| Criteria | Score
(4-0) | Rationale |
| Laws on VC/PE fund formation and operation | 2 | There are two type of relevant vehicles for fund administrators under 1998 legal reforms, the most attractive being the group investment fund (fondo colectivo de inversión). This type of fund can invest in productive firms, and can itself sell shares. The possibilities of these legal vehicles have not yet been fully explored because of other factors inhibiting venture and equity capital. There are also investment trusts (fideicomisos de inversión), which can be a cumbersome instrument. |
| Tax treatment of VC/PE funds & investments | 3 | There is tax exemption for funds and trusts and capital gains relating to share transfers as long as the fund has paid corporate income tax due. Dividends are not taxed when distributed, since they are paid out of already taxed corporate income. Dividends paid by one resident company to another generate no additional taxes. However, there is a .1% annual tax on corporate assets payable to the Superintendency of Companies, and tax laws are sometimes confusing and shifting. (December 2006 interview, EIU Country Commerce 2006) |
| Protection of minority shareholder rights | 1 | Minority rights are covered in the corporate governance norms that the Andean Development Corporation has developed and for which it is providing Ecuadorian firms training and technical assistance along with other international agencies over a four-year period. But this is a voluntary undertaking for firms. The Fondo País Ecuador finds the need to be strict by requiring changes in firm statutes when investing (December 2006 interview). |
| Restrictions on institutional investors (pension funds, insurance firms) investing in VC/PE | 2 | There is only one pension fund, which is state-owned and for public employees. It can make equity investments with only minimal restrictions, as can insurers. Bigger obstacles are internal decision-making structures and the lack of attractive investment opportunities (December 2006 interview). |
| Protection of intellectual property rights | 1 | EIU Risk Briefing score. Trademarks, copyrights and patents are fairly well protected in law but not in practice. The law also protects industrial designs and undisclosed information (información no divulgada), including trade secrets, which need not be registered. Copyrights also need not be registered. International business groups continue to protest what they call a poorly drafted provision in the Education Law of 1999, which is meant to grant free software licenses to some educational institutions through Article 78. Piracy is the most important challenge to protecting intellectual property. The Business Software Alliance, an international industry group that promotes the protection of intellectual property, estimates that the piracy rate for software alone was 70% and caused US$13m in losses in Ecuador in 2004. Police forces continue to take some public action, such as steamrolling or destroying confiscated copies of pirated CDs, DVDs and other software. Nevertheless, this has done little to affect the massive quantity of pirated merchandise widely available. |
| Bankruptcy procedures/creditors' rights/partner liability in cases of an invested company's bankruptcy | 3 | The IDB gave Ecuador the highest score for strength of creditor rights in its 2005 study. Partner liability is not a problem for investment (December 2006 interview). |
| Capital markets development and feasibility of exits (ie, local IPOs) | 1 | Average of three EIU Risk Briefing scores. The Bolsa de Valores de Guayaquil (BVG) and the Bolsa de Valores de Quito (BVQ) are Ecuador’s two stock exchanges. The capital markets remain small and underdeveloped despite the 1993 capital markets law, which set up a modern regulatory structure and opened stockmarket trading to banks and other firms. Most large industrial groups are privately held, and financed through debt. The bulk of the activity on the two stock exchanges involves trading in short-term commercial paper, bank obligations and government debt. Equity trading is limited to shares in a handful of banks and companies. |
| Registration/reserve requirements on inward investments | 3 | There are no reserve requirements. Registration is simple and takes place with the central bank. There are no exchange controls. (EIU, Country Commerce 2006; December 2006 interview) |
| Corporate governance requirements | 1 | There is movement toward international best practice with the voluntary Andean Development Corporation code in the process of implementation. But mandatory legal norms remain lacking. (December 2006 interview). |
| Strength of the judicial system | 0 | EIU Risk Briefing score. The legal system is severely under-funded, inefficient and corrupt at every level. The higher courts are politicized and sometimes biased against foreign investors. Even when foreign investors have won compensation in the courts, payment has often not been enforced. Investors have resorted to international tribunals instead, but cases often drag out for years. Where national law does not disallow it, businesses may consider circumventing national law by making contracts that specify both what law should govern any dispute and in which forum any dispute should be heard (such as an arbitration panel). |
| Perceived corruption | 0 | EIU Risk Briefing score. Corruption remains widespread in many institutions. Political appointments–often to placate coalition parties–are prevalent, undermining the effectiveness of state bodies. The judiciary is highly politicized and the fragmented legislature is unlikely to tackle this problem effectively. Access to legal protection and law enforcement is flawed and effective protection of rights is waning. Against this backdrop, there is a risk that higher domestic liquidity–partly as a result of windfall oil profits–could further encourage corruption. There is a framework in place to earmark revenue from oil sales to specific funds, but these are often loosely-defined. Weak institutional oversight is likely to exacerbate this problem, undermining the rule of law and serving as a disincentive to private investment. |
| Quality of local accounting industry/use of international standards | 4 | International standards are in use in Ecuador's dollarized economy, and this helps spur investment (December 2006 interview). |