International
Investments: Is
Policy Pendulum Swinging Back?
By Kavaljit Singh
25 July, 2007
Countercurrents.org
In
the last five decades, there have been dramatic swings in the policy
pendulum governing foreign investments at various levels in response
to changing global political context. In the 1960s and 70s, the dominant
thinking was foreign investments should be restricted as it interferes
in the domestic economic policy making besides posing a threat to national
sovereignty. The 1980s and 90s witnessed major swings in the investment
policy pendulum towards greater liberalization of the regulatory framework
at the national level. The swing was more pronounced in developing countries,
particularly in Asia, Latin America, and Central and Eastern Europe.
Countries unilaterally (sometimes voluntarily) undertook liberalization
measures such as lifting their controls on foreign ownership, removing
performance requirements, and liberalizing their capital account. An
increasing trend towards privatizing public sector companies in developing
and transition countries added momentum to investment liberalization
processes. Several countries also offered various guarantees and subsidies
to foreign investors.
The extent of these swings
in policy can be measured in several ways. For instance, expropriations
had increased in the 1960s and early 1970s, but almost disappeared in
the 1990s. According to UNCTAD, a total of 1,393 regulatory changes
were introduced in national investment regimes during 1991-2001, out
of which 1,315 (almost 95 per cent) were meant to create a favorable
investment environment. In 2001 alone, as many as 208 regulatory changes
were made by 71 countries, of which only 16 changes were less favorable
for foreign investors.
The 1990s witnessed a surge
in the number of bilateral investment treaties (BITs) as more and more
countries started adopting liberalized investment policies. The highest
number of BITs were negotiated and concluded during this decade. Regional
initiatives on investment liberalization also emerged in the 1990s.
In 1991, negotiations took place between the US, Canada, and Mexico
to launch the North American Free Trade Agreement (NAFTA) in 1994. In
many aspects, NAFTA was simply an extension to Mexico of the existing
Canada-US Free Trade Agreement.
Is the Pendulum Swinging
Back?
Despite the dominant trend
towards greater liberalization of investment flows, nowadays certain
kinds of investments have come under closer scrutiny by policy makers.
In several countries (both developed and developing), there are moves
to tighten existing investment rules or to enact new rules to regulate
foreign investments and protect “strategic sectors” from
foreign investors.
Unlike the 1990s, nowadays
the costs and benefits of foreign investments are being evaluated in
a much more balanced manner, keeping in mind not only economic factors
but also social, political, and strategic factors. It is increasingly
becoming clear that the benefits of foreign investment have been fewer
than anticipated while the costs have been much bigger. In some host
countries (such as Bolivia and Malaysia), there is a greater realization
of costs involved with foreign investment. The initial euphoria associated
with the benefits of foreign investments seems to be subsided. To a
large extent, disappointment with certain kinds of foreign investment
has put a big question mark on the benefits of investment liberalization.
The growing unease with foreign
investments could be grasped from several recent developments, some
of which are summarized below:
* Several Latin American
countries (such as Bolivia, Ecuador, Argentina, Ecuador, and Venezuela)
are renegotiating contracts with TNCs to bring economic equilibrium
between the foreign company and the host country. In Bolivia, for instance,
the government successfully renegotiated contracts with ten foreign
energy companies (mostly from the region) in October 2006. Under the
new contracts, majority ownership of gas fields has been transferred
to the state and government’s energy tax revenues are expected
to increase by four times. The renegotiation of contracts was the outcome
of the nationalization policy announced by President, Mr. Evo Morales,
on May 1, 2006, under which foreign companies were asked to sign new
contracts giving the government majority control or leave the country.
In March 2006, Ecuador passed a new law that gives the government 60
per cent tax on oil profit of foreign companies if the oil prices exceed
certain benchmarks.
* Cross-border M&As deals
have become the bone of contention in recent years. As discussed elsewhere,
several important M&As deals have been blocked by policy makers
in both the developing and the developed world. In many countries, attempts
are being made to screen foreign investments from a security perspective.
* In 2006, India’s
National Security Council suggested a new law, National Security Exception
Act, which would empower the government “to suspend or prohibit
any foreign acquisition, merger or takeover of an Indian company that
is considered prejudicial to national interest.”
* Russia is considering new
rules to protect its strategic resources, particularly oil and gas.
Despite strong pressure from the EU (the main consumer of Russian energy
resources), Russia has refused to ratify the Energy Charter Treaty which
covers the key areas of trade, investment protection, environmental
issues, and dispute resolution. Though Russia signed the charter in
the early 1990s, it has refused to ratify it. Russia has refused to
provide non-discriminating access to foreign companies to the country’s
pipelines, primarily the gas transportation network controlled by state-owned
gas company, Gazprom.
