A growing number of American companies are not only exportingtheir products overseas, but they are exporting their very essenceas companies. They're doing this in the form of foreign directinvestment. This surge in acquiring assets abroad has prompted asearch for global rules to encourage and protect overseasinvestments.
Global rules already exist to encourage trade, with 132 nationsbelonging to the World Trade Organization. But no similar body ofground rules exists to foster the flow of investment among nations.This lack of rules persists despite the explosion of foreign directinvestment (FDI) in recent years. In 1996, multinational companiesworldwide invested $350 billion in productive assets outside theirhome countries, double the flow in 1992. Since 1980, annual globalflows of FDI have grown 5 times faster than trade and 10 timesfaster than production.
American companies lead the world in foreign investment. TheUnited States was both the world's top recipient of FDI in 1996,with $78.1 billion flowing in, and the world's top source of FDI,with American companies investing $85.6 billion in productiveassets abroad. In 1996, U.S. multinational companies controlled$797 billion in assets abroad, while foreign companies controlled$630 billion of assets in the United States.
Behind this phenomenon is a growing need for American companiesto establish a presence in the markets they serve. As Lawrence A.Bossidy, chairman and CEO of AlliedSignal Inc., told a meeting ofthe Washington, D.C.-based U.S. Council for International Business,"To succeed in today's marketsa company cannot hope to sit back home in Dubuque making widgetsand then export the finished goods to buyers abroadEither through affiliates or joint venture partners you need to bethere, on the ground with localfacilitiesTo gain a foothold in an overseas market, you need to invest,"
Companies establish operations overseas for a number ofcompelling reasons. Owning affiliates abroad allows U.S. exportersto retain control of product technology and to maintain brandquality. Establishing a presence in a market puts companies closerto their customers to better tailor their products to local tastes,and to better meet local competition. Many small and mid-sizedcompanies invest abroad to supply inputs for overseas affiliates oflarger U.S. companies. If the product is a service, such asinsurance or consulting, it cannot be delivered withoutestablishing a presence in the target market. Ultimately, companiesinvest abroad because it is profitable, with returns on foreigninvestments averaging 10 percent in 1995.
A major barrier to additional foreign investment remainsuncertainty. For small and medium-sized companies in particular,the shifting and often opaque rules of the game in foreigncountries raise the risk premium and thus discourage the free flowof capital. This friction, in turn, deprives less developedcountries of capital and lowers the return to investors, reducingthe efficiency of the global economy.
In 1995, representatives from the Organization for Cooperationand Development, the world's 29 most advanced economies, sought torespond to this need by agreeing to negotiate a MultilateralAgreement on Investment. The purpose of the ongoing negotiations isto offer a set of guarantees to protect property rights andestablish a fair and transparent set of rules to govern globalinvestments.
The foundation of the MAI would be non-discrimination. Nationssigning the treaty would agree to treat foreign-owned companies "noless favorably" than domestic companies ("national treatment") orcompanies from other nations (the "most-favored nation"principle).
The MAI would also prohibit "performance standards," such asexport requirements, technology transfer, local content rules andhiring quotas for management. It would guarantee the freedom ofcompanies to make any investment-related financial transfers, suchas profits, capital and royalties, whether into or out of the hostcountry. The treaty would require just compensation for anyexpropriation of property for public purposes. Finally, theseguarantees would be protected by an independent dispute settlementprocedure that would arbitrate between governments, and betweenfirms and governments.
The MAI is not a radically new idea. The United States hasalready signed bilateral investment treaties, or BITs, with 41other nations. The North American Free Trade Agreement with Canadaand Mexico also contains strong investment provisions. All of theseexisting treaties contain the same basic guarantees to investors asthe proposed MAI, the only difference being that the MAI wouldextend the principles to all of our major trade and investmentpartners and would be open to any other country willing to abide byits provisions.
Global investment guarantees would benefit all Americancompanies with current operations or plans to expand abroad. "It isnot only large multinational corporations that stand to gain fromthe creation of multinational rules on investment," notes the U.S.Council for International Business. "The MAI will reduce risk andadd a significant degree of predictability to entering new markets,thereby also making it easier for small and medium sizedenterprises to become more integrated in the global economy. Onceoverseas, such enterprises thrive."
The MAI's non-discrimination rules would guarantee that once aU.S. company has risked its capital to established an affiliateabroad, it will be allowed to compete on an equal footing withdomestically owned producers. And without the freedom to shiftfunds, a company may not be able to repatriate its profits,negating the whole reason for investing abroad.
The ban on performance rules would preserve the operationalindependence of U.S. companies. "If you're a little guy, you haveyour own ideas about product mix, local suppliers and the(affiliate's) relationship with the parent company. The treatywould give you entrepreneurial autonomy," said Daniel Price, aWashington trade attorney and former deputy counsel in the officeof the U.S. Trade Representative.
Equally important is the dispute settlement provisions. For asmaller company, negotiating through a foreign country's legalsystem can be a daunting task, and the courts may be inherentlybiased against foreign firms. Binding international arbitrationoffers firms a better chance of receiving a fair hearing. Enablingcompanies to challenge a treaty violation directly rather thanthrough their home government reduces the need to court politicalfavors. "This is particularly important for smaller companies whosepolitical clout is less," Price noted.
Despite its obvious advantages for U.S. investors, the MAIappears to have hit a brick wall. The agreement was supposed to befinished by April of this year, but has now been postponedindefinitely. U.S. negotiators are rightly concerned that theEuropean Union's insistence of special provisions for its memberswould dilute the non-discrimination principle.
An advisory panel that includes American businessrepresentatives has raised other legitimate concerns. The agreementmay contain too many exceptions, with France and Canada, forexample, demanding that "cultural industries" be excluded. Tobroaden its support among governments, the treaty now excludestaxation from the non-discrimination clause, a gapping loopholethat could cripple the ability of foreign-owned companies tocompete against domestic rivals. Possible language calling forminimum labor and environmental standards (language supported bythe Clinton administration) could prevent governments from pursuingeconomically rational deregulation.
Less friendly objections have come from environmental andself-styled watchdog groups who warn that the MAI would compromisenational sovereignty and gut the ability to enact environmental andother public safety regulations. In testimony before Congress inFebruary, Lori Wallach of the Public Citizen's Global Trade Watchclaimed, "The MAI would cause an enormous shift of power away fromdemocratic governments and towards foreign investors andcorporations as regards U.S. domestic policy concerning foreigndirect and portfolio investment, currency trading and numerousbusiness, development, land-use, zoning, environmental and otherlaws."
Supporters of the treaty counter that it would not prevent theenactment of even the most onerous and unreasonable regulations,provided the regulations apply equally to domestic firms as well asforeign-owned firms. The treaty would limit the power ofgovernments to expropriate property without compensation, but thisis a basic right already enshrined in the U.S. Constitution.
The Multilateral Agreement on Investment remains a work inprogress and its prospects are far from certain, but its coreprinciples, if enacted, would promote not only trade and investmentacross borders but also the global expansion of property rights,due process and equal treatment under the law for Americancompanies investing abroad.