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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 138 January 5, 2015
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Adrian P. Torres ([log in to unmask])
*Host governments should not treat state-owned enterprises
differently than other foreign investors*
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by
Steven Globerman*
The growth of outward foreign direct investment (OFDI), particularly from
China, has generated substantial controversy about whether
government-controlled or state-influenced foreign investors should be
treated differently than other foreign investors by host country
governments.[1] <#14abbb5430540857_14abb853835fd9e7__edn1> Indeed, several
developed country governments impose special review procedures on OFDI
undertaken by state-owned enterprises (SOEs). For example, in 2012 the
Canadian government announced that takeovers of domestic companies by
foreign SOEs would face “strengthened scrutiny,” permitting them only in
“exceptional circumstances.”[2] <#14abbb5430540857_14abb853835fd9e7__edn2>
The fundamental concern about SOEs is that their business activities will
harm the host economy because they are dictated primarily by political,
rather than commercial, objectives. The degree to which this is presently
true is debatable. Moreover, the policy implications of this assessment,
however valid, are rarely rigorously articulated and evaluated. Rather, it
is assumed that the pursuit of non-commercial objectives by foreign
investors harms the host economy and, therefore, should be discouraged or
prevented entirely.
If there is a theme linking the impact of OFDI by SOEs to the welfare of
the host economy, it is that the pursuit of non-commercial objectives will
result in inefficient behavior and performance on the part of SOEs, which
in turn will weaken the host economy. However, to the extent that SOEs
willfully engage in inefficient economic behavior, the harm will be
experienced primarily by the SOEs’ owners, and not by residents of the host
economy. This argument rests on the notion that the foreign investor
ordinarily pays a price for foreign assets acquired (usually an operating
company) that reflects the discounted present value of the assets when
owned and managed by an investor whose objective is to maximize profits by
operating the acquired assets efficiently. Put simply, in a competitive
market for corporate assets, SOEs will need to bid prices that reflect the
efficient or profit-maximizing use of the assets to be acquired, even if
the SOEs intend to engage in certain non-efficient behaviors. The result is
that existing domestic owners should be no worse off financially by selling
to an SOE than they would be by selling to a privately owned foreign
investor. Indeed, they should be at least marginally better off, given
that the winning acquirer presumably pays a higher price than unsuccessful
bidders.
So who in the host economy is made worse off by SOE investments? One
argument is that multinational enterprises (MNEs) from emerging markets
behave less responsibly than their for-profit counterparts headquartered in
developed countries in areas like environmental and labor practices. SOEs
are also seen as being much less transparent in their financial and social
impact reporting than privately owned MNEs. These issues highlight the
concern that SOEs from emerging markets are likely to impose costly
externalities on host economies.
Yet, regulators, particularly those in developed countries, can restrain
SOE behavior, thereby reducing negative externalities.[3]
<#14abbb5430540857_14abb853835fd9e7__edn3> Even if Chinese and other SOEs
are imperfectly informed about the regulatory environment when entering a
host economy, substantial fines and regulatory censure should quickly
educate SOE management about legal and illegal business practices. To be
sure, not all objectionable business practices by SOEs are regulated, or
even detected, by regulators; however, other market participants can also
act as a check on opportunistic behavior by SOEs. For example, prospective
employees should demand higher wages from SOEs than from private companies
if SOEs implement unfair labor practices. Similarly, consumers should
demand lower prices from SOEs than from private companies if the former are
perceived as being less safety conscious. In short, corporate misbehavior
by SOEs could be substantially internalized by those SOEs in the form of
lower profits.
Finally, while many governments provide direct or indirect support for OFDI
to their MNEs investing abroad, the support provided by the Chinese
government has been criticized for giving Chinese SOEs an unfair advantage
in acquiring foreign assets or for driving out efficient domestic firms.[4]
<#14abbb5430540857_14abb853835fd9e7__edn4> Related to an earlier point,
competitive bidding for foreign assets may result in much of the Chinese
government subsidies being captured by shareholders of acquired companies
in host economies. Furthermore, if the acquired assets are managed
inefficiently, foreign affiliates of SOEs may require ongoing financial
subsidies in order to survive in the marketplace against more efficient
rivals. Even the Chinese government faces financial limits to its ability
to support its home country MNEs. The termination or reduction of
government subsidies would invite the re-entry of efficient host-country
firms.
