Wendy Shingai Madende

This article discusses the growing number of factors and variables, which constitute the core of foreign direct investment policy instruments. It does so within the new context of the foreign direct investment regime and its requisite policy intervention. The need for intense policy research and analysis is emphasized. It is further intended in this write-up, to provoke a debate, aims at delineating, and attempts to explain, the complexity of crafting foreign direct investment (FDI) the implications for developing countries and or developed and evolving countries and the challenges they face in implementing policy instruments. It is nowadays accepted that FDI plays a crucial role in industrial development of the developed and developing countries alike and can help in boosting economic growth through, for example, total factor productivity growth. Developed and developing states alike have obtained substantial benefits. It has created jobs and increased tax revenue to host states, and enabled MNEs to compete for and earn profits abroad to home states. As the ratio of inward FDI to overall productivity in an economy is, in general, relatively high for developing countries in comparison to industrialized countries, the role of well-designed FDI policies in economic development cannot be overestimated. It is also important to indicate that, from a policy perspective, the pros and cons of policies are framed by considerations of who (interest groups) gains or loses. This is not a trivial issue, depending not only on the demographic structure of employment of the labour force in the economy, but also on the changing nature of the relative balance of competitive advantage between countries.It is also observed that various factors are raised as disadvantages in developing economies amongst which include, corruption involving foreign investors and the ruling class or politicians of a country. Unequal distribution of resources and wealth in general as the poor continue to be marginalized. Generally FDI is beneficial and necessary to any economy but it brings with it national security concerns as both the investors and beneficiaries seek to gain satisfactorily from the investments. GLOBALIZATION, FOREIGN DIRECT INVESTMENT AND NATIONAL SECURITY Growing FDI flows are a significant factor of the globalization process, being one of the driving forces of globalization, and its main consequence at the same time. The rise of FDI is mainly due to enabling environment countries created through liberalizing their national entry requirements to Multinational Enterprises (hereinafter MNEs), especially since the 1980's the investment climate has been conducive for foreign direct investors. In other words, MNEs not only consider home and host country characteristics when they decide to invest, but also third locations. While the process of economic globalization and its constituent elements are constantly coevolving, there are several dimensions concerning the new context of FDI that policy makers in developing countries need to be increasingly aware of. In fact, there is a spatial correlation between FDI in a particular country and in alternative countries or regions. There is empirical evidence that regions surrounded by large markets tend to attract more FDI. An additional element that is arguably having a radical impact in the new context of economic globalization, and FDI in particular, is the set of international laws agreed to by signatories of, and imposed by, the World Trade Organization (WTO). The changing environment for national security or the quest to protect technologies and sectors of the economy considered vital for the host country, its sovereignty and competitiveness are creating a new reality that will necessarily affect both, the legal framework and the global fluxes of FDI. In addition to certain purely social and economic problems related to the potential change of domicile of the acquired enterprise, the loss of jobs that it can imply or the change in its management, some particular fears specifically related to national security issues exist in relation to FDI. Authors speak of at least three threats of diverse kinds potentially generated by FDI: the dominance of supply that penalizes the host country, the transfer of technology that harms host country interests, or the possibility of engaging in sabotage or espionage. Acquisitions of national corporations by foreign investors either private or public coming on many occasions from emerging markets and targeted at different sectors of the economy or firms of the host state has spread social alarm and regulatory reactions against FDI in many places of the world, or at least against FDI coming from certain countries or that which is targeting certain areas of the national economy. This refers to developing countries –the extractive industry is a good example of that- but also increasingly to developed ones. Developed countries fear they will lose control of strategic sectors of the economy and national champions in favour of foreign corporations coming in many cases from geopolitical or economic competitors. At times in developing countries the introduction of FDI has come to some extent with ‘strings attached’. This has resulted in threats to the national security of countries with very unpleasant outcomes. Countries have been plunged into civil wars, genocide and even terrorism as the supposed investors put their interest first at the expense of their intended beneficiaries. Some countries have been plunged into modern day slavery as locals are employed for very little wages. Other foreign investors opt to bring in their own labour force form their countries of origin rendering the locals from the host countries jobless. Other countries have their economies continue to spiral downwards as foreign investors plunder the natural resources of a country, for example, mining activities that result in minerals being shipped out of their country of origin to other destinations. FDI in some instances has been used as a mechanism by some entities to take - over or colonize enter states or nations. In this scenario it is indispensable to distinguish between the protection of the state and its economic and social viability, through the reference to terms like national security or essential security interests and the protection of the economic interests of the state, of its economic development or any other critical objective which may or may not be linked to the previous idea of national security and that in certain cases may even run against the notion of the free market. The line between protecting legitimate public policy objectives and protectionism is very fine and not always easy to be determined. The advantages and disadvantages of FDI policies arise not in absolute terms but relatively from the way they are calibrated and recalibrated and applied in changing circumstances. A s a manifestation of the arguments that have so far been developed in this article, one could straightforwardly start by stating that these advantages and disadvantages are not absolute but, on the contrary, are both relative and temporal. The advantages and disadvantages vary from country to country. Some disadvantages outweigh the advantages and vice-versa. The acceptance of FDI on national security grounds