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III. FOREIGN INVESTMENT AND TRADE
(1) Framework forForeign Direct Investment
1. TheForeign Investment Law, LawNo.861of19July1978, modified in1983 byLaw138,
governs foreign direct investment (FDI) intheDominican Republic. Under thelaw,theDirectorate
ofForeign Investment (Directorio deInversión Extranjera )evaluates andapproves foreign direct
investment projects. TheDirectorate, chaired bytheGovernor oftheCentral Bank, iscomposed of
representatives oftheGovernment andtheprivate sector. Thelawalsodefines thesectors inwhich
FDIistobeallowed andtheextent ofsuchparticipation. TheDirectorate may,however, atitsdiscretion
declare anysector closed toforeign investment. Thelawestablishes rules oncapital registration,
reinvestment ofprofits, andrepatriation ofcapital andprofits; inaddition, itregulates technology
transfer andFDIincertain service sectors.
2. FDIinthefreezones, covered byLaw8-90, doesnotrequire authorization fromtheDirectorate
ofForeign Investment orregistration withtheCentral Bank.
3. FDIpolicy hasbeenconsistent withDominican industrial policy (Chapter V(4)) inpromoting
export oriented activities while placing restrictions ondevelopment inother sectors oftheeconomy.
Priority, bylaw,isgiven toprojects which promote exports andimprove thebalance ofpayments,
suchastourism projects. Ingeneral, FDIisnotallowed inareas oftheeconomy where domestic
investment isconsidered sufficient orinareas thatarenotconsidered ascontributing totheeconomic
development ofthecountry. Itisalsorestricted inspecific sectors oftheDominican economy. FDI
isprohibited inthefollowing public sector services: drinking water, sewage, electricity,
telecommunications andpostal services. FDIislimited to29percentofequity inactivities reserved
fornational enterprises, suchastheproduction ofmaterial andequipment related tonational defence
andsecurity; advertising, broadcasting, newspapers, magazines, publishing andmass media
communication; internal landtransport, except when directly related tohandling tradeables; internal
air,maritime transport andcabotage; andforestry. Inagriculture, animal husbandry, fishing, banking,
insurance, andotherfinancial institutions, inwhich national andmixed enterprises operate, participation
offoreignequityislimitedtoapercentagenotexceeding49percent.1Thus,foreignfinancialinstitutions
based intheDominican Republic must beatleast50percentDominican-owned. Citibank andthe
Bank ofNova Scotia areexceptions, since theywere established before approval oftheForeign
Investment Law.
4. Inorder torepatriate capital orprofits, theinitial investment must beregistered withthe
Central Bankandreceive approval fromtheForeign Investment Directorate. Annual profits generated
byforeign capital, dulyregistered withtheCentral Bank, mayberemitted uptoanamount equivalent
to25percentoftheregistered capital. Profits exceeding 25percentcanbereinvested intourism,
export-oriented industries, andimport-substituting industries, provided thattheygenerate atleast
30percentofdomestic value added.2Invested capital canberemitted onlyupto2percentannually
and,cumulatively, upto20percentoftheoriginal investment. According totheGovernment, annual
1Anational enterprise isonewithaminimum of70percentDominican ownership andmanagement; amixed
enterprise has51to70percentDominican ownership andmanagement.
2Article 20ofLaw861.WT/TPR/S/11
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profit remittances cannot exceed theequivalent of25percentofthenetvalue oftheoriginal and
additional investment plusreinvestment, minus repatriation, dulyregistered withtheCentral Bank.
5. Furtherrestrictionsapplytotheacquisitionofland,hiringoflabour,andaccesstocredit.Foreign
companies cannot obtain domestic credit foraperiod greater thanoneyearwithout priorapproval from
theCentral Bank. Thepurchase oflandbyforeign persons orenterprises islimited to5,000 m2.Land
purchases above thislimitmust beauthorized bypresidential decree. Inrelation tolabour, atleast
80percentoftheemployees hired byaforeign company mustbeDominican nationals. Nevertheless,
employment offoreigners above themaximum maybeauthorized ifqualified Dominican personnel
cannot befound. Thecompany, however, hastotrainDominican staff.
6. Therestrictive nature oftheDominican Republic 'sforeign investment lawscreates anincentive
tocircumvent theregulatory system. Much foreign investment, therefore, isnotregistered withthe
Central Bank andforeign investors usemethods suchastransfer pricing torepatriate profits. The
Government, however, realizing theflaws oftheLawandtheimportance offoreign capital forfurther
development ofthecountry, haverecently drafted anewFDIlaw.
