More generally, a welcoming stance could in the long run stimulate investing companies to adopt – to some degree – standards of corporate governance and social responsibility that are compatible with Europe’s economic interests.
To say that foreign investment from China is welcome, however, is not to argue that governments should just sit back and enjoy the benefits. On occasion, it can be at odds with the national interests of the host country. To maintain oversight, therefore, a case-by-case review system should be in place. The existence of such a system would also help address unwarranted public anxiety about investment from countries whose political and economic systems differ from our own. This would in turn facilitate the continued growth of investment from emerging economies such as China, which is still small compared with the high level of bilateral trade already in place.
What has already caused anxiety in some European countries, particularly Germany and France, is the fact that the leading Chinese companies, banks and investment funds are state-controlled. Because Europeans regard China’s autocratic political system as incompatible with their own democratic norms, the growth of Chinese influence in European companies is a highly sensitive issue.
The EU does not have an investment review system comparable to those of the US, Australia or Japan. The best-known review body is the Committee on Foreign Investment in the US (CFIUS), established in 1975 and strengthened by the Foreign Investment and National Security Act of 2007. CFIUS investigates transactions that involve foreign governments, national security threats or control of critical infrastructure. While the UK, France and Germany have systems to review sensitive takeovers, none is as developed as CFIUS. More importantly, it is essential that the EU as a whole has one review system. Europe can hardly afford to turn away foreign investors, including state-controlled entities. Europe’s need for Chinese investment is likely to increase, and without collective bargaining power on the European side China is able to play one country off against another.
The point of a European screening system is not to block particular investments. Once in place, the review system should not discriminate between non-EU investors in terms of nationality or type of ownership. For the time being, Chinese companies and funds do not seek controlling shares in European entities. When they start doing so, there are already ways for countries to prevent takeovers that pose a risk to security. The greater benefit lies in reassuring foreign investors. A transparent European review body could take away fears that protectionism and inconsistencies play a part in prohibiting certain takeovers, increasing the inflow of foreign investment.
The biggest benefit of a review system is that it would stimulate policymakers and experts to consider the implications of proposed investments from China and other emerging economies. Problems to be addressed include identifying which entities are vital to European security, what level of Chinese investment constitutes an undesirable influence, and what the benefits of foreign investment are in relation to national security interests. The main issue is not the Chinese taking over European companies of great strategic importance; it is how to respond to the longer-term accumulation of economic power in Europe by a country such as China.
There is a justifiable concern that today’s commercially motivated investments by state-controlled entities may at some point be used by foreign governments to pursue political goals. The sooner politicians and policymakers start thinking through the implications of this, the better.
The writers are researchers with Clingendael Asia Studies at the Clingendael Institute in The Hague. Maaike Okano-Heijmans is also visiting fellow with the Asia-Pacific College of Diplomacy at the Australian National University.
This article first appeared here at the Financial Times.
It seems there is a fairly urgent need to have an international or world organisation to facilitate and oversee international capital flows or cross-border or foreign investment, given the magnitude and importance of capital movement internationally at present and into the future, and the likely increasing disputes or impediment or protections that affect the efficient allocation of global financial and physical capital resources.
There should be a set of agreed principles that govern international capital flows. The principles should be non-discriminatory in nature. National security may be a legitimate reason for some government intervention, but the rules governing it needs to be spelt out clearly and that should not be used as an excuse for discrimination at will by governments or politicians either economically, politically or racially.
There should be an international agreement on international investment and capital flows. One additional advantage of having an international overseeing organisation is to minimise the potential damages done by big speculative players in the international capital market.
Should different ownership be treated differently, given that all firms are under the regulation of a sovereign country? But it is an interesting and legitimate question and needs to be addressed openly and fairly.
One option for such an international organisation is to broaden the responsibility of and empower the WTO, so it would also serve as a forum for nations to settle disputes in international capital flows. Another option is to restructure the IMF and give it a new mandate on overseeing international capital flows.
Neither of these comments is well thought out. As every MNC investor has learned, once you commit the assets, your are totally subject to the whims of the host country — at least since countries stopped sending the marines to safeguard investors’ properties in other countries. Neither of the articles (and many similar pieces before) spells out what exactly the foreign-government-owned investor will do?? Actually, the biggest danger are the disruptive effects that come from the destruction of economic value caused by incompetent management associated with foreign gov. owned companies trying to run business operations in a foreign country. Will someone please let us know what special skills PRC SOE management teams have in running Aussi coal mines?? We have had experience with Japanese investments in the US during the 80’s: they had no idea how to run golf courses in California and tall buildings in Manhattan. After a decade they were sold back at great losses, often to the original owners. Different story in the auto industry: the Japanese knew how to run assembly plants better than their local competitors and this is what made them succeed to this very day. Bottomline: FDI is not a matter of (financial) capital flows but the ability to manage business assets in unfamiliar (and often hostile) environments.
We do have an organization that addresses FDI issues; it has done so for a long time and is called the OECD; the United Nations also have an arm that occupies itself with such issues. We do not need a new institution but better understanding of that part of (micro-) economics.