becomes increasingly qualified and made dependent on factors such as the sector or specific industry targeted by the investment, its nature –either green-field or through M&A of an already existing Under-taking, its condition –purely private or sovereign driven- or its origin. Any of these factors, alone or a combination of some of them, activate in most cases the national system of evaluation of FDI on national security or related grounds. According to UNCTAD (1998) and UNIDO (2003), the process of FDI liberalization involves three measures: (i) the removal of those market distortions resulting from restrictions and/or incentives applied distinctively to foreign investors, as they discriminate in the favour of or against some investors; (ii) the enhancement of several positive standards of treatment for foreign investors (national treatment, most-favoured-nation treatment, fair and equitable treatment);31 and (iii) the reinforcement of market supervision in order to guarantee the proper functioning of the market (competition rules, disclosure of information, prudential supervision). However, it is worth mentioning that policies aimed at liberalizing FDI are not necessarily the best policies for creating a favourable investment climate and even less for attracting or promoting FDI. The growing prominence of national security issues in the development of national foreign investment policies is raising questions about how policymakers can evaluate the economic costs and benefits of such measures when the measures are designed to restrict mergers, acquisitions, and take-overs of domestic firms by foreign investors for national security reasons. Indeed, such measures can sometimes focus more on achieving non-economic objectives than on achievingeconomic efficiency or on supporting a market-based allocation of resources. In addition, such policies often expose differing political and philosophical differences between policymakers within countries and among countries. Part of the difficulty involved in assessing the economic impact is that at present there is no working set of parameters that establishes a functional definition of the national security implications of such economic activities as mergers, acquisitions, or take-overs of existing firms by foreign investors. In fact, as seen earlier, regional-integration agreements constitute a powerful means to attract FDI, especially when governments cooperate with each other when drawing up coherent and coordinated policies. Some countries use foreign investment screening regimes concerning national security to address specific concerns relating to investments by foreign State-owned enterprises in strategic industries and companies. These countries often introduce additional screening requirements in this regard. For example, in Australia, foreign State-owned enterprises must comply with extended disclosure obligations and generally require prior governmental consent for their investments. In the Russian Federation, approval is compulsory for transactions involving foreign State-owned enterprises in minority stakes of domestic firms and such transactions are prohibited if a majority participation is intended. FDI screening related to national security is conducted mostly at the ministerial or cabinet level. Over time, additional screening criteria have been introduced that reach beyond the original concept of national Security. While the CFIUS review process remains the most challenging and the one most likely to result in obstacles for a deal, the expansion of FDI requirements in other countries highlights the importance of developing a sound cross-border strategy for navigating this issue. Early on, assess the necessity of FDI reviews for investments in sensitive industries. In broad strokes, virtually all the major FDI review mechanisms focus on the defense and security sector, critical infrastructure, raw materials and inputs (energy products, minerals, and food security), advanced technologies, mass media and sensitive personal data. Cross-border investments in these categories are the most likely to trigger FDI reviews. Recognize that investor-related due diligence is essential. A number of FDI regimes require filings for transactions involving state-backed investors, sometimes even for passive investments. Private equity and other investment partnerships therefore must be prepared to disclose information about their limited partners and partnership agreements during FDI reviews. Understand and submit mandatory filings. Most FDI regimes now require mandatory and suspensory filings for at least some transactions, usually with certain exemptions or waivers. The groups and networks that organize alternative forms of governance rely on their information and communication links, and the strength and duration of social ties. Institutions of economic governance are imperfect everywhere and are abysmal in many countries. When we see how traders and investors cope with these imperfections, by choosing organizational forms and alternative institutions that provide better internal and relational governance, we have to admire their resilience and ingenuity. Countries have the power to control FDI and its imposition does not necessarily have a negative impact on foreign investment flows. However, many of these systems are opaque and susceptible to political influence. And in many cases, the combination of the vast powers granted on the administration, the absence of clear-cut definitions of some basic notions like national security, the changing attitude towards multilateralism or the fast geostrategic changes that are taking place in the world –also in Asia- may support the temptation to use these screening systems both to control the functioning of the market or to adopt hidden economic or strategic goals. CONCLUSION Following the terrorist attacks of September 11, 2001, policymakers in the United States and abroad have increased their scrutiny of foreign investment in their economies as a component of national security. There is no precise way, however, to estimate the exact dollar amount for the economic costs and benefits of national policies that attempt to direct or restrict foreign direct investment for national security concerns. Both economic theory and recent empirical evidence suggest that FDI has a beneficial impact on developing host countries. But recent work also points to some potential risks: it can be reversed through financial transactions; it can be excessive owing to adverse selection and fire sales; its benefits can be limited by leverage; and a high share of FDI in a country's total capital inflows may reflect its institutions' weakness rather than their strength. Though the empirical relevance of some of these sources of risk remains to be demonstrated, the potential risks do appear to make a case for taking a nuanced view of the likely effects of FDI. Policy recommendations for developing countries should focus on improving the investment climate for all kinds of capital, domestic as well as foreign. On the contrary, successful policies are a matter of matching a country’s FDI policies to specific circumstances of the economy, stage of development, location, resources, regional agreements and international competition, in accordance with the priorities set by international bodies.