7. Thedraftlawwasapproved bytheChamber ofDeputies inJanuary 1995andwassenttothe
Senate inSeptember 1995. Thenewlawisaimed atattracting foreign capital byliberalizing the
investment régime, andgranting national treatment toforeign investors. Itisexpected thatthelaw
willeliminate restrictions oncapital andprofit remittances andpermit these tobeeffected infreely
convertible currencies without prior authorization. Registration requirements forforeign capital are
tobemaintained onlyforstatistical purposes. Specific restrictions onFDIwill,however, bemaintained.
Controls willapply toinvestment inpublic services, production ofmaterial andequipment related to
national defence andsecurity, agriculture, animal husbandry, fishing, banking, insurance, andother
financial institutions.3Itisexpected thatthenewlawwillreplace anumber ofexisting special laws,
such asthePrivate Insurance Law, theCivil Aeronautics Law, theLawontheProtection and
Development oftheMerchant Marine, theFishing Law, andtheMining Law, thatimpose restrictions
onFDIinthese sectors. IfthedraftFDIlawisapproved, restrictions toinvestment inother laws
willbeeliminated.Furthermore,anyremainingrestrictionstoinvestmentwillapplyequallytoforeigners
andnationals.
8. TheDominicanRepublichassignedabilateralagreementforreciprocalprotectionofinvestment
(acuerdos paralaprotección delasinversiones )withSpain tocover political andeconomic risks.
Bilateral agreements with theUnited States, Canada, France, theUnited Kingdom, andthe
Republic ofKorea arealsobeing negotiated.
9. TheGovernment 'spolicy towards FDI, infact,reflects thecountry 'soverall development
strategy. Ontheonehand, import-substitution industries continue tobeprotected, while ontheother
export-oriented activities arepromoted. Thisisaccomplished byallowing reinvestment ofprofits only
inimport-substituting industries orexport-oriented industries. ThenewFDIlaw,when approved,
should make theDominican Republic more attractive toforeign investors. Thebenefits tothe
Dominican Republic ofayetmore liberal FDIlawcould beconsiderable, given thatunexploited
investment opportunities existandcould increase ifprivatization ofState-owned enterprises wereto
takeplace.
3Government communication.Dominican Republic WT/TPR/S/11
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(2) Trends andPatterns inForeign Direct Investment
10. Foreign direct investment intheDominican Republic increased substantially from1975to1990
(Chart III.1); cumulative inflows increased fromUS$582 million tooverUS$5.5 billion intheperiod.4
Historically, thesector thathasattracted thegreatest FDIhasbeenthetertiary sector, followed by
thesecondary sector; FDIinthetertiary sector grewfrom40percentin1975to48percentin1990,
principally because ofthegrowth inthetourism industry intheDominican Republic. Theshare of
FDIintheprimary sector hasbecome almost insignificant, decreasing from18.2percentin1975 to
7.5percentin1990.
11. Developed countries accounted foralmost 90percentofthecumulative gross inflows ofthe
FDItotheDominican Republic between 1970 and1990 (Chart III.1). FDIoriginated mainly inthe
United States, Canada, andmembers oftheEuropean Union.5Canada andtheUnited States accounted
for80percentoftotalFDIin1990. Inthesame year, tenoftheseventeen largest foreign affiliates
intheDominican Republic wereU.S.companies, investing mainly intheservices sector. OneCanadian
4U.N. (1994), p.27 World Investment Directory: Latin America andtheCaribbean. ,Vol.IV,
NewYork, NY.
5U.N. (1994), p.27 World Investment Directory: Latin America andtheCaribbean. ,Vol.IV,
NewYork, NY.WT/TPR/S/11
Page 30Trade Policy Review Mechanism
firmwasinvolved incommunications, while theremaining sixwere European enterprises investing
inthemanufacture offood, beverages, andchemicals, andintheexploitation ofcoalandpetroleum.6
12. TheDominicanRepublic,withlow-costlabourandexportpromotionschemes,hasalsoattracted
some FDIgeared towards labour-intensive activities, associated withexport-processing zones. For
instance, in1994, 52percentoftheenterprises operating inthefreezones wereforeign; 46percent
ofthem were U.S.companies.7These data, however, arenotreflected intheofficial Central Bank
statistics because, asnoted above, FDIinthefreezones requires neither authorization norregistration.
Asthese datashould normally betaken intoaccount when analysing FDI, onlyapartial picture of
thepatterns inforeign investment canbeobserved.
6U.N. (1994), World Investment Directory, Vol. IV.
7SEIC (1994). Secretaría deEstado deIndustria yComercio, "Informe delsector dezonas francas
correspondiente al1994" Santo Domingo, República Dominicana ,1994.