WASHINGTON - The United States and other beneficiaries of foreign investment
are seeking to restrict it, a leading US think-tank says in a report, warning
that this "protectionist drift" could roil capital markets and stifle global
economic growth for years to come.
Numerous countries have approved or are seriously considering laws to restrict
new foreign investment or subject it to significantly more government scrutiny
and regulation, says the Council on Foreign Relations.
Among these are 11 - including the United States, Russia, Canada, China and
Germany - that together receive 40% of the
world's foreign direct investment (FDI).
In a classical FDI deal, an investor from one country acquires a lasting
interest, such as a physical investment in a factory, in an enterprise in
another country. The investment must be large enough to afford the investor
control over the foreign entity.
Such investment has proved a stronger engine of global economic development
than has trade, say authors David Marchick and Matthew Slaughter. "Investment
liberalization has been the strongest driver of growth worldwide," they say.
Marchick is global head of regulatory affairs at the Carlyle Group, a top
private equity firm. Slaughter, a senior fellow at the council, has served on
President George W Bush's council of economic advisers.
"Looking ahead, an even stronger protectionist drift ... could exacerbate the
ongoing turmoil in global capital markets, with widespread consequences for the
real economy in many countries," they say.
Restrictions on foreign investment would result in considerable costs to the
global economic system, reducing benefits to investor, or "source", and
recipient, or "host" countries alike.
"The United States offers some of the clearest evidence on the host-country
benefits of FDI inflows," according to the report, "Global FDI Policy".
"Beyond employing millions of Americans, the US operations of foreign companies
make American workers and the overall economy more productive through
investment in physical capital, investment in R&D [research and
development], and trade," it adds.
The document says outbound investments benefit source countries because "these
outflows enhance the competitiveness of their multinational parent companies by
allowing them to better serve foreign markets".
Marchick and Slaughter urge governments to curb their appetite for restrictions
on foreign investment. Government review of foreign investments should be
governed by four principles, they say.
First, any investment-review law should be limited to national security
considerations and should not be tainted by economic motivations.
Second, the review process should be quick and predictable so as not to disrupt
potential investments. Third, the confidentiality of business transactions
should be carefully safeguarded.
Fourth, countries should avoid targeting specific sectors, such as
telecommunications or energy, for comprehensive reviews of every proposed FDI
deal. Already, investment reviews once limited to defense sectors have spread
to energy, ports, telecommunications and even gambling.
The authors further recommend that finance ministers from key countries
involved in international investment meet annually to discuss and refine these
principles, and that the Organization for Economic Cooperation and Development
and the International Monetary Fund play a more active role in encouraging
countries to adopt the resulting "best practices".
Marchick and Slaughter trace a "protectionist drift" back to 2006. That was
when it emerged the Bush administration had approved the acquisition of British
port operator P&O by Dubai Ports World, which is owned by the government of
the Arab emirate. The deal would have left the Dubai company operating six
large US ports.
Many in Congress, including top lawmakers from Bush's Republican Party, vowed
to block the deal, which they said would compromise national sovereignty and
security. Some went so far as to suggest that terrorists would gain a toehold
on the US shoreline were the ports allowed to pass into Arab hands. Political
wrangling ended when Dubai Ports announced that it would sell the six ports to
a US entity.
US, Middle Eastern and other commentators accused the politicians of abusing
national security and pandering to xenophobia while obscuring the fact that US
authorities would have retained jurisdiction over national security and customs
enforcement. Some speculated that the politicians - and the local political,
business, and union bosses who backed them - were really out to protect
patronage politics, not national sovereignty or security.
General John Abizaid, then commander of US forces in the Middle East, spoke out
against those who opposed the deal, saying it "really comes down to Arab- and
Muslim-bashing that was totally unnecessary".
Marchick and Slaughter take the politicians' national security arguments at
face value, adding that a number of other countries also have scrutinized or
squashed deals on similar grounds.
The United States and Europe remain highly suspicious of investment from
developing countries, China and Arab states because many of the biggest
investors in these countries are government-owned entities, most prominently,
so-called sovereign wealth funds.
The authors reject Western fears about the investment pools, noting that
sovereign wealth funds "have existed for more than 50 years and have been
responsible investors".
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