Prior to 1990, no private investments were possible in Mongolia; much of the country's investment capital was derived from government loans and grants provided by the former USSR and allied countries. New government policy and laws since the late 1980s, including the Foreign Investment Law of 1993, provide the legal basis and incentive for foreign investments. In 1994, Mongolia concluded a Bilateral Trade and Investment Agreement (BTIA) with the US, in 1997 accessed to the WTO, and in 1999 was granted normal trade relations (NTR) status by the US.
The Foreign Investment and Taxation Laws provide for tax incentives and exemptions for foreign investment. Total income tax exemptions are granted to businesses engaged in infrastructural projects like building power plants, thermal plants, power transmission networks, highways, railways, and air cargo transportation facilities. Mining operations, metallurgy operations, chemicals production, and machinery and electronics manufacturing receive a 10-year tax holiday, and 50% tax exemption for the next five years. Companies that export more than 50% of production receive a three-year tax holiday, and 50% tax exemption for another three years. Thus far, private foreign capital remains a small source of investment in the country. Mongolia's lack of infrastructure remains an impediment to foreign investment. A north-south paved road running from Russia to China and through the capital was completed with finance from the Asian Development Bank (ADB) but Mongolia still lacks an East-West highway. As of July 2000, cumulative foreign investment in Mongolia totaled $308.4 million. The biggest source has been China, including Hong Kong ($86 million), followed by Japan ($47.5 million), South Korea ($30.4 million), the US ($27.1 million), Russia ($15.5 million) and Canada ($9.3 million). The sector attracting the most foreign direct investment (FDI) has been mining (24%), followed by light industry (19.6%); raw material processing, including cashmere (10.9%); trade and catering (6.4%); construction (6.3%); banking and financial services (5.4%) and telecommunications (5.0%). Leading investors include Sumitomo Corporation and Komatsu of Japan; Korean Telecom; and SOCO Oil, Caterpillar, and Nescor of the United States.