Columbia FDI Perspectives
Perspectives on topical foreign direct investment issues
No. 297 February 8, 2021
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Riccardo Loschi ([log in to unmask])
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Divestments
by MNEs: What do we know about why they happen?*
by
Maria Borga and Monika Sztajerowska**
Divestments are frequent corporate phenomena. Firms routinely invest and expand their operations as well as downsize and sell their business activities at home and abroad. In fact, about one in five foreign affiliates is divested every five years.[1]
A 2020 global business survey also suggested that 78% of surveyed firms planned to divest some operations in 2021.[2]
With the global pandemic, cross-border divestments may rise if rising debt levels and liquidity constraints drive companies to sell off some of their foreign operations. In the longer term, the COVID-19 outbreak, together with such factors as digitalization
and trade tensions, could lead companies to rethink their global supply chains. Even before the current crisis, investment retention was discussed within the
WTO, the G20 Trade and Investment Working Group and the
World Bank Group.
However, governments that proactively attract FDI may wish to retain it. For example, investment promotion agencies (IPAs) increasingly focus on investment facilitation and aftercare services and engage in broader policy advocacy.[3]
Nevertheless, divestment enables MNEs to optimize their business portfolios by shifting resources from less productive to more productive uses and may reflect a natural evolution of firms’ local investment activities. From that perspective, divestments may
be a positive signal for host economies if they, for example, result from host economies developing and becoming less attractive for low-wage or pollution-intensive activities.
There is a large literature on factors influencing MNE investment decisions. These studies explore the importance of tax policy, institutions, education, infrastructure, and international agreements, including free trade agreements (FTAs), and firm characteristics,
among others. There are also numerous studies analyzing the role of business factors, such the geographic and sectoral diversification of parent firms. Yet, little is known about the relative role of different divestment drivers across a large group of countries,
and the importance of public policies. What can we say about drivers of MNE divestments?
First, policies clearly matter, on top of traditionally-studied business factors such as divested business units’ performance or the financial health of MNEs’ economic groups. For example, domestic regulations affecting labor market efficiency and unit labor
costs play a prominent role. International trade and investment rules clearly matter to MNEs, as higher applied trade tariffs increase divestments. An FTA between the countries of an affiliate and its parent firm also reduces the divestment probability by
about 10 percentage points, all else equal. The effect is stronger for deeper FTAs (e.g., customs or economic unions) that include rules beyond trade tariffs, including provisions on international investment. Among business factors, group-wide considerations—such
as overall financial health or liquidity constraints—are stronger predictors of divestments than affiliate performance itself.
What are the main policy lessons learned?
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The risk of divestment should be explicitly taken into account when designing investment policies. Whether negotiating new, or exiting old, trade and investment agreements or
deciding on the overall framework for regulating FDI, investment incentives or IPA services, the possibility of divestment must be reflected in the policy design.
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There may be trade-offs between investment retention goals and wider policy objectives. As such, far from pursuing investment retention as a goal, policymakers will need to balance
different objectives. It is important that investment-retention policies do not introduce distortions, such as those that can occur when governments offer incentives to preclude divestments.
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Countries should start reflecting divestments in official FDI statistics. Only a few countries regularly report data for both equity capital increases and decreases.[4]
Yet, such data could help researchers and policymakers better understand FDI dynamics.
Finally, much is still to learn: studies using granular data on policy design and local country and firm characteristics
can make useful contributions. A business reality, yet far from the mere flipside of investment, divestments clearly merit more of policymakers’ and researchers’ attention.
*
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.
[1]
The focus is here on voluntary sale of business units by foreign investors to domestic investors using a firm-level dataset covering foreign affiliates in selected OECD and G20 economies between 2007 and 2014. The definition of divestment, geographic scope
and time frame were limited by data availability. Yet, it did enable the analysis of divestment drivers and the impact of the loss of foreign investors on the operations of firms for a large number of countries. The time frame captured the global financial
crisis’ effects on firm divestment. (This may mean that the drivers differed from other periods, but it may also make the findings relevant to understanding the pandemic’s effects on divestment.) This is relevant because there is a large literature on the
possible positive effects of foreign ownership on performance of firms and potential second-order effects on host economies.
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The material in this Perspective may be reprinted if accompanied by the following acknowledgment: “Maria Borga
and Monika Sztajerowska, ‘Divestments by MNEs: What do we know about why they happen?,’ Columbia FDI Perspectives No. 297, February 8, 2021”. Reprinted with permission from the Columbia Center on Sustainable Investment (www.ccsi.columbia.edu).”
A copy should kindly be sent to the Columbia Center on Sustainable Investment at
[log in to unmask].
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For further information, including information regarding submission to the
Perspectives, please contact: Columbia Center on Sustainable Investment, Riccardo Loschi,
[log in to unmask].
Most
recent Columbia FDI Perspectives
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No. 296, Rachel Thrasher, ‘Room to move: Building flexibility into investment treaties to meet climate-change commitments,’ Columbia FDI Perspectives, January 25, 2021
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No. 295, Stefanie Schacherer, ‘Facilitating investment through IIAs: The case of the Regional Comprehensive Economic Partnership Agreement,’ Columbia FDI Perspectives, January
11, 2021
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No. 294, Federico Ortino, ‘Taming the chaos in investment treaty protections,’ Columbia FDI Perspectives, December 28, 2020
All previous
FDI Perspectives are
available at http://ccsi.columbia.edu/publications/columbia-fdi-perspectives/.
Other relevant CCSI news and announcements
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CCSI announces a call for papers for the 2020 edition of the Yearbook on International Investment Law
and Policy. Original contributions to be considered for publication in the Yearbook will be accepted on a rolling basis until February 28, 2021. More information can be found
here.
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CCSI is accepting applications until March 31, 2021
for its Executive Training on Sustainable Investments in Agriculture, which will take place online June 15-25, 2021. Please
visit our website for more information, including on how to apply.
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CCSI is accepting applications until February 28, 2021
for its Executive Training on Extractive Industries and Sustainable Development, which
will take place online June 7-18, 2021. Please
visit our website for more information, including on how to apply.
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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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