Protectionism Against Foreign Investors on Rise

Global Survey Sees New Barriers, Often Connected to National Security

Major nations including the United States have begun erecting barriers to keep foreign investors out of many businesses, says a new report commissioned by the World Bank. Many of them justified on national-security grounds, the mechanisms could revive protectionism at a time when international trade is still struggling out of global recession, says the report. Authored by Karl P. Sauvant, executive director of the Vale Columbia Center on Sustainable International Investment, it was published as the G20 countries meet in Pittsburgh, Pa., to discuss related issues.

Foreign direct investment, or FDI, in which investors buy stock of foreign companies or invest in factories or other infrastructure, has boomed in recent decades. FDI, at $50 billion a year in the early 1980s, rose to $1.9 trillion a year in 2007. By then, it accounted for $15 trillion in stock, controlled by more than 80,000 multinational enterprises.  The money flow declined 15 percent in 2008 due to the financial crisis, and may go down as much as 50 percent this year, but it remains a major driver of the global economy.

“If anything, the current crisis should put a premium on attracting more of such investment, be it to shore up ailing national firms or, more generally, increase investment at a time of recession,” said Sauvant in the report.

The survey shows that from 1992-2002, only 6 percent of national regulatory changes made FDI less welcome; in 2003-2004, this went to 12 percent; and in 2005-2007, to 21 percent. In 2006-2007, regulation changes that made FDI less welcome applied to some 40 percent of world FDI flow—“an impressive figure that demonstrates quite convincingly that a change is underway,” says Sauvant.

In the terrorism-conscious post 9/11 environment, many countries have evoked national security and similar concepts in setting up new restrictions, particularly in regard to acquisitions made by sovereign wealth funds and state-owned enterprises of other countries. Among the moves Sauvant cites in the report:

• The United States, which has strengthened regulation of defense industries and technologies that supply military advantages, as well as assets considered crucial infrastructure, such as port facilities;
• Germany, which has adopted similar restrictions to protect “public security” and “public order”;
• France, which has acted to protect strategic industrial assets from foreign takeover;
• Australia, which requires foreign takeovers be consistent with “national interest”;
• Canada, which amended its investment law in March 2009 to include a national-security test for proposed investments;
• Japan, where foreign deals are subject to tough screening on many grounds, and a 2007 regulation strengthened government authority to review acquisition of 10 percent or more of listed companies with technologies that could be used in weapons systems;
• China, which strengthened its own broad review system in 2006;
• Russia, which passed a 2008 law requiring government approval for transactions involving activities “of strategic importance to the country’s defense and national security”;
• -India, which recently introduced a measure requiring prior approval for transfers to non-resident entities in sectors including air transport, banking, insurance and telecommunications.

“While governments need of course the flexibility to pursue legitimate public policy objectives … the boundary line between [that] and protectionism is a fine one,” says Sauvant. “To what extent they will actually use these mechanisms only for limited purposes of protecting legitimate national objectives—or, rather, will abuse them for protectionist purposes—is a matter of watchful waiting.” In the meantime, Sauvant calls for an independent body to monitor for potentially protectionist actions, and “name and shame” countries that take them.