, provide for expropriation or restrictions to property if this is in the public interest. In the event of expropriation or property restriction, full compensation must be made. Disputes are settled by an independent court, as required under Art. 6 Para. 1 of the European Human Rights Convention. As a rule, recourse to expropriation is only taken in cases involving major public construction projects, such as highways, railroads or airports. - Dispute Settlement The U.S. Embassy is not aware of any significant investment disputes in recent history, nor are there any known major cases of expropriation or nationalization involving domestic or foreign investors. The Swiss legal system includes commercial and bankruptcy laws, and provides for sufficient protection of secured interests in property. Laws are consistently applied and enforced. Switzerland has been a member of the International Center for the Settlement of Investment Disputes (ICSID) from its inception in 1966. - Performance Requirements/Incentives Neither the federal nor cantonal governments impose performance requirements or offer performance incentives. There is no requirement that nationals own equity in foreign investments or that technology be transferred on certain terms. - Right to Private Ownership and Establishment Foreign and domestic enterprises may engage in all forms of remunerative activities and may freely establish, acquire and dispose of interests in business enterprises. Legal restrictions apply to the following areas: 1. Corporate boards. The Swiss Code of Obligations (article 708) stipulates that boards of corporations registered in Switzerland must have a Swiss majority. The Federal Council may grant exceptions to this rule to holding companies whose major business is conducted outside Switzerland. However, even in this case, at least one director entitled to represent the company must be domiciled in Switzerland. The provisions were not designed to prevent or discourage the establishment or acquisition of companies by foreigners, but to provide protection to creditors and company shareholders. 2. Hostile takeovers. Swiss corporate shares can be issued both as registered shares (in the name of the holder) or bearer shares. Provided their shares are not quoted on the stock exchange, Swiss companies may in their articles of incorporation impose certain restrictions on the transfer of registered shares to prevent unfriendly takeovers by domestic or foreign companies (Article 685a of the Code of Obligations). Unwelcome takeovers can also be warded off by public companies, but legislation introduced in 1992 has made this practice more difficult. Public companies must now cite in their statutes significant reasons, relevant for the survival, conduct and purpose of their business, to prevent or hinder a takeover by an outsider. As a further measure, public corporations may limit the number of registered shares that can be held by any one shareholder to a certain percentage of the issued registered stock. As practice has shown, most corporations limit the number of shares to between two and five percent of the relevant stock. 3. Foreign financial institutions wishing to establish operations in Switzerland must obtain prior approval from the Swiss Banking Commission. This is granted if the following conditions are met: reciprocity on the part of the foreign state; the foreign bank's name must not give the impression that the bank is Swiss; the bank must adhere to Swiss monetary and credit policy; and a majority of the bank's management must have permanent residence in Switzerland. Otherwise, foreign banks are subject to the same regulatory requirements as domestic banks. A new banking law that should enter into force in 1995 will enable foreign banks to set up branches, subsidiaries or representations without prior approval by the Federal Banking Commission (based on reciprocity). Foreign or domestic investors will have to inform the Federal Banking Commission before acquiring or disposing of a qualified majority of shares of a bank under Swiss law. The participation of a bank in a company outside the financial and insurance areas should not exceed 15 percent of its capital. Such participation should not exceed 60 percent in total of the bank's own funds. Banks organized under Swiss law must inform the Banking Commission before they open up a branch, subsidiary or representation abroad. In case of exceptional temporary capital outflows threatening Swiss monetary policy, banks can be obliged to seek National Bank approval to issue foreign bonds or other financial instruments that would cause capital outflow. 