*Columbia FDI Perspectives*

Perspectives on topical foreign direct investment issues

No. 265   November 18, 2019
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])

Managing Editor: Marion A. Creach ([log in to unmask])

*An international framework to discipline outward FDI incentives?****


Karl P. Sauvant and Clémence Boullanger**

With all developed countries and some 140 emerging markets reporting
outward FDI (OFDI) stocks in 2017, the question arises what policy actions,
if any, home country governments should take to support their firms
investing abroad. As OFDI potentially benefits home economies by improving
firms’ access to markets and resources of all kinds, the challenge consists
in increasing their international competitiveness and bringing capabilities
back home.

Hence, all developed countries support their outward investors in various
ways, including by granting specific advantages to home country firms.[1] But
most emerging markets have not done so yet. Still, they face the challenge
of considering policies and measures to ensure that this situation does not
put their firms at a competitive disadvantage. This will lead to an
escalating OFDI-incentive competition (mirroring the “bidding-wars” on the
inward FDI side) that, ultimately, helps no country.

The most problematic OFDI incentives are financial and fiscal measures.
These include, e.g., grants, loans, financial guarantees, and specific tax
exemptions. Their proliferation raises several issues.

·      An escalation of OFDI-incentive competition can lead to a
misallocation of public funds and wasteful “beggar-thy-neighbor” policies.
This is particularly challenging for countries with limited resources.

·      The increased international competitiveness of specific firms does
not always translate into positive effects in home countries, e.g., when
MNEs do not repatriate earnings. Actually, the more firms internationalize
through FDI, the smaller—potentially—the overlap between their global
corporate interests and the national interests of the countries in which
they are headquartered.

·      Possibilities for abuse exist. MNEs may engage in “OFDI-incentives
shopping,” as the definition of a “domestic” firm is not always
clear.[2] Foreign
firms could rout investments through countries with generous OFDI
incentives, leaving them without the desired OFDI benefits.

·      OFDI incentives affect competitive neutrality, i.e., the promotion
of a level playing field for competition among firms. This concern has
mostly been raised in the context of state-owned enterprises (SOEs)—which
possess various advantages vis-à-vis private firms—but could be extended to
OFDI incentives in general. Indeed, governments distort competition in the
world FDI market when introducing measures to support the international
expansion of their firms, thereby placing them in a more advantageous
position vis-à-vis firms from countries that do not receive the same help
from their governments.

Two complementary solutions offer themselves:

·      Governments supporting their outward investors should at least focus
any aid on projects that directly benefit domestic economic development
(as, e.g., China does).

·      Discussions on an international framework for OFDI incentives should
be initiated. As OFDI incentives are applied unilaterally, only a
multilateral (or regional) approach can prevent governments from outbidding
each other by offering incentive packages to their outward investors.

Admittedly, seeking a OFDI-incentives agreement is a long-shot, given the
past failure to reach an international agreement constraining inward
FDI-incentive competition. Yet, three considerations support action:

·      Importantly, since most governments do not back their domestic
outward investors with incentives yet, they have a self-interest in a
preemptive agreement, to avoid having to join a costly incentive

·      Governments increasingly recognize the wasteful effects of inward
FDI-incentive competition. This rationale also applies to OFDI incentives.
The European Commission has begun to take action, in reference to state-aid
rules and the distortion of competition.[3]

·      Governments are beginning to address issues related to competitive
neutrality and SOEs in treaties, e.g., in Chapter 17 of the Comprehensive
and Progressive Agreement for Trans-Pacific Partnership

Discussions on limiting OFDI incentives could be sponsored by the World
Association of Investment Promotion Agencies (with some supportive
countries?), as its members should have an interest in this matter.

An international framework on OFDI incentives could emulate the “traffic
light” approach of the WTO’s Subsidies and Countervailing Measures
Agreement.[4] It could first require increased transparency and eventually
discipline the most harmful incentives, starting with capping specific
financial incentives. However, exceptions could cover incentives
encouraging FDI flows to least developed countries, sustainable FDI flows

A build-in agenda could provide for a gradual approach for emerging markets
still in the process of liberalizing OFDI. This would allow these
economies’ domestic outward investors to catch up with their competitors
from developed countries, which typically benefitted from OFDI incentives
when establishing themselves abroad.

Absent a preemptive multilateral or regional approach, all governments will
eventually engage in OFDI-incentive competition, lest their firms face a
competitive disadvantage. This would lead to the adoption of costly
measures not necessarily benefiting domestic development—a missed


* *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 series.*

** Karl P. Sauvant ([log in to unmask]) is Resident Senior Fellow at the
Columbia Center on Sustainable Investment, a joint center of Columbia Law
School and the Earth Institute at Columbia University; Clémence Boullanger (
[log in to unmask]) is a global business law and governance
student at Columbia Law School and Sciences Po Paris. The authors are
grateful to Marta Soprana, Matthew Stephenson and Heather Lynne
Taylor-Strauss for their helpful peer reviews.

*[1]* Karl P. Sauvant et al., “Trends in FDI, home country measures and
competitive neutrality,” *Yearbook on International Investment Law and
Policy*, 2012-2013 (New York: OUP, 2014), pp. 3-95.

[2] Spain, e.g., offers financial support to investment projects involving
a “Spanish interest”, without distinguishing between domestic and foreign
companies: <>.

[3] The General Court upheld two Commission decisions that classified as
prohibited state aid a Spanish tax scheme providing a specific fiscal
advantage to domestic firms acquiring shareholdings in foreign
companies: Judgement
of 15 November 2018, *Deutsche Telekom v Commission*, T-207/10,

[4] Pierre Sauvé,and Marta Soprana, “Mission impossible? The political
economy of disciplines on investment incentives,” *Journal of World Trade*,
vol. 52 (2018), pp. 209–228

*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Karl P. Sauvant and Clémence Boullanger, ‘An
international framework to discipline outward FDI incentives’ Columbia FDI
Perspectives, No. 265, November 18, 2019. 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,
Alexa Busser, [log in to unmask]

The Columbia Center on Sustainable Investment (CCSI), a joint center of
Columbia Law School and the Earth Institute at Columbia University, is a
leading applied research center and forum dedicated to the study, practice
and discussion of sustainable international investment. Our mission is to
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*Most recent Columbia FDI Perspectives*

·       No. 264, Yun Zheng, ‘China’s new Foreign Investment Law: deeper
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·       No. 263, Fabio Morosini, Nicolás M. Perrone and Michelle R.
Sanchez-Badin, ‘Strengthening multi-stakeholder cooperation in the
international investment regime: The Brazilian model,’ October 21, 2019

·       No. 262, Rishi Gulati and Nikos Lavranos, ‘Guaranteeing the
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·       No. 261, Zbigniew Zimny, ‘FDI has benefitted the EU members from
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·       No. 260, Karl P. Sauvant, ‘Do not neglect establishment trade: the
China-US example,’ September 9, 2019

*All previous FDI Perspectives are available at

*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]
| w: | t: @CCSI_Columbia

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