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Double standards over FDI in developed countries

FDI inflows, mostly in the form of acquisitions, can cause concerns in host countries

THE COMPLEXITIES that accompany foreign direct investment as indeed most types of foreign, non-trade inflows into a country have been in evidence recently. For countries such as India, FDI is considered a superior form of investment to, say, portfolio flows, although it is the latter type, coming under the broad category of foreign institutional investors (FII), that has underpinned the stock markets' phenomenal rise.

It is also well known that the country's external account is critically dependent on these capital flows to bridge the widening current account deficit. Invisibles and workers' remittances have been the other consistent performers but it is the FII flows — and through their role in forex reserves accretion — that have given policy makers confidence in the face of a mounting oil import bill.

FII flows are, however, less stable than FDI. Besides, FDI is supposed to bring in technology and better management practices and generate employment in the recipient country.

Naive assumption

However, these routine assumptions on the relative merits and demerits of different types of capital inflows have proved wrong in many cases.

Part of the misconception on FDI arises from a lack of understanding of the form they take. It is naïve to think that they come in only to set up large, greenfield ventures. A greater proportion of total FDI flows is in the form of mergers and acquisitions (M&As). In a globalising world, this is only to be expected. But M&As often involve change in ownership, result in hostile takeovers and more generally strain existing regulations in many countries. Besides, technology has made it possible for funds to flow instantaneously across national borders.

Diffused MNC structures

Today's large multinationals, which spearhead FDI flows, have diffused ownership structures with shareholders from many countries. This suggests that they can no longer be regarded as belonging to a specific country though they may retain their corporate headquarters in one country. For recipient countries such as India (although it is beginning to emerge as a major investor abroad as well), it is no longer a simple matter of giving an unqualified welcome to all types of FDI.

Recent takeover episodes

The reality is that there are sectoral caps in India for FDI. Other countries have their own reasons for restraining if not discouraging certain forms of foreign investment. Not all those reasons have an economic logic but it will be naïve to ignore them. A few recent episodes will help in a better understanding of the issues.

On March 9, DP World, an entity owned by the UAE Government and engaged in the management of ports worldwide, decided to sell its stakes in six American ports rather than face growing political opposition within the U.S. The company had acquired the rights to manage those ports following its earlier takeover of P & O, a major British shipping and port management company.

As long as P&O was managing those ports nobody raised any concerns over security or for that matter over anything else. Even the Dubai company's takeover of P&O had hardly created any ripples. But substitute British ownership and management with Arab control and you have a huge problem. The U.S. Congress was poised to legislate against the deal and although the U.S. President had argued in favour of DP World, the company decided to divest rather than confront the politicians.

The DP World episode has other messages too. Thanks largely to M&As, ownership of companies is constantly changing. Governments have very little say on deals that take place in some other country but impact their national interests. A large majority of cross-border M&As involving American companies originate from western democracies and are seldom subject to a similar degree of scrutiny. There has been of course a glaring display of double standards.

Apart from the obvious one of U.S. politicians opposing a deal simply because the new owner is from the Arab world (even if from a friendly country) there is the other matter of being selective: it is well known that the U.S. cannot do without the huge investments other countries including cash rich Arab countries are making everyday.

Economic patriotism

Lakshmi Mittal's bid for Arcelor, Europe's biggest steel maker, has met with opposition, not entirely for economic reasons. Top political leaders of France and Luxembourg are mobilising opposition to the deal citing economic patriotism. The real reason is the supposed "lack of a cultural fit" between the takeover target and the would-be acquirer.

Last summer, a Chinese oil company CNOOC was thwarted in its bid to buy Unocal, an American petroleum company that had put itself on the auction block. Despite the better terms offered by the Chinese company, Unocal was pressured by American politicians and others to accept an inferior bid from the local Chevron. Here again, a fear of letting strategic energy assets get into foreign, more specifically Chinese, hands had weighed with the politicians.

Right now in India, security concerns have been raised over the sale of a 10 per cent equity stake in the telecom joint venture Hutchison-Essar by the holding company Hutchison-Telecom International. The buyer, an Egyptian company Orascom, has a large presence in Pakistan and Bangladesh.

Security issues ought to dominate FDI policies especially if sensitive sectors such as telecom are involved. However, policies once framed must be made transparent.

C. R. L. NARASIMHAN

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