4. Insurance is subject to an ordinance requiring placement of all risks physically situated in Switzerland with companies located here. Therefore, it is necessary for foreign insurers wishing to provide liability coverage in Switzerland to establish a subsidiary or branch. - Protection of Property Rights Switzerland has one of the best regimes in the world for the protection of intellectual property, and protection is afforded equally to foreign and domestic rightsholders. Switzerland is a member of all major international intellectual property rights conventions and was an active supporter of a strong IPR text in the GATT Uruguay Round negotiations. Patent protection is very broad, and Swiss law provides rights to inventors that are comparable to those available in the United States. Switzerland is a member of both the European Patent Convention and the Patent Cooperation Treaty, making it possible for inventors to file a single patent application in the United States (or other PCT country, or any member of the European Patent Convention, once it enters into force) and receive protection in Switzerland. If filed in Switzerland, a patent application must be made in one of the country's three official languages (German, French, Italian) and must be accompanied by detailed specifications and if necessary by technical drawings. The duration of a patent is 20 years. Renewal fees are payable annually on an ascending scale. Patents are not renewable beyond the original 20- year term. According to the Swiss Patent Law of 1954, as amended, the following items cannot be covered by patent protection: surgical, therapy and diagnostic processes for application on humans and animals; inventions liable to disturb law and order and offend "good morals". Nor are patents granted for species of plants and animals and biological processes for their breeding. In virtually all other areas, coverage is identical to that in the United States. Should an American firm have concerns about possible patent infringement in Switzerland, access to the courts is readily available and there is a well-established and highly regarded patent bar. Trademarks are also well-protected. Switzerland recognizes well-known trademarks and has established simple procedures to register and renew all marks. The initial period of protection is 20 years. Service marks also enjoy full protection. Trademark infringement is very rare in Switzerland -- street vendors are relatively scarce here, and even they tend to shy away from illegitimate or gray-market products. A new copyright law in 1993 improved a regime that was already quite good. The new law explicitly recognizes computer software as literary works and establishes a remuneration scheme for private copying of audio and video works which distributes proceeds on the basis of national treatment. Owners of television programming are fully protected and remunerated for rebroadcast and satellite retransmission of their works, and rights-holders have exclusive rental rights. Collecting societies are well established. Infringement is considered a criminal offense. The term of protection is life plus 70 years. The Swiss also protect layout designs of semiconductor integrated circuits, trade secrets, and industrial designs. Protection for integrated circuits and trade secrets is very similar to that available in the U.S., and protection for designs is somewhat broader. Because of the complexities involved in ensuring protection in each of these areas, individuals and corporations seeking protection are advised to engage the services of a specialized lawyer. - Regulatory System: Laws and Procedures In its international trade, Switzerland has reached a high level of liberalization, and such trade is practically unhampered or distorted by government regulations. By contrast, a considerable number of obstacles hinder competition on the domestic market, caused by planning regulations, local building codes, standards for equipment, approval procedures, opening hours for shops, and requirements proving "public need" for restaurants, to name but a few. Cartels are not prohibited under Swiss law, as long as their "social and economic impact" cannot be considered harmful, and as a result, the Swiss economy is highly concentrated. Companies in a number of industrial and service branches have organized themselves, through trade and industry associations, into horizontal and vertical cartels. Such arrangements exist in the market for prescribed medicines, sanitary ware, kitchen equipment, optical products, books, beverages, food retailing, dietary products, property and health insurance, and many other sectors of the economy. Authorities justify their tolerance of cartels by their alleged positive impact on country-wide supplies, public health, technical progress, and for environmental or cultural policy reasons. Under a revitalization program launched after Switzerland's EEA rejection in December 1992, the Swiss government presented a revised cartel law that, while not prohibiting them, would allow for a more restrictive attitude against cartels. Consumer organizations would have the right to denounce cartels, and a Federal Office for Competition would investigate the market against harmful collusive behavior. The burden of proof would be shifted to the firms under investigation. In addition, preventive controls would be set up in order to hinder companies from bypassing the Cartel Act. Switzerland also has a law on price surveillance to complement the Cartel Act. It relates in particular to cases where the establishment of effective competition is seen as desirable. An official price inspector is commissioned to observe price developments and to prevent or rectify