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*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?**** by 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 competition. · 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 <https://www.mfat.govt.nz/assets/Trans-Pacific-Partnership/Text/17.-State-Owned-Enterprises-and-Designated-Monopolies-Chapter.pdf> . 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 and SME OFDI. 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 opportunity. ------------------------------ * *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. <https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2814307> [2] Spain, e.g., offers financial support to investment projects involving a “Spanish interest”, without distinguishing between domestic and foreign companies: <https://www.cofides.es/biblioteca-de-documentos/folleto-fiex>. [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, EU:T:2018:786 <https://curia.europa.eu/jcms/upload/docs/application/pdf/2018-11/cp180175en.pdf> . [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 <https://www.kluwerlawonline.com/abstract.php?area=Journals&id=TRAD2018010>. *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 (**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, 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 develop and disseminate practical approaches and solutions, as well as to analyze topical policy-oriented issues, in order to maximize the impact of international investment for sustainable development. The Center undertakes its mission through interdisciplinary research, advisory projects, multi-stakeholder dialogue, educational programs, and the development of resources and tools. For more information, visit us at http://www.ccsi.columbia.edu. *Most recent Columbia FDI Perspectives* · No. 264, Yun Zheng, ‘China’s new Foreign Investment Law: deeper reform and more trust are needed, November 4, 2019 · 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 independence of the judges of a Multilateral Investment Court: A must for building the Court’s credibility,’ October 7, 2019 · No. 261, Zbigniew Zimny, ‘FDI has benefitted the EU members from Central and Eastern Europe and can continue to do so,’ September 23, 2019 · No. 260, Karl P. Sauvant, ‘Do not neglect establishment trade: the China-US example,’ September 9, 2019 *All previous FDI Perspectives are available at *http://ccsi.columbia.edu/publications/columbia-fdi- perspectives/. *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: www.ccsi.columbia.edu | t: @CCSI_Columbia <https://twitter.com/CCSI_Columbia> "The Case for an Advisory Centre on International Investment Law", "An Advisory Centre on International Investment Law: Key Features", "Do not Neglect Establishment Trade: The China-US Example", "Incentivizing Sustainable FDI: The Authorized Sustainable Investor", "The Potential Value-added of a Multilateral Framework on Investment Facilitation for Development", "Promoting Sustainable FDI through International Investment Agreements", "Determining Quality FDI", "The State of the International Investment Law and Policy Regime", "Towards G20 Guiding Principles on Investment Facilitation for Sustainable Development", "Five Key Considerations for the WTO Investment-facilitation Discussions, Going Forward", "International Investment Facilitation: By Whom and for What?", "Moving the G20's Investment Agenda Forward", "Sustainable FDI for Sustainable Development", "Towards an Investment Facilitation Framework: Why? What? When?", "Beware of FDI Statistics!", and "Towards an Indicative List of FDI Sustainability Characteristics", are available at https://ssrn.com/author=2461782 and http://www.works.bepress.com/karl_sauvant/. ____ AIB-L is brought to you by the Academy of International Business. For information: http://aib.msu.edu/community/aib-l.asp To post message: [log in to unmask] For assistance: [log in to unmask] AIB-L is a moderated list.