4. Business establishment and operations
Uruguay has long acknowledged the long-term benefits of an open and non-discriminatory international investment environment. As such, the country retains very few restrictions on establishment and operations of foreign-owned enterprises. This chapter examines the openness of Uruguay’s investment regime in relations to barriers to entry of foreign-owned firms and exceptions to national treatment. It also benchmarks the openness of Uruguay’s FDI regulatory regime against OECD and various other emerging economies through the OECD FDI Regulatory Restrictiveness Index, showing the level of openness far above the average encountered in developing countries and even most advanced economies.
Uruguay has long acknowledged the long-term benefits of an open and non-discriminatory international investment environment. Investment is a critical condition to spur growth and sustainable development. While domestic firms typically undertake the bulk of investments, international investors can sometimes bring important complementarities. Beyond bringing additional capital to a host economy, evidence suggests that FDI can help to improve resource allocation and production capabilities, act as a conduit for the local diffusion of technological and managerial expertise, and provide improved access to international markets (Moran et al., 2017).
A country’s attractiveness to foreign investors depends on a large range of determinants, some of which are exogenous to government control, such as geography and economic size. Unlike these, the openness to foreign investment is a policy area which governments can shape. Two features have a direct bearing on an economy’s openness to FDI, namely the conditions that apply the entry of foreign investors and the extent to which they are discriminated against once established. Both policies have been shown to be a significant determinant of the attractiveness of countries to FDI (Fournier, 2015; Mistura and Roulet, 2019; Nicoletti et al., 2003), and, consequently, of the potential effects foreign investments can have on the host economy (see, for instance, OECD, 2015 and OECD, 2018). Partly due to their relevance in shaping the operating environment for international investors, market access conditions and the extent of discrimination against foreign-owned established investors typically lie at the heart of key international regulatory frameworks on investment.
At the OECD, these policies are, respectively, the objective of two internationally-recognised instruments, namely the Code of Liberalisation of Capital Movements1, and the National Treatment instrument (Box 4.1), which is part of the OECD Declaration on International Investment and Multinational Enterprises. Parties to these instruments are encouraged to uphold the principle of non-discrimination at entry (between residents and non-residents, and across the latter) and thereafter (between nationals and foreigners) as a way of creating an enabling environment for foreign direct investment, and to be transparent about any departures from this principle.
As an applicant for adherence to the Declaration, Uruguay is encouraged to voluntarily commit to providing national treatment to foreign investors in its territory – i.e. to treat enterprises operating on its territory, but controlled by the nationals of other adhering countries, no less favourably than domestic enterprises in like situations.2 It is also encouraged not to backtrack in relation to existing measures comprising exceptions to the national treatment. For transparency reasons, as for all other Adherents, Uruguay is required to report a list of any existing exceptions to national treatment during the adherence process. Likewise, it is required to report other measures that may not constitute exceptions to national treatment, but that are important determinants of policies in the context of national treatment, such as measures on corporate organisation or related national security.
National treatment is the commitment by an Adherent to the Declaration on International Investment and Multinational Enterprises to treat enterprises operating on its territory, but controlled by the nationals of another country, directly or indirectly, no less favourably than domestic enterprises in like circumstances.
The term "operating in its territory" in the instrument conveys the idea of doing business from a place of business in the host country, as distinct from conducting business in the country from abroad. This recognises that adhering countries' practices differ regarding recognised forms of business but that the main forms of doing business are through locally incorporated subsidiaries and branches. The principle of national treatment applies regardless of the home country's treatment of enterprises from the host country (OECD, 2005).
The National Treatment instrument consists of two elements: a declaration of principle, which forms part of the Declaration, and a procedural OECD Council Decision which obliges Adherents to notify their exceptions to national treatment and establishes follow-up procedures to deal with such exceptions. The Decision comprises an annex that lists exceptions to national treatment, as notified by each Adherent and accepted by the OECD Council. The Investment Committee periodically examines the exceptions. Only measures concerning legal entities are reported for the purpose of the National Treatment instrument, and thus any measure that may apply to natural persons is not reflected in the list contained in the annex to the Council’s decision. To ensure transparency, Adherents to the Declaration also undertake to report any measures that, while not representing exceptions to national treatment, have an impact on it. The lists of these exceptions and measures are published and regularly updated. There are featured in Annexes A and B to the present Review.