abusive pricing behavior. However, his powers are limited to the issuance of recommendations on behalf of the concerned economic branches, and in practice, there is little price competition in most Swiss retail sectors. - Efficient Capital Markets and Portfolio Investment Switzerland is among the world's top financial centers. The Swiss-franc denominated foreign bond market is one of the largest markets for foreign borrowers, and Zurich is one of the largest gold trading centers in the world. Zurich is well-known to institutional investors, whereas Geneva appeals to private investors. Lugano is a smaller financial center. Basel is the seat of the Bank for International Settlements. There are no restrictions on the purchase or sale of foreign currencies and equities. Residents and non-residents may conclude foreign exchange contracts, whether of a commercial or financial nature, in all currencies. Exchange controls exist only for countries having non- convertible currencies. All forward transactions can be made at free market rates, by foreigners and Swiss. Payments for imports from all sources may be made freely, and exporters are free to dispose of their proceeds. No legal impediments apply to payments for, or receipts from, invisibles. Repatriation of invested capital is unrestricted. The credit market is open to foreign investors without restriction, at the same terms and conditions as for Swiss investors. A variety of credit instruments is available. With the exception of hidden reserves that companies in Switzerland are entitled to hold, legal, regulatory, and accounting systems are transparent and consistent with international norms. To prevent misuse of the very liberal market framework, provisions to regulate certain aspects of portfolio investment have been enacted. One is the Due Diligence Convention among Swiss banks, under which banks must identify the beneficial owner of invested funds. Further, the Swiss government enacted provisions against money laundering in 1990, and additional measures were proposed by the government in mid-1993. In its report on Switzerland, the Financial Action Task Force on money laundering (FATF) considered the Swiss measures against money laundering as exemplary for the banking sector, but still insufficient for the non-banking sector. Aware of the problem, the government has drafted a bill on money laundering that would include the non-banking sector. The proposed law has been criticized by the private sector, however, and has not been discussed by parliament. Switzerland is a signatory to the money laundering agreement of the European Council. Portfolio investment should be further encouraged by a revised law on mutual funds, which enters into force in 1995. The new law will remove all restrictions on the type of assets mutual funds are allowed to hold in their portfolio. A recent study estimated the worldwide fortune of institutional investors in Switzerland to be over SF 1,000 billion. Insurance companies were estimated to own SF 300 billion, and pension funds SF 275 billion). Despite some structural changes, the Swiss banking system is considered healthy and sound. Triggered by a crisis in the real estate market in 1991, a concentration process affecting mainly regional banks started to develop. With the exception of one bank closure by the Federal Banking Commission, the process evolved smoothly and without loss for depositors. Between 1991 and 1993, the number of regional banks dropped by 18 percent, and in 1993 Volksbank, the fourth largest commercial bank, was taken over by Credit Suisse, which became the second largest bank in Switzerland. In 1993, total assets of the country's five largest banks were SF 667 billion, representing 55 percent of all bank assets in Switzerland. Foreign investment is not restricted by "cross-shareholding" or "stable shareholder" arrangements. There is no discrimination against foreign investors of any kind, except limitations cited earlier in this section. - Political Violence Switzerland continues to be a country of political and social stability, and there are no signs of possible political violence. - Bilateral Investment Agreements To date Switzerland has concluded 63 Investment Protection Treaties with developing countries and the former Soviet bloc. Of these, 56 are in force, with: Tunisia, Niger, Guinea, Ivory Coast, Senegal, Congo, Cameroon, Liberia, Rwanda, Togo, Madagascar, Malta, Tanzania, Costa Rica, Benin, Chad, Ecuador, Upper Volta, South Korea, Uganda, Zaire, Central African Republic, Egypt, Indonesia, Sudan, Mauritania, Jordan, Syria, Malaysia, Singapore, Mali, Sri Lanka, Panama, Morocco, China, Bolivia, Turkey, Hungary, Uruguay, Poland, Czechoslovakia, (former) Soviet Union, Jamaica, Argentina, Ghana, Bulgaria, Cape Verde, Chile, Peru, Paraguay, Vietnam, Albania, Estonia, Latvia, Lithuania, Uzbekistan. Six treaties have been signed, but not yet ratified: Belarus, Honduras, Romania, Venezuela, Gambia and Kazakhstan. - OPIC and other Investment Insurance Programs OPIC is not active in Switzerland. However, Switzerland is a member of the Multilateral Investment Guarantee Agency (MIGA). - Labor Switzerland's only major raw