Encouraging Outward FDI
Many investor nations
now have government-backed insurance programs to cover
major types of
foreign investment
risk.
The types of risks insurable through these programs
include expropriation
(nationalization),
war
losses,
and
the
inability
to
transfer
profits home. Such
programs are particularly useful in encouraging firms to undertake
investments in
politically unstable
countries.j"
In
addition,
several advanced countries
also have special
funds or banks
that
make government loans to firms wishing to invest
in developing countries.
As a further incentive to encourage domestic firms to undertake
FDI, many countries have eliminated double taxation offoreign income (i.e.,
taxation of income in
both the host country and the home country). Last, and perhaps
most significant, a
number of investor
countries
(including
the United
States) h;;tve
used their political
influence to persuade host countries to relax their restrictions on
inbound FDL For
example, in
response
to direct
U.S.
pressure,Japan relaxed many
of its formal
restrictions on inward FDI in the 1980s. Now, in response to further U.S.
pressure,Japan moved
toward relaxing its informal barriers to inward FDL One beneficiary
of this trend has
been Toys "R" Us, which, after five years of intensive lobbying
by company and U.S.
government officials, opened its first retail stores inJapan
in December 1991. By 2000, Toys
"R" Us had more than 150 stores inJapan, and its
Japanese operation,
in which the company retained a controlling stake, had a listing
on the Japanese stock
exchange.
Restricting Outward FDI
Virtually all
investor countries, including the United States, have exercised some control
over outward FDI from
time to time.
One
common policy
has been to limit capital
outflows out of
concern for the
country's
balance
of
payments.
From
the
early
1960s until 1979, for
example, Great Britain had exchange-control regulations that
limited the amount of
capital a firm could take out of the country. Although the main
ntentof such policies
was to improve the British balance of payments, an important
secondary intent was
to make it more difficult for British firms to undertake FDI.
In addition,
countries have occasionally manipulated tax rules to try to encourage
their firms to invest
at home. The objective behind such policies is to create jobs at
home rather than in
other nations. At one time these policies were also adopted by
Great Britain. The
British advanced corporation tax system taxed British companies'
foreign earnings at a
higher rate than their domestic earnings. This tax code created
an incentive for
British companies to invest at home.
Finally, countries
sometimes prohibit firms from investing in certain countries for
political reasons.
Such restrictions can be formal or informal. For example, formal
rules prohibited U.S.
firms from investing in countries such as Cuba, Libya, and Iran,
whose political
ideology and actions are judged to be contrary to U.S. interests. Similarly,
during the 1980s,
informal pressure was applied to dissuade U.S. firms from investing
in South Africa. In
this case, the objective was to pressure South Africa to
change its apartheid
laws, which occurred during the early 1990s. Thus, this policy
was successful.
HOST-COUNTRY POLICIES
Host countries adopt
policies designed both to restrict and to encourage inward FDI.
As noted earlier in
this chapter, political ideology has determined the type and scope
of these policies in
the past. In the last decade of the 20th century, many countries
moved quickly away
from adhering to some version of the radical stance and prohibiting
much FDI and toward a
combination of free market objectives and pragmatic
nationalism.
Encouraging Inward FDI
It is .infTPa".i.r.>gJy commas: for govemments to offer incentives to foreign
firms to invest
in their countries.
Such incentives take many forms, but the most common are
tax concessions,
low-interest loans, and grants or subsidies. Incentives are motivated
by a desire to gain
from the resource-transfer and employment effects of FDI. They
are also motivated by
a desire to capture FDI away from other potential host countries.
For example, in the
mid-1990s the governments of Great Britain and France
competed with each
other on the incentives they offered Toyota to invest in their respective
countries. In the
United States, state governments often compete with each
other to attract FDI.
For example, Kentucky offered Toyota an incentive package
worth $112 million to
persuade it to build its U.S. automobile assembly plants there.
The package included
tax breaks, new state spending on infrastructure, and lowinterest
loans.t"
Restricting Inward FDI
Host governments use
a wide range of controls to restrict FDI in one way or another.
The two most common
are ownership restraints and performance rf'-9JJir.t'.we.>;ltu~.
OwnershIp restraints
can take several forms. In some countries, foreign companies are
excluded from
specific fields. For example, they are excluded from tobacco and mining
in Sweden and from
the development of certain natural resources in Brazil, Finland,
and Morocco. In other
industries, foreign ownership may be permitted although
a significant
proportion of the equity of the subsidiary must be owned by local investors.
For example, foreign
ownership is restricted to 25 percent or less of an airline
in the United States.
Foreign firms are
often excluded from certain sectors on the grounds of national security
or competition.
Particularly in less developed countries, the belief seems to be
that local firms
might not be able to develop unless foreign competition is restricted
by a combination of
import tariffs and FDI controls. This is really a variant of the infant
industry argument
discussed in Chapter 5.
Also, ownership
restraints seem to be based on a belief that local owners can help
to maximize the
resource-transfer and employment benefits ofFDI for the host country.
Until the early
1980s, theJapanese government prohibited most FDI but allowed
joint ventures
betweenJapanese firms and foreign MNEs if the MNE had a valuable
technology. The
Japanese government clearly believed such an arrangement would
speed up the
subsequent diffusion of the MNE's valuable technology throughout the
Japanese economy.
Performance
requirements can also take several forms. Performance requirements
are controls over the
behavior of the MNE's local subsidiary. The most common performance
requirements are
related to local content, exports, technology transfer, and
local participation
in top management. As with certain ownership restrictions, the
logic underlying
performance requirements is that such rules help to maximize the
benefits and minimize
the costs of FDI for the host country. Virtually all countries employ
some form of
performance requirements when it suits their objectives. However,
performance
requirements tend to be more common in less developed countries than
in advanced
industrialized nations. For example, one study found that some 30 percent
of the affiliates of
U.S. MNEs in less developed countries were subject to performance
requirements, while
only 6 percent of the affiliates in advanced countries were
faced with such
requirementsY