Drawing from the above frameworks, this chapter examines the openness of Uruguay’s investment regime against these two sets of policies: barriers to entry and exceptions to national treatment. In view of Uruguay’s adherence to the Declaration, this chapter also reports the list of exceptions to national treatment and measures reported for transparency notified by Uruguay to the OECD. Lastly, it benchmarks the openness of Uruguay’s FDI regulatory regime against OECD and various other emerging economies through the OECD FDI Regulatory Restrictiveness Index (Box 4.2).
Uruguay is an open economy to foreign investment, and market participants benefit from high standards of protection. As discussed in greater detail in the next Chapter, according to the Constitution all investors have equal legal status and property rights acquired through the investment of capital cannot be restricted by law or any other legal act. Foreign investors are also guaranteed the right to free transfer and repatriation of profit and invested capital. The principle of non-discrimination is enshrined in Law 16.060/1989, section XVI and by Law 16.906/1997 (on national interest, promotion, and protection). In addition, there are no laws aimed specifically at foreign investors, which reduces the risk of inconsistent and discriminatory treatment between foreign and domestic investors.
The Companies Code (Ley de Sociedades, No. 16.060), which regulates the establishment and operation of businesses in Uruguay, provides for equal treatment between domestic and foreign-owned enterprises established in Uruguay. Accordingly, a foreign investor may establish or participate in establishing a company and may acquire rights and/or commitments as for any domestic investor. The establishment of a business entity by foreign investors is carried out as per regulations for domestic investors.
As such, foreign investors are generally treated without discrimination. There is no general investment screening mechanism for inbound FDI, and there are only a few regulatory restrictions concerning the entry and participation of foreign investors in economic activities in Uruguay. These measures are typically limited in scope. Foreign investors are unconstrained in their ability to acquire real estate, be it for business purposes or as real estate investments, with one exception. Foreign companies, or Uruguay-registered subsidiaries that are themselves invested by a foreign state, cannot buy land, a provision introduced in 2014 to protect domestic sovereignty and facilitate the development of the Instituto Nacional de Colonización. In the rest of the economy, the few exceptions, in particular for protected areas, do not discriminate between domestic and foreign investors. All these measures are discussed in further detail below.
The Index focuses on four types of measures: foreign equity restrictions, discriminatory foreign investment screening and approval requirements, restrictions on the employment of foreign key personnel, and other operational restrictions (such as limits on purchase of land or on repatriation of profits and capital). The extent of discrimination between foreign and domestic private investors is the central criterion to decide whether a measure should be scored. Nevertheless, non-discriminatory measures are also covered when they are considered more burdensome for foreign investors, such as rules regarding the nationality of board of directors. The Index covers 22 sectors, almost all sectors of the economy except health and education. The economy-wide index is obtained by averaging the scores for all 22 sectors.
Scores range from 0 (open) to 1 (closed). The scoring methodology is inspired by the seminal work of Hardin and Holmes (1997) based on expert judgement. Foreign equity restrictions are given a higher score, followed by discriminatory screening measures. Restrictions on foreign key personnel and other measures receive relatively lower scores. Scores reflect the sum of scores under each policy dimension, capped at one. For further details on the scoring methodology, please refer to Kalinova et al. (2010).
The Index is based on statutory measures as reflected in official OECD instruments or identified in OECD Investment Policy Reviews and yearly monitoring reports. The use of country positions under the OECD Code of Liberalisation of Capital Movements and the OECD National Treatment Instrument, as well as the comprehensive discussion of countries’ discriminatory measures undertaken in the Investment Policy Reviews ensures the appropriate identification of measures and allows for a great deal of consistency in their interpretation. The Index is updated on a yearly basis, based on the Secretariat’s monitoring of investment policy changes in all OECD members, G20 economies and adherent countries to the OECD Declaration on International Investment and Multinational Enterprise, which is undertaken in the context of Freedom of Investment Roundtable and is extended for the purposes of the Index to all countries covered. OECD members and adherents to the Declaration are also formally required to notify the OECD in case of changes to regulations affecting foreign investment, which facilitates keeping track of reforms for the purposes of the Index. This allows the Index to be used to track the progress of liberalisation over time.
