WHY DO COUNTRIES ACCEPT OR REJECT FOREIGN INVESTMENT?
Q: Can you help us understand the benefits of foreign direct investment for countries on the receiving end? The benefits seem pretty clear when it comes to greenfield investment, which is when a company builds a new factory from the ground up, hiring new employees and helping the local economy expand. But does incoming FDI always help a country’s economy?
A: A lot of foreign direct investment is not greenfield. A lot of foreign direct investment these days involves a merger or an acquisition, having a foreign company take over a local company.
In some cases they will be buying the local company because they want to make a bunch of new investments and help it grow. But in other cases they may be looking to cut costs, which could mean laying people off, reducing salaries, or scaling back operations. In short, it depends.
Q: Why would the U.S. government be wary of allowing inward foreign investment?
A: The United States generally has an open approach toward foreign direct investment coming in. The presumption is that companies who are investing in the United States are helping the U.S. economy.
But large investments are subject to a national security review, which is done by the Committee on Foreign Investment in the United States (CFIUS). Typically that would happen because the investment is coming from a country or a company that arouses concerns about security.
Some transactions have gotten a lot of attention, in which there have been questions about national security, fairly or unfairly. One was the DP World purchase of a U.S. port at a time when there were concerns about terrorism. There has been a set of Chinese offers to buy U.S. technology companies, which generally have been blocked.
Q: What are some examples of countries that have not been as open to investment as the United States?
A: China, broadly speaking, has had the opposite approach: you need explicit approval to invest in China. Many companies have received approval and have a large presence in China, but the ability to invest in China cannot be assumed.
WHAT ARE THE RULES FOR FDI?
Q: To regulate trade, countries created the World Trade Organization (WTO). Countries have not made an international agreement for foreign investment, leaving the rules to be decided on a case-by-case basis. Why is that?
A: Both trade and investment can be viewed as a matter of sovereignty. Sovereign countries can, in theory, do what they like when it comes to limiting and encouraging trade and investment.
But in order to facilitate trade, countries have agreed through the WTO to limit tariffs to a certain level. The idea is that everybody has tied their hands. Of course not everyone has tied their hands in precisely the same way—different countries have different tariffs on different products. But in general, there is an agreed set of tariffs and an organization that polices those tariffs.
On the investment side, there are countries that have not been willing to enter into the same kind of commitment. As a result, countries have more authority to have different policies toward inward investment.