* Although China’s
foreign investment regime is significantly open but acquisitions of
Chinese firms by foreign investors are increasingly being questioned
amidst a growing mood of “economic patriotism.” The National
Development and Reform Commission of China has emphasized the need to
shift to a “quality, not quantity” approach towards attracting
foreign investments. The Commission asked the government to encourage
foreign investments in higher-value-added sectors and discourage low-value
export-processing and assembly-type manufacturing. In its policy document
for the 11th Five-Year Plan released in November 2006, the Commission
suggested closer scrutiny of future mergers in sensitive sectors and
called for new legislations on foreign takeovers. Since 2005, the rapid
entry of foreign banks in the Chinese financial sector has raised serious
concerns in the policy circles about the benefits of a liberalized financial
regime.
* There has been a phenomenal
increase in the disputes between TNCs and host governments in recent
years. More than 200 international arbitration cases concerning investment
projects have been initiated in the past few years. The disputes are
expected to increase further given the rethinking on the benefits of
foreign investments by some host governments.
* Of late, the growing engagement of private equity funds (such as Kohlberg
Kravis Roberts & Company, Blackstone, and Carlyle Group) in the
cross-border mergers and acquisitions has generated considerable public
criticism in some developed countries. In 2005, Mr. Franz Müntefering,
the then chairman of the Social Democratic Party (SPD), described private
equity funds and hedge funds as “swarms of locusts that fall on
companies, stripping them bare before moving on.” In the case
of South Korea, the activities of private equity funds came under scrutiny
following reports of non-payment of taxes. Private equity funds earned
billions of dollars by taking over sick banks in the post-crisis period
and later re-floated them in the Korean financial markets. After the
strong public outcry, the regulatory authorities in Korea undertook
stern actions against such funds. In the US, there are growing calls
for strict regulation of private equity funds following the failed $50
billion takeover bid of Vivendi Universal of France by Kohlberg Kravis
Roberts & Company in 2006. In the UK, the Financial Services Authority
(FSA) reviewed the operations of private equity funds and found several
areas of potential risk to the financial system because of their market
abuse and anti-trust practices. The FSA called for closer regulation
and supervision of private equity funds.
Similarly, the phenomenal
rise of hedge funds, known for their short-term investment strategies
and lack of transparency and accountability, has come under considerable
criticism in many developed countries. The UK’s FSA has taken
a tough stand against hedge fund industry. In a discussion paper, the
FSA warned that “some hedge funds are testing the boundaries of
acceptable practice concerning insider trading and market manipulation.”
The FSA also announced the establishment of a dedicated new unit which
would monitor and supervise the trading behavior of hedge fund industry.
This is a significant development given the fact that the bulk of European
hedge funds are located in the UK and they account for at least 30 per
cent of trading at the London Stock Exchange, which is the biggest stock
market within the Europe. Even in the US, the Securities and Exchange
Commission is examining new measures to increase its surveillance on
hedge funds.
* The corporate scandals
(from Enron to Worldcom to Parmalat) have further dented the benign
image of TNCs worldwide. The scandals have exposed systemic flaws in
the corporate governance model based on self-regulation. Despite much-touted
claims of corporate transparency and disclosures, the basic norms of
governance were completely flouted by these corporations. Regulations
related to accounting and reporting were either circumvented or followed
in letter rather than in spirit. What is even more disturbing is the
fact that most of these corporations had their own codes of conduct,
illustrating that voluntary codes of conduct are clearly insufficient
to ensure that TNCs conduct their business operations responsibly. Such
codes therefore should not be considered as a substitute for state regulations.
* Outsourcing has become
a contentious political issue in many developed countries (for instance,
US) because of the fear of white-collar job losses in the service sector.
How far these developments
could lead to a major backlash against foreign investment remain to
be seen. Nevertheless, there is an increased onus on the foreign investors
and their advocates to prove (both theoretically and empirically) that
foreign investments are always beneficial to the host country. Nowadays
there are now very few supporters of the earlier market-friendly approaches
that focused exclusively on investors’ rights and nations’
obligations. Even within the corporate world, questions related to investors’
obligations in both home and host countries are being raised. Thus,
any attempt to launch multilateral investment agreement that intends
to serve the interests of foreign investors exclusively at the expense
of weakening the regulatory framework is unlikely to succeed in the
present geo-political context. No wonder, the policy focus has shifted
away from multilateral to bilateral and regional investment agreements.
Kavaljit Singh
is Director, Public Interest Research Centre, New Delhi. He can be reached
at [email protected].
The above article is based on his latest report, Why Investment Matters:
The Political Economy of International Investments (FERN, The Corner
House, CRBM and Madhyam Books, 2007). The full report could be downloaded
from:
http://www.thecornerhouse.org.uk/pdf/document/Investment.pdf
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