Actual implementation of statutory restrictions, which is difficult to assess, is not factored into the scoring. Although important, other aspects of the regulatory framework, such as the nature of corporate governance, the extent of state ownership, and institutional or informal restrictions which may also impinge on the FDI climate, are not incorporated.
Source: Kalinova et al. (2010).
The openness of Uruguay’s investment regime is attested by its position under the OECD FDI Regulatory Restrictiveness Index. The extent of discrimination against foreign investors observed in Uruguay’s regulations is lower than for most of the 70 countries benchmarked under the Index (Figure 4.1). Uruguay compares favourably against both the OECD and non-OECD averages in this respect, and also against the average of non-OECD Adherents to the Declaration. Its level of restrictiveness is 33% lower than the average of the other seven LAC countries covered by the Index and about 35% lower than the average of adherents to the Declaration.
On a sectoral basis, Uruguay also maintains a more open environment than most other countries in nearly all business activities. When compared to the OECD average, regulatory restrictions on FDI are greater only in transport industries and the media (Figure 4.2), sectors where many other countries – in particular emerging economies – retain certain restrictions. The remaining restrictions pertain mainly to local incorporation requirements (e.g. air transport and auxiliary services, rail transport, insurance services) and the use of maximum foreign equity limits (e.g. media services).
1. Data reflect regulatory restrictions as of September 2019 for Uruguay, as provided by the authorities, and as of end-year 2018 for all other economies.
2. This designation is without prejudice to positions on status, and is in line with the UN Security Council Resolution 1244/99 and the Advisory Opinion of the International Court of Justice on Kosovo’s declaration of independence.
Source: OECD FDI Regulatory Restrictiveness Index, www.oecd.org/investment/fdiindex.htm. Please refer to Kalinova et al. (2010) for further information on the methodology.
1. Data reflect regulatory restrictions as of September 2019 for Uruguay, as provided by the authorities, and as of end-year 2018 for all other economies.
2. This designation is without prejudice to positions on status, and is in line with the UN Security Council Resolution 1244/99 and the Advisory Opinion of the International Court of Justice on Kosovo’s declaration of independence.
Source: OECD FDI Regulatory Restrictiveness Index, www.oecd.org/investment/fdiindex.htm
Any difficulty in attracting FDI into Uruguay is, therefore, unlikely to be related to de jure restrictions on local establishment or business operations for foreign investors. Nonetheless, as mentioned above, the regulatory environment for FDI must not be seen in isolation from the overall business environment. While barriers to FDI should not necessarily be a concern for attracting international investment in Uruguay, the stringency and cumbersomeness of business regulations and the level of state participation in the economy may be (Chapters 3 and 7). In some cases, non-discriminatory deficiencies in the business environment may affect domestic and foreign investors alike. In other cases, they may still have disproportional effect on foreign investment.
Uruguay has no trans-sectoral exception to national treatment. Market access conditions are also more common across sectors than exceptions to national treatment. Sector-specific measures consisting of departures from the national treatment principle are limited to foreign ownership restrictions in a few commercial activities, such as freshwater fishing, and transport. Uruguay also does not impose limits on access to local finance and incentives (e.g. tax concessions) or government purchasing markets for foreign-controlled enterprises incorporated in the territory.
These measures are discussed in further details below. As per obligations under the National Treatment instrument, Uruguay’s list of the measures constituting an exception to national treatment at national and territorial level is reported in Annex A of this Review. Annex B contains the list of measures reported for transparency reasons (e.g. measures based on national security considerations, as well as non-discriminatory corporate organisation requirements, official aids and subsidies and public and private monopolies and concessions). Measures restricting investments by natural persons are not reported, as they are not covered by the instrument.
