2013 Index of Economic Freedom

Investment Freedom

Investment Freedom

In an economically free country, there would be no constraints on the flow of investment capital. Individuals and firms would be allowed to move their resources into and out of specific activities, both internally and across the country’s borders, without restriction. Such an ideal country would receive a score of 100 on the investment freedom component of the Index of Economic Freedom.

In practice, most countries have a variety of restrictions on investment. Some have different rules for foreign and domestic investment; some restrict access to foreign exchange; some impose restrictions on payments, transfers, and capital transactions; in some, certain industries are closed to foreign investment. Labor regulations, corruption, red tape, weak infrastructure, and political and security conditions can also affect the freedom that investors have in a market.

The Index evaluates a variety of restrictions that are typically imposed on investment. Points, as indicated below, are deducted from the ideal score of 100 for each of the restrictions found in a country’s investment regime. It is not necessary for a government to impose all of the listed restrictions at the maximum level to effectively eliminate investment freedom. Those few governments that impose so many restrictions that they total more than 100 points in deductions have had their scores set at zero.

Investment restrictions:

National treatment of foreign investment

• No national treatment, prescreening 25 points deducted
• Some national treatment, some prescreening 15 points deducted
• Some national treatment or prescreening 5 points deducted

Foreign investment code

• No transparency and burdensome bureaucracy 20 points deducted
• Inefficient policy implementation and bureaucracy 10 points deducted
• Some investment laws and practices non-transparent
or inefficiently implemented
5 points deducted

Restrictions on land ownership

• All real estate purchases restricted 15 points deducted
• No foreign purchases of real estate 10 points deducted
• Some restrictions on purchases of real estate 5 points deducted

Sectoral investment restrictions

• Multiple sectors restricted 20 points deducted
• Few sectors restricted 10 points deducted
• One or two sectors restricted 5 points deducted

Expropriation of investments without fair compensation

• Common with no legal recourse 25 points deducted
• Common with some legal recourse 15 points deducted
• Uncommon but occurs 5 points deducted

Foreign exchange controls

• No access by foreigners or residents 25 points deducted
• Access available but heavily restricted 15 points deducted
• Access available with few restrictions 5 points deducted

Capital controls

• No repatriation of profits; all transactions require
government approval
25 points deducted
• Inward and outward capital movements require
approval and face some restrictions
15 points deducted
• Most transfers approved with some restrictions 5 points deducted

Up to an additional 20 points may be deducted for security problems, a lack of basic investment infrastructure, or other government policies that indirectly burden the investment process and limit investment freedom.

Sources.Unless otherwise noted, the Index relies on the following sources for data on capital flows and foreign investment, in order of priority: official government publications of each country; Economist Intelligence Unit, Country Commerce, 2009–2012; Office of the U.S. Trade Representative, 2012 National Trade Estimate Report on Foreign Trade Barriers; and U.S. Department of Commerce, Country Commercial Guide, 2009–2012.

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