Peer reviewed analysis from world leading experts

Equal treatment for outward investors

Reading Time: 3 mins

In Brief

During the past decade, emerging economies have increasingly become important players in the global FDI market.

In 1990 more than 30,000 multinational enterprises (MNEs) headquartered in emerging markets rose from roughly 5 per cent to more than 25 per cent. These new players — many of which are state-owned enterprises (SOEs) and sovereign-wealth funds (SWFs) — are now competing against long-established MNEs in many sectors.

Share

  • A
  • A
  • A

Share

  • A
  • A
  • A

Among developed countries, the arrival of these investors has sparked concerns that have been pursued by the OECD, both in the Trans-Pacific Partnership negotiations and at the national level. There are two particular sources of anxiety.

First, some developed countries worry that governments of emerging economies will use such state-controlled entities for foreign-policy purposes. While there is no systematic evidence to support the claim that foreign direct investors have predominantly non-commercial objectives, this possibility cannot be excluded. Given this prospect, some developed countries have strengthened their regulatory framework to allow for the review of mergers and acquisitions by state-controlled entities, especially in sensitive industries and critical infrastructure.

Second, SOEs and SWFs may receive various kinds of support from their governments, thereby distorting ‘competitive neutrality’ vis-à-vis private-sector firms. For example, governments could have a distorting effect by providing information about investment opportunities, access to cheap capital, fiscal incentives, financial support for specific projects, credit guarantees, reduced disclosure requirements, official development assistance tied to FDI projects or political support.

In acting on these concerns, developed countries must bear in mind that state-controlled entities are important players in the global FDI market — and that developed countries’ state-controlled entities are bigger players in this market than those of emerging markets. While SWFs account for only about US$100 billion worth of FDI, the 49 largest non-financial SOEs control roughly US$1.8 trillion in foreign assets. Of these, the 29 companies headquartered in emerging markets control a total of US$400 billion worth of foreign assets, compared to roughly US$1.4 trillion held by the 20 firms headquartered in developed countries. As a result, the rules established for state-controlled MNEs are more relevant to companies based in developed countries than to those more numerous but less powerful MNEs originating in emerging markets.

And while state-controlled entities receive support from their governments, so too do privately-owned MNEs. Internationally competitive firms are seen to benefit the country’s economy, governments — especially in developed countries but also increasingly in emerging markets — support both state-controlled and private firms in FDI.

In order to address concerns about ‘competitive neutrality’, policies must address the extent to which state-controlled and privately owned firms receive official support for their outward investment. More transparency in this area should be established as a basis for informed policy making. Beyond that, any official action would require more policy restraint by governments of developed countries than by their emerging-market counterparts.

Whether undertaken by state-controlled entities or private firms, FDI can contribute to economic growth and development. There is no need for special treatment of state-controlled entities beyond addressing national security concerns. Special treatment for one group of investors can lead only to the fragmentation of a non-discriminatory international investment regime, and this is hardly a desirable outcome.

Karl P. Sauvant is Resident Senior Fellow at the Vale Columbia Center on Sustainable International Investment, Columbia University.

An earlier version of this article was first published here on Project Syndicate.

Comments are closed.

Support Quality Analysis

Donate
The East Asia Forum office is based in Australia and EAF acknowledges the First Peoples of this land — in Canberra the Ngunnawal and Ngambri people — and recognises their continuous connection to culture, community and Country.

Article printed from East Asia Forum (https://www.eastasiaforum.org)

Copyright ©2024 East Asia Forum. All rights reserved.