Cross-sectoral measures affecting foreign investment
Land and other real estate
The right of ownership of private property and real estate is spelled out in the Constitution and other legal texts (see above). The main exception is Law 19.283 of 2014 that declares preservation and defence of the State’s full sovereignty on national resources, and land in particular, to be of general interest. Henceforth, “the executive power will not be allowed to determine that the ownership of rural real estate and agricultural exploitations be in possession of companies controlled directly or indirectly by foreign States or sovereign wealth funds”.3 The measure is meant to assuage fears that investments by foreign governments jeopardise national sovereignty and contribute to growing concentration in wealth and land ownership. A clause indicates that, if the Uruguayan government is interested in hosting a state investor, it will indicate so and instruct the interested party to submit a formal request. The Instituto Nacional de Colonización has pre-emption rights on all land deals larger than 500 hectares.
Reciprocity condition
A foreign investor may establish or participate in establishing a company and may acquire rights and/or commitments in the same way as any domestic investor.
Nonetheless, policies conditioning market access on reciprocal treatment in the home country is reflected under the OECD FDI Regulatory Restrictiveness, since they depart from the underlying principle of liberalisation embedded in the OECD instruments on international investment and capital movements, which is to promote liberalisation through unilateral action at a countries’ own pace rather than through bargaining. Besides, any benefits associated with such investments flowing to host economies are likely to occur regardless of whether the home country of that firm provides equal treatment to host country firms. There may be cases where reciprocity conditions may actually contribute to ensuring an increasing degree of liberalisation overall, and therefore these are given special consideration under the OECD Codes of Liberalisation of Capital Movements for instance, but ultimately they still constitute a barrier for foreign investment.
Sector-specific measures affecting foreign investment
The sector-specific exceptions to the NTi notified by Uruguay concern the ownership of commercial fishing, media, and transport companies (see Annex A to this Review). Other sector-specific measures discussed below refer to measures imposing conditions on the establishment of foreign investors in Uruguay. While not covered by the NTi, they constitute statutory barriers to entry and, as such, are included in the OECD FDI Regulatory Restrictiveness Index.
Other policies affecting foreign investment and reported for transparency purposes under the National Treatment Instrument
A few other policies applied by Uruguay, while not discriminating between foreign-controlled enterprises and domestic enterprises, may result in difference in impact by potentially imposing a greater burden on the foreign controlled-enterprise. Policies based on public order and essential security considerations may restrain access to certain sectors of national interest. Likewise, the existence of public, private, or mixed monopolies may render access to certain sectors difficult for foreign investors. As such they are important determinants in the context of national treatment. Such measures are notified by a country adhering to the OECD Declaration for transparency purposes.
Uruguay has reported only a few measures for transparency purposes under the NTi (see Annex B). These are related to conditions imposed on key personnel in fisheries, media, and sea and air transport, as well as a few sectors which are kept under public monopoly. Also relevant is the obligation to have a majority of nationals on the boards of companies operating surface transport services (railways and roads).
In addition, foreign investment activities can be limited in certain areas due to national security considerations. Uruguay does not have national security review mechanisms nor any other specific policy that would allow it to respond to threats to its national security stemming from established foreign direct investors. However, it does not allow foreign SOEs and Sovereign Wealth Funds (SWFs) to own rural land and caps at 49% their shares in agricultural enterprises.
Measures based on public order and essential security considerations
International instruments such as the OECD Declaration and the OECD Guidelines for Recipient Country Investment Policies relating to National Security (OECD, 2009) recognise countries’ rights to regulate to manage potential risks to national security or public order. Unlike some governments which have recently increasingly invoked national security to control foreign investment (Wehrlé and Pohl, 2016; Wehrlé and Christiansen, 2017), Uruguay has remained content with the absence of formal policies to manage or potentially prevent certain acquisitions by foreigners on national security grounds. If such policies exist, they are limited to the acquisition of land or real estate in some sensitive geographical areas and by state-controlled entities.
