Foreign direct investment (FDI) can have a lot to offer an economy. But, the world's nations are becoming increasingly concerned about the impact of FDI on national security. As governments have placed more emphasis on screening investments, they've increased the costs of investments - and reduced the attractiveness - to foreign investors.
David Marchick and Matthew Slaughter look at trends in foreign investment reviews in their new Council of Foreign Relations report, Global FDI Policy. Correcting a Protectionist Drift (June 2008). Marchick was the author, with the late Edward Graham, of US National Security and Foreign Direct Investment (Peterson Institute, 2006).
Marchick and Slaughter point to three reasons for heightened security concerns:
- More investments are now coming from non-traditional countries, such as Dubai, China, and Russia.
- Government ownership and control of companies making investments is increasing.
- Rising foreign reserves can lead some governments to limit or reduce foreign investment in certain sectors (here they are specifically thinking of moves in Russia and China).
Bottom line, Marchick and Slaughter identify four general principles to guide national security reviews of FDI:
- The investment review law should be narrowly tailored and focused on national security and not on economic factors.
- The investment review process should provide predictability to transaction parties by ensuring that reviews will be conducted within a definite timeframe.
- The investment review process should ensure confidentiality to the transaction parties.
- Countries should avoid sector-based lists for determining transactions requiring investment reviews or, as a second-best alternative, should draft such lists as narrowly as possible.
They also identify roles for three international organizations:
- The OECD has a long-standing comparative advantage at documenting and analyzing member-country best practices... The OECD should create and maintain a database to house information supplied by participating countries on items including the number of FDI reviews, the transactions on which conditions were imposed, and the number of transactions that were blocked by the government or in which the prospective acquirer withdrew. The database should also contain information on the industries that triggered reviews and the countries from which prospective investments originated. One of the difficulties in assessing the impact of the contemplated FDI regimes is the lack of quantitative and qualitative data on FDI reviews. Governments simply do not publish these data, and they should.
- Consistent with its recently initiated efforts to generate conduct guidelines for sovereign wealth funds, the IMF can similarly work toward guidelines on FDI policies directed at state-involved enterprises. These guidelines could broadly accord both with our four principles above and with the SWF goals of encouraging investments for economic rather than political reasons, of providing transparent information on broad investment philosophies (without divulging competitive secrets), and of providing transparent information on governance and decision-making methods.
- Finally, meetings of the G8 nations—and related broader meetings with additional countries—can reinforce the core messages of sound FDI policies. The regularity and high level of these meetings can make them especially useful as another venue to amplify and endorse the efforts both of individual countries and of the OECD and the IMF as just outlined.
Currently, thye don't think it makes sense to work towards a multilateral agreement on security reviews.
Hat tip: Tips to Encourage Foreign Investment, While Satisfying Political Pressure (Real Time Economics, June 25, 2008).
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