Internat= ional Investments: Is the Pendulum Swinging Back

International Investments: Is the Pendulum Swinging Back?

Kavaljit Singh

Despite the dominant trend towards greater liberalization of investment flows, certain kinds of investments have come under closer scrutiny by policy makers. In several countries (both developed and developing), there are moves to tighten exist= ing 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 al= so social, political, and strategic factors. It is increasingly becoming clear that the benefits of foreign investment have been fewer than anticipated wh= ile 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. T= o a large extent, disappointment with certain kinds of foreign investment has p= ut a big question mark on the benefits of investment liberalization.

The growing unease w= ith foreign investments could be grasped from several recent developments, some= of which are summarized below:

* S= everal 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 tim= es. 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 n= ew contracts giving the government majority control or leave the country. In M= arch 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.

* C= ross-border M&a= mp;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 m= ade to screen foreign investments from a security perspective.

* In 2006, India’s National Securi= ty Council suggested a new law, National Security Except= ion Act, which would empower the government “to suspend or prohibit any foreign acquisition, merger or takeover of an Indian company that is consid= ered prejudicial to national interest.”

* <= !--[if supportFields]>Ru= ssia"<![endif]-->Russia is considering new rul= es 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 cov= ers 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 control= led by state-owned gas company, Gaz= prom.

* A= lthough China’s foreign investment regime is significantly open but acquisitions of Chinese= firms by foreign investors are increasingly being questioned amidst a growing moo= d of “economic patriotism.” The National Development and Reform Commission of China has emphasized the need to shift to a “quality, not quantity= 221; approach towards attracting foreign investments. The Commission asked the government to encourage foreign investments in higher-value-added sectors a= nd 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 ent= ry of foreign banks in the Chinese financial sector has raised serious concern= s in the policy circles about the benefits of a liberalized financial regime.

* T= here has been a phenomenal increase in the disputes between TNCs and host governments in recent years. Of the 219 known international arbitration cas= es concerning investment projects brought by November 2005, some two-thirds we= re initiated during the past three years [1]. The disputes are expected to increase further given the rethinking on the benefits of foreign investment= s by some host governments.

* Of late, the growing engagement of private equity funds (such as Kohlberg Kravis Roberts & Company, and Carlyle Group) in the cross-border mergers and acquisitions has generated considerable public cri= ticism 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 “sw= arms of locusts that fall on companies, stripping them bare before moving on.= 221; 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 authoriti= es in Korea= undertook stern actions against such funds. In the US, there are growing ca= lls for strict regulation of private equity funds following the failed $50 bill= ion takeover bid of Viv= endi 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 th= eir market abuse and anti-trust practices. The FSA called for closer regulation= and supervision of private equity funds.

* S= imilarly, 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 UK̵= 7;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.R= 21; 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, w= hich 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.

* T= he corporate scandals (from Enron to Wor= ldcom to Parmalat) have fu= rther dented the benign image of TNCs worldwide. The scandals have exposed system= ic flaws in the corporate governance model based on self-regulation. Despite much-touted claims of corporate transparency and disclosures, the basic nor= ms 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 con= duct their business operations responsibly. Such codes therefore should not be considered as a substitute for state regulations.

* <= !--[if supportFields]>Ou= tsourcing"<![endif]-->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 o= nus on the foreign investors and their advocates to prove (both theoretically a= nd 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’ rig= hts and nations’ obligations. Even within the corporate world, questions related to investors’ obligations in both home and host countries are being raised. Thus, any political move at the international level that inte= nds to serve the interests of foreign investors exclusively at the expense of weakening the regulatory framework is unlikely to succeed in the present geopolitical context.

Notes:

1. Karl Sauvant, “Is foreign dire= ct investment still a welcome tool?,” Taip= ei Times, September 7, 2006.

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