One should not conclude from this discussion that OFDI by SOEs does not
raise any public policy issues. For example, specific investments may raise
concerns about national security. However, national security concerns may
also arise from OFDI by European or United States (US) MNEs, as
demonstrated by recent revelations about U.S. electronic espionage in
Europe. The main point is that host country governments should reassess
their hostility toward investments by SOEs or risk losing access to an
important source of investment capital.
------------------------------
* Steven Globerman is the Kaiser Professor of International Business at
Western Washington University’s College of Business and Economics and is a
Senior Fellow at the Fraser Institute. The author is grateful to Shaun
Donnelly, Peter Enderwick and Curtis Milhaupt for their helpful peer
reviews. *The views expressed by the author of this Perspective do not
necessarily reflect the opinions of Columbia University or its partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
series.*
[1] Most OFDI from China is undertaken by SOEs. *See* Ken Davies, *China
Investment Policy *(Paris: OECD, 2013).
[2] <#14abbb5430540857_14abb853835fd9e7__ednref2> Wendy Dobson, “China’s
state-owned enterprises and Canada’s FDI policy” (Calgary: University of
Calgary, 2014).
[3] <#14abbb5430540857_14abb853835fd9e7__ednref3> *Id.*
[4] <#14abbb5430540857_14abb853835fd9e7__ednref4> UNCTAD (2006),
“Developing Countries are Beginning to Promote Outward FDI”,
http://unctad.org/en/Docs?webiteiia20065_en.pdf.
*The material in this Perspective may be reprinted if accompanied by
the following acknowledgment: “Steven Globerman**,** ‘Host governments
should not treat state-owned enterprises differently than other foreign
investors**,’ Columbia FDI Perspectives, No. 138, January 5, 2015.
Reprinted with permission from the Columbia Center on Sustainable
Investment (www.ccsi.columbia.edu <http://www.ccsi.columbia.edu>).” A copy
should kindly be sent to the Columbia Center on Sustainable Investment at
[log in to unmask] <[log in to unmask]>.*
For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Adrian Torres, [log in to unmask] or [log in to unmask]
*Most recent Columbia FDI Perspectives*
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- No. 137, Dylan G. Rassier, “Locating production and income within
MNEs: An alternative approach based on formulary apportionment,” December
22, 2014.
- No. 136, Gus Van Harten, “Canada’s non-reciprocal BIT with China:
Would the US or Europe do the same?” December 8, 2014.
- No. 135, Stephen M. Schwebel, “In defense of bilateral investment
treaties,” November 24, 2014.
*All previous FDI Perspectives are available at *
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*Other relevant CCSI news and announcements:*
- *On January 22, 2015,* CCSI and Chadbourne & Parke LLP will be hosting
a “Year-in-Review” focusing on 2014′s key developments in investor-state
arbitration. The event will draw together academics, government
representatives, and practitioners in order to present and discuss
outcomes, trends, and outliers in disputes involving governments and
claimants from around the world, and explore implications for pending and
future cases. For more information, please go to our website here
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- *On January 26, 2015,* CCSI will offer a free CLE session
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at
Columbia Law School, led by Lee Caplan, Partner, Arent Fox LLP. This CLE
session will provide governments, investors and other interested
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- *Deadline extended: On March 8-13, 2015,* CCSI will offer a new
interdisciplinary Executive Training course on Sustainable Investments
in Agriculture
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designed primarily for public sector officials and civil society
representatives from low- and middle-income countries, whose
responsibilities relate to investments, agriculture, land or rural
development. The course will take place at Columbia University and will
provide an overview of pressing issues related to agricultural investments,
as well as an introduction to relevant practical skills. Please visit the
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extended deadline for applying is January 5, 2015.*
- *From January to April 2015, *CCSI will host its ninth annual
International Investment Law and Policy Spring Speaker Series. This year’s
speakers include (in the order of their talks) Josh Kallmer, Diane
Desierto, Giorgio Sacerdoti, Emmanuel Gaillard, Kabir Duggal, Eloise
Obadia, Xavier Carim, and Lee Caplan. The series will be co-sponsored by
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moderated by Ian Laird and Borzu Sabahi. Select presentations will be
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for
the schedule and more details. *No registration is required. *
Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
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Fax: (212) 854-7946
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