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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 237  October 22, 2018
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Marion A. Creach ([log in to unmask])
Host country concerns and policies toward state-owned MNEs
* <#m_5488269554111678346__edn1>
Alvaro Cuervo-Cazurra** <#m_5488269554111678346__edn2>

Governments provide fiscal and financial incentives to attract FDI. But
when state-owned enterprises (SOEs)[1] <#m_5488269554111678346__edn3> are
the investors, attitudes reverse, and governments tend to constrain their
investments. Host country officials distrust foreign SOEs’ motives and
perceive them as recipients of unfair state support in the form of
preferential financing, subsidies and tax concessions. Such perceptions do
not always match reality, however. Some governments maintain hands-off
relationships with their SOEs, while many large private companies benefit
from government support. Nevertheless, perceptions remain, and host country
governments end up treating foreign SOEs differently, imposing additional
regulatory procedures, limitations on public procurement, investment
restrictions, and controls on cross-border transactions.

In many cases, governments claim national security as justification for
discriminating against SOEs. Discrimination contravenes international
investment agreements, but it is often allowed for national security
reasons. However, such justification tends to be overused and masks a
variety of issues that require different policies. Three concerns, in
particular, may require different policy responses, and the appropriate
policies are those that are defined ex-ante and narrowly to address these
specific concerns.

The first and typical concern over foreign SOEs is national security.
Whereas privately held companies are founded by entrepreneurs to take
advantage of market opportunities, SOEs tend to be created by governments
to solve market imperfections and achieve goals that the private sector is
not addressing. Hence, FDI by SOEs may be perceived as an extraterritorial
tool and raise concerns about their non-business objectives. Such
apprehensions are likely to be particularly prevalent in areas that are
considered sensitive to national security in the host country, i.e., areas
that are crucial for ensuring military superiority in case of conflict.

The identification of areas of national security concern and the exclusion
of all FDI may be the appropriate policy. Ex-ante policies that clarify
which sectors are important for national security, and do so narrowly,
would help establish clear rules for all investors. A narrow definition of
national security areas, such as defense and advanced dual-use
technologies, helps avoid domestic companies using the national security
argument to limit foreign competition. Exclusion may apply to all foreign
companies and not only state-owned ones. SOEs are directly connected to
their home country governments, but private companies can also be

A second issue is opacity. SOEs suffer from a multilevel agency problem;
citizens are nominally the owners of companies, but politicians have
control, and politically-appointed managers run the companies. This may
result in politicians directing investments abroad to
politically-beneficial areas even if these investments have limited
business value. This complex multilevel agency problem affects how
state-owned MNEs are perceived to behave abroad, creating concerns about
the opacity in their decision-making because it is not fully clear who is
responsible for decisions.

Monitoring is an adequate policy, and one that does not require special
treatment for foreign SOEs. Both domestic and foreign companies can follow
the domestic practices of disclosure of organizational structures and
responsibilities. If current laws and regulations are not up to par, host
country governments can update them and apply them to all companies to
increase transparency and accountability in actions.

A final issue relates to adversarial governments. As the old saying goes,
governments do not have friends, they only have interests. They can
exercise influence and build and deploy soft power through SOEs, directing
companies to support the development of friendly countries even if it is
not profitable to do so. However, in some cases, home and host country
governments may have an antagonistic relationship, and host country
governments may want to avoid influence or punish home country governments.

Control may be an adequate policy. Perceptions of divergent interests are
unclear, they can change quickly with the rotation of governments in home
and host countries, and international investment agreements limit
discrimination. Identifying ex-ante the criteria politicians use to judge
other governments and their diverging interests, and establishing judicious
and sparingly-used review and control mechanisms concerning FDI from
countries with adversarial governments, may help reduce misunderstandings
and potential retaliation and an escalation of animosity.

In conclusion, investments by foreign SOEs raise multiple concerns that
require clarification.  Justifications based on worries loosely related to
national security tend to be overused for excluding SOEs’ investments and
may mask concerns over opacity or adversarial governments. The exclusion of
SOEs is not the only policy alternative. Monitoring and control mechanisms
are available and may be more appropriate. Policies that clarify host
country governments’ views on an ex-ante basis and that have a narrow scope
are useful. They help balance the benefits of FDI while addressing
politically important concerns over SOEs’ behavior, prevent domestic
companies’ regulatory capture by seeking protection from foreign
competition in the name of national interests and help SOEs plan
investments with a higher likelihood of success.

* <#m_5488269554111678346__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_5488269554111678346__ednref2> Alvaro Cuervo-Cazurra (
[log in to unmask]) is Professor of International Business and
Strategy at D’Amore-McKim School of Business, Northeastern University.
This *Perspective
*is based on a paper titled “Thanks but no thanks: state-owned
multinationals from emerging markets and host country policies,”
forthcoming in *Journal of International Business Policy*. The author
thanks Ruth Aguilera, Anna Grosman, Aldo Musacchio, and Ravi Ramamurti for
their feedback on an earlier version of this Perspective, and Armand de
Mestral and two anonymous peer reviewers for their helpful comments and
[1] <#m_5488269554111678346__ednref3> State ownership of firms is very
diverse. See, Alvaro Cuervo-Cazurra et al., “Governments as owners:
state-owned multinational companies,” *Journal of International Business
Studies*, vol. 45 (2014), pp. 919-942.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Alvaro Cuervo-Cazurra, ‘Host country concerns
and policies toward state-owned MNEs,’ Columbia FDI Perspectives, No. 237,
October 22, 2018. Reprinted with permission from the Columbia Center on
Sustainable Investment (***
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,
Marion A. Creach, [log in to unmask]

*Most recent Columbia FDI Perspectives*

   - No. 236, Laza Kekic, “To what extent has FDI benefited the transition
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*All previous FDI Perspectives are available at *
*. *

*Other relevant CCSI news and announcements*

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Judge Jennifer
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   - *On October 31,* CCSI, together with the International Institute for
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Karl P. Sauvant, Ph.D.
Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
Ph: (212) 854-0689
Fax: (212) 854-7946
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*Karl P. Sauvant, PhD*

*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
435 West 116th St., Rm. JGH 825, New York, NY 10027
| p: (212) 854 0689 | cell: (646) 724 5600 e: [log in to unmask]
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