material is its labor force. It consists of approximately 3.5 million people. Over 60 percent are employed in the services sector. The major services are tourism, banking, insurance, consulting, public administration and health care. Industry employs 33 percent of the workforce. The biggest branches are machinery and electronics, followed by chemicals and pharmaceuticals, watchmaking, textiles, and food processing. The remaining 5.2 percent work in the agricultural sector. Because wages in Switzerland are among the highest in the world, the Swiss economy is capital intensive and geared toward high technology products. The government does not fix minimum wages. Salaries are freely negotiated between employers and employees; so are, to some extent, conditions of work. However, the Federal Labor Act and the Code of Obligations contain regulations covering maximum work hours, minimum length of holidays, maternity leave, sick leave and compulsory military service, contract termination, and others. In the industrial labor field, wages are in most cases determined by collective agreements between major labor unions and employers' associations. Often collective agreements serve as models for other work contracts. About one-third of the country's labor force is unionized. In general, labor management relations are excellent. They are characterized by a willingness on both sides to settle disputes by negotiation rather than by strike; days lost to strikes are among the lowest in the OECD member nations. Although Switzerland has experienced a dramatic increase of unemployment since 1991 (from 1 percent at the beginning of 1991 to 5 percent at the end of 1993), there is a shortage of highly skilled workers in some manufacturing and service sectors. Consequently, the Swiss government has modified its restrictive immigration policy to facilitate authorization of work permits for highly skilled foreign workers. - Foreign Trade Zones/Free Ports Foreign trade zones do not exist in Switzerland. There are 27 free ports at major frontier posts, at the international airports of Geneva and Zurich, and at most of the larger trade and industrial centers within Switzerland. Their establishment and operation is governed by the Customs Law of 1925. They are all operated by private enterprises, and foreign investors are free to participate. Local as well as foreign investors may also open new free port facilities, provided they can prove that a need for additional establishments exists. - Capital Outflow Policy The Swiss government has no policy on, or any laws to regulate or even monitor, the outflow of capital. The only incentive it offers for encouraging investment by Swiss companies in developing countries is a type of investment guarantee, and the framework of bilateral investment treaties which it has concluded with many developing countries. - Foreign Direct Investment Statistics No official data relating to foreign direct investment in Switzerland is available. OECD figures on direct investment flows show that between 1981 and 1990, direct investment in Switzerland amounted to $12.4 billion (5% of Swiss GDP) or 1.6 percent of total inward direct investment funds from OECD countries. For the same period, Swiss outward direct investment was $31.9 billion or 3.3 percent of total outward direct investment funds. The book value of U.S. direct investment in Switzerland at the end of 1993 stood at $32.9 billion, constituting close to six percent of total U.S. direct investment abroad and making Switzerland the fourth most favored country for U.S. investors. However, interpretation of percentage shares should be treated with a degree of caution in view of U.S. investment in Swiss-based holding companies which operate as international intermediaries redirecting funds to other foreign subsidiaries. According to figures from the U.S. Department of Commerce, finance (excluding banking), insurance, and real estate represented as much as 54 percent of U.S. direct investment in Switzerland. Wholesale trade was the second mainstay (28.8%), followed by manufacturing (5.8%), and banking (5.4%). In 1990, a total of over 500 American companies in Switzerland employed 54,800 persons, or 0.8 percent of the country's labor force. Most recent figures released by the Swiss National Bank show Swiss direct investment abroad in 1992 totaled SF 7.9 billion, of which SF 1.2 billion was invested in North America. The U.S. continued to be the most important country for Swiss direct investment, followed by France, Germany, Great Britain, the Netherlands, Italy, Spain, Brazil, and the Caribbean. At the end of 1992, Swiss companies employed over one million people abroad. Employment in the U.S. (277,600 people), Germany, France, Great Britain and Italy represented 54 percent of total employment abroad. In terms of capital stock, Swiss direct investment abroad reached SF 107.5 billion at the end of 1992 or 31.7 percent of GDP. The book value of Swiss direct investment in the U.S. at the end of 1993 was $21.4 billion, whereby manufacturing, insurance, and trade represented 77 percent of the total. Finance accounted for 5 percent of Swiss direct investment in the United States.