Activities covered by public, private, mixed monopolies or concessions
A number of activities are reserved to the Oriental Republic of Uruguay, namely:
the extraction, import and refining of oil which is carried out by the state-owned company ANCAP;
the provision of electricity transmission which is carried out by the state-owned company UTE;
the provision of electricity distribution, which is reserved to UTE;
the provision of wholesale electricity market supply, which is reserved to UTE;
the operation of Uruguay’s gas storage system, which is reserved to UTE;
the wholesale gas market supply, which is reserved to ANCAP;
water supply and management, which is the monopoly of the state-owned company OSE;
wastewater treatment and sewage, for which OSE is responsible.
OECD calculations reveal that Uruguay has one of the most open regimes for international investment according to the FDI Regulatory Restrictiveness Index. Exceptions under the OECD National Treatment instrument are limited to foreign ownership restrictions in very few activities or sectors. Despite this de jure openness, investors complain about various types of inconveniences when operating a business, a perception supported by the country's performance in international rankings (Table 4.1). Oft-heard concerns include administrative burdens in terms of time and costs, in particular when registering property and obtaining building permits, and some interpretative inconsistencies between public institutions.
In 2019, Uruguay ranked 101st out of 190 countries in World Bank’s Doing Business indicators – exactly in the middle, although much closer to the best-performing country (New Zealand, 25 points above) than to the worst one (Somalia, 41 points below). In comparison with other LAC countries, Uruguay is among the top third, preceded by eight countries and ahead of 21. When compared with the 12 non-OECD countries that are Adherents to the OECD Declaration, Uruguay has worse scores than most of them – from 25th-ranked Kazakhstan to Tunisia at 78th – although better than Egypt, Brazil, and Argentina. It must be noted that Doing Business – which addresses ten business regulatory areas such as starting a business, paying taxes and enforcing contracts – should not be construed as an overall measure of the investment climate; but can still provide an indication of possible areas of attention – and the relative importance of the overall administrative burden in the country. Uruguay’s relatively weak performance, in particular in comparison with other high-income emerging economies, is driven by poor scores in several sub-indicators, in particular those related to dealing with construction permits, discussed in more detail in Chapter 7 on investment promotion and facilitation:
The Global Competitiveness ranking of the World Economic Forum provides additional perspectives on the quality of the business environment. In 2018, Uruguay ranked 53rd out of 140 countries, a loss of three positions with respect to 2017. The country performs well in areas like health (and human capital more broadly) and institutional quality (and the enabling environment in general), but its markets for capital, labour and products are perceived as badly-functioning. In particular, labour markets in Uruguay are characterised by relatively higher costs and relatively more stringent regulations with the associated benefits to workers and potential costs to the private sector. For example, while Uruguay is ranked third globally on workers’ rights, highlighting strong regulatory framework and well-developed protection net – it also scores close to the bottom worldwide on pay and productivity, flexibility, redundancy costs, hiring and firing practices, cooperation in labour-employee relationship and flexibility in wage determination (Figure 4.3). This is in stark contrast with Costa Rica or Chile, two similarly small-sized and open economies with which Uruguay may compete for FDI. Other critical factors include weak innovation capability (despite high ICT adoption) and small market size. More discussion of these policy areas can be found in Chapter 3.
Source: WEF Global Competiveness Index 2019
Overall, as suggested by Uruguay’s overall rankings in Doing Business and the Global Competitiveness Index, there is room for speeding up administrative procedures, making them more transparent and effective, and improving the overall quality and transparency of market regulation – and specific areas and options for policy reforms are discussed in Chapter 7.
Concerning the promotion and defence of competition, Law No. 18.159/2007 is focused on the investigation of anticompetitive conduct, rather than the analysis of economic concentrations. Implementation is in the hands of the Commission on the Promotion and Defence of Competition, a decentralised body of the Ministry of Economy and Finance, which has scarce resources, few personnel and little autonomy (UNCTAD, 2016). In order to strengthen the system for the protection and promotion of competition that will ultimately enhance consumer welfare and national competitiveness, Law 19.833/2019 introduced two substantive provisions. The reform introduces a list of per se forbidden practices (such as agreements between companies or industry associations concerning prices, output limitations, market sharing, and coordination) and a prior authorisation regime for any economic concentration deal above a threshold (total annual turnover of the parties to the deal larger than UI 600 million, roughly equivalent to USD 74 million).
