Foreign Direct Investment in a Globalized World
As the forces of globalization have continued to integrate the world economy, foreign direct investment (FDI) has proliferated, growing by more than thirty percent per year since 2003. The dizzying pace of FDI growth reflects the significant role of sovereign wealth funds, many of which are government-owned or controlled. Concerns about these trends have led U.S. policymakers to increase their scrutiny of FDI, and other nations have done so as well.
On Tuesday, July 22, 2008 the Wilson Center on the Hill Program hosted an event that explored the changing face of FDI and evaluated the recent changes in national policies on FDI, with a particular focus on changes in U.S. policy. The program featured three expert panelists: David Marchick, Managing Director of Global and Regulatory Affairs at The Carlyle Group, Theodore Moran, Director and Wallenberg Professor at the Georgetown University School of Foreign Service, and Scott Morris, Senior Professional Staff for the House Committee on Financial Services. The discussion was moderated by John Sewell, Senior Scholar at the Woodrow Wilson International Center for Scholars. Following the discussion, the panel also answered several questions fielded from the audience.
David Marchick began the discussion by highlighting key findings from a report he authored with Matthew Slaughter for the Council on Foreign Relations, Global FDI Policy: Correcting the Protectionist Drift. The report examines the positive effect that FDI has had on economic growth, a view held by many economists. He noted that firms that receive FDI often pay their workers higher wages and support higher levels of research and development (R&D) spending than other firms. Given that the demand for investment in the United States far exceeds domestic savings, funds from abroad are crucial for maintaining investment in the U.S. at current levels. In essence, the United States needs inbound FDI in order to support economic growth and stability.
Marchick commented that, given the benefits of FDI, recent U.S. efforts to tighten the flow of FDI have the potential to harm the U.S. economy. He suggested that the U.S. government should only restrict FDI when it has a compelling interest; namely, if a proposed investment raises national security or safety concerns, violates anti-trust legislation, or involves discriminatory hiring practices. Furthermore, bodies that review foreign investment proposals should streamline their review process by creating a timeline for each case and ensure that all deliberations are confidential.
Marchick noted that the recent shift towards restricting FDI is not unique to the United States, as other countries have recently passed legislation similar to the recent CIFIUS amendments and are reviewing FDI proposals more closely than before. He cited a report by the United Nations Conference on Trade and Development, which assesses that, over the last six years, the number of unfavorable policy actions linked to FDI has risen from 1.5% to 20 %. Factors contributing to this increase include concerns about increased levels of investment coming from China and the Middle East, which make the United States government anxious for national security reasons. An additional concern is that investments are flowing to more sensitive sectors of the economy, such as social services.
Theodore Moran followed, reiterating that under reasonably competitive and transparent conditions, FDI does promote growth. He cautioned, however, that, in protective markets, it has the opposite effect.
In the case of U.S. investment abroad, outward investment by American companies has the tendency to increase investment at home because companies building supply chains abroad have the means to expand their exports from the United States. Moran announced that he is working on and will soon release a report with recommendations for formalizing the FDI review process in the U.S., making it easier to assess which investors pose a national security threat to the United States.
Scott Morris agreed that the current trend toward stricter reviews of FDI is global and commented on the state of inward and outward investments in America. He emphasized that FDI review boards should particularly consider the investment proposals of government-owned firms from abroad, as they may pose the greatest security concerns. Moreover, he stressed that Congress is the appropriate body for addressing national security and FDI regulation. While the trend discussed by Marchick does include the United States, the greater concern should be the state of our own economy and the general desirability of U.S. markets. In terms of outward investment, Morris emphasized that the government has legitimate interests in supporting companies that invest abroad. Also, he responded to accusations from other countries that the U.S. caused the shift to more restrictive FDI policies in the global economy. Compared to other governments, the U.S. is generally very open to investors and the government has not set hard limits for them.
In response to the question of how effective the U.S. is at attracting FDI, Marchick noted that most countries have a separate government body in charge of attracting investors. However, there is no federal body in the U.S. to address these issues; instead, states operate to encourage investment independent of the federal government. He noted that a small institution would be beneficial when dealing with controversial foreign investors. Moran added that some states are more successful in attracting investors than others; for example, North Carolina has been very successful.
William Krist, Senior Scholar from the Woodrow Wilson Center raised a question about the prospects for a multilateral investment agreement. Marchick responded that, empirically and legally, multilateral arrangements on investment would be positive and would create more stability and certainty, which is good for investors. Unfortunately, there is a political dilemma, "bordering on toxic" at the moment. Morris agreed that multilateral negotiations are in general quite fraught and there is a problem with the patchwork strategy of bilateral treaties and foreign trade agreements.
In response to a question on the role of environmental impact assessments in FDI regulations, Morris stated that, if the domestic environmental regulations of other countries are not as tough as U.S. standards, it would be inappropriate for the United States to interfere, because those policies should fall under the decision-making role of national sovereigns and multilateral institutions.
To close, Moran discussed the role of FDI versus foreign aid. He stressed that FDI should not replace foreign aid, as it does not always fund vital infrastructure development or health services. though it does stimulate growth and create jobs. "Hopefully, they go together," he commented. Sewell supported this statement, citing the East Asian Miracle, in which roughly half of all growth was attributed to significant investment in human capital.
Drafted by Nick Mills and Sarah Eversman STAGE Program