It is evident that an open and transparent environment for foreign investment is important since it expands market opportunities and enhances predictability for investors. Nonetheless, there are other incentives to which foreign investors respond, including the quality of the overall business environment, which also impinges on domestic investors. For this reason, behind-the-borders regulatory challenges, which affect both foreign and domestic investments, should be seen in tandem with market access and treatment of foreign investors. These other policies affecting the overall business environment are addressed in the next chapters.
Uruguay has one of the most open regimes for international investment according to the OECD FDI Regulatory Restrictiveness Index. It is more open in statutory terms than the average OECD member country and Uruguay's exceptions under the OECD National Treatment instrument are limited to restrictions in a few activities. Any difficulty Uruguay may have in attracting FDI is, therefore, unlikely to be related to its level of statutory restrictiveness.
While an open environment for FDI is important, this is one many factors considered by potential investors. Foreign firms are equally affected by deficiencies in the overall business environment and burdensome regulations, impinging on domestic investors too. As suggested by international indicators, notably in comparison to other emerging economies in LAC and elsewhere, and discussed further in Review, there are several areas in the overall business environment where Uruguay has yet to address shortcomings. They can serve as a complement to the market access measures that helped opened the local economy to foreign investment and trade.
Consider if some of the remaining restrictions on FDI, in the transport, maritime and media sectors, could not be reduced or abolished. For example, it could be considered if the restrictions sustained in such sectors as media are consistent with the authorities’ objective to build a competitive audio-visual sector and attract FDI.
Build on successful liberalisation to shift focus towards addressing wider investment climate issues and reducing the administrative burden for all firms. Statutory restrictions on FDI are important but not a determining factor influencing the location of MNE firms. In particular, considering small size of the economy, the ease of doing business and exporting could be its key comparative advantage.
References
Fournier, J. M. (2015), "The negative effect of regulatory divergence on foreign direct investment", OECD Economics Department Working Papers No. 1268, OECD Publishing, Paris.
Mistura, F. and C. Roulet (2019), “The Determinants of Foreign Directment Investment: Do Statutory Restrictions Matter?”, OECD International Investment Working Paper, No. 2019/02.
Moran T. H., E. M. Graham and M. Blomström (2005), Does Foreign Direct Investment Promote Development?, Peterson Institute for International Economics
Nicoletti, G., S. Golub, D. Hajkova, D. Mirza, and K.-Y. Yoo, (2003), “The Influence of Policies on Trade and Foreign Direct Investment”, OECD Economic Studies No. 36, 2003/1, OECD Publishing, Paris.
Wehrlé, F., H. Christiansen (2017), “State-owned enterprises, international investment and national security: The way forward”, OECD Insights Blog www.medium.com/@OECD/state-owned-enterprises-international-investment-and-national-security-the-way-forward-c21982c9fa8c
Wehrlé, F., J. Pohl (2016), “Investment Policies Related to National Security: A Survey of Country Practices”, OECD Working Papers on International Investment, No. 2016/02, https://doi.org/10.1787/18151957
Notes
← 1. The Code of Liberalisation of Capital Movements is an OECD instrument designed to support the progressive freedom of capital movements, while providing flexibility for countries to lodge reservations regarding operations the country is not yet in the position to liberalise and to reintroduce restrictions in situations of serious economic and financial disturbance. Since 2011, non-OECD economies may apply for adherence to the Code. Currently seven non-OECD countries are undergoing the process of adherence (Argentina, Brazil, Bulgaria, Uruguay, Peru, Romania and South Africa).
← 2. In the case of the Code, for instance, members are required to progressively abolish measures that discriminate between residents and non-residents and to treat residents of all other members alike. Any remaining restriction on operations they are not yet in a position to liberalise are notified and lodged in the country reservation list for transparency reasons.
← 3. For the purpose of the OECD FDI regulatory restrictiveness index, the measure is considered to be for national security, and hence not considered.