A growing number of American companies are not only exporting their products overseas, but they are exporting their very essence as companies. They’re doing this in the form of foreign direct investment. This surge in acquiring assets abroad has prompted a search for global rules to encourage and protect overseas investments.
Global rules already exist to encourage trade, with 132 nations belonging to the World Trade Organization. But no similar body of ground rules exists to foster the flow of investment among nations. This lack of rules persists despite the explosion of foreign direct investment (FDI) in recent years. In 1996, multinational companies worldwide invested $350 billion in productive assets outside their home countries, double the flow in 1992. Since 1980, annual global flows of FDI have grown 5 times faster than trade and 10 times faster than production.
American companies lead the world in foreign investment. The United 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 productive assets 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 companies to establish a presence in the markets they serve. As Lawrence A. Bossidy, chairman and CEO of AlliedSignal Inc., told a meeting of the Washington, D.C.-based U.S. Council for International Business, “To succeed in today’s markets a company cannot hope to sit back home in Dubuque making widgets and then export the finished goods to buyers abroad Either through affiliates or joint venture partners you need to be there, on the ground with local facilities To gain a foothold in an overseas market, you need to invest,”
Companies establish operations overseas for a number of compelling reasons. Owning affiliates abroad allows U.S. exporters to retain control of product technology and to maintain brand quality. Establishing a presence in a market puts companies closer to their customers to better tailor their products to local tastes, and to better meet local competition. Many small and mid-sized companies invest abroad to supply inputs for overseas affiliates of larger U.S. companies. If the product is a service, such as insurance or consulting, it cannot be delivered without establishing a presence in the target market. Ultimately, companies invest abroad because it is profitable, with returns on foreign investments averaging 10 percent in 1995.
A major barrier to additional foreign investment remains uncertainty. For small and medium-sized companies in particular, the shifting and often opaque rules of the game in foreign countries raise the risk premium and thus discourage the free flow of capital. This friction, in turn, deprives less developed countries of capital and lowers the return to investors, reducing the efficiency of the global economy.
In 1995, representatives from the Organization for Cooperation and Development, the world’s 29 most advanced economies, sought to respond to this need by agreeing to negotiate a Multilateral Agreement on Investment. The purpose of the ongoing negotiations is to offer a set of guarantees to protect property rights and establish a fair and transparent set of rules to govern global investments.
The foundation of the MAI would be non-discrimination. Nations signing the treaty would agree to treat foreign-owned companies “no less favorably” than domestic companies (“national treatment”) or companies from other nations (the “most-favored nation” principle).
The MAI would also prohibit “performance standards,” such as export requirements, technology transfer, local content rules and hiring quotas for management. It would guarantee the freedom of companies to make any investment-related financial transfers, such as profits, capital and royalties, whether into or out of the host country. The treaty would require just compensation for any expropriation of property for public purposes. Finally, these guarantees would be protected by an independent dispute settlement procedure that would arbitrate between governments, and between firms and governments.
The MAI is not a radically new idea. The United States has already signed bilateral investment treaties, or BITs, with 41 other nations. The North American Free Trade Agreement with Canada and Mexico also contains strong investment provisions. All of these existing treaties contain the same basic guarantees to investors as the proposed MAI, the only difference being that the MAI would extend the principles to all of our major trade and investment partners and would be open to any other country willing to abide by its provisions.
Global investment guarantees would benefit all American companies with current operations or plans to expand abroad. “It is not only large multinational corporations that stand to gain from the creation of multinational rules on investment,” notes the U.S. Council for International Business. “The MAI will reduce risk and add a significant degree of predictability to entering new markets, thereby also making it easier for small and medium sized enterprises to become more integrated in the global economy. Once overseas, such enterprises thrive.”
The MAI’s non-discrimination rules would guarantee that once a U.S. company has risked its capital to established an affiliate abroad, it will be allowed to compete on an equal footing with domestically owned producers. And without the freedom to shift funds, 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 operational independence of U.S. companies. “If you’re a little guy, you have your own ideas about product mix, local suppliers and the (affiliate’s) relationship with the parent company. The treaty would give you entrepreneurial autonomy,” said Daniel Price, a Washington trade attorney and former deputy counsel in the office of the U.S. Trade Representative.
Equally important is the dispute settlement provisions. For a smaller company, negotiating through a foreign country’s legal system can be a daunting task, and the courts may be inherently biased against foreign firms. Binding international arbitration offers firms a better chance of receiving a fair hearing. Enabling companies to challenge a treaty violation directly rather than through their home government reduces the need to court political favors. “This is particularly important for smaller companies whose political clout is less,” Price noted.
Despite its obvious advantages for U.S. investors, the MAI appears to have hit a brick wall. The agreement was supposed to be finished by April of this year, but has now been postponed indefinitely. U.S. negotiators are rightly concerned that the European Union’s insistence of special provisions for its members would dilute the non-discrimination principle.
An advisory panel that includes American business representatives has raised other legitimate concerns. The agreement may contain too many exceptions, with France and Canada, for example, demanding that “cultural industries” be excluded. To broaden its support among governments, the treaty now excludes taxation from the non-discrimination clause, a gapping loophole that could cripple the ability of foreign-owned companies to compete against domestic rivals. Possible language calling for minimum labor and environmental standards (language supported by the Clinton administration) could prevent governments from pursuing economically rational deregulation.
Less friendly objections have come from environmental and self-styled watchdog groups who warn that the MAI would compromise national sovereignty and gut the ability to enact environmental and other public safety regulations. In testimony before Congress in February, Lori Wallach of the Public Citizen’s Global Trade Watch claimed, “The MAI would cause an enormous shift of power away from democratic governments and towards foreign investors and corporations as regards U.S. domestic policy concerning foreign direct and portfolio investment, currency trading and numerous business, development, land-use, zoning, environmental and other laws.”
Supporters of the treaty counter that it would not prevent the enactment of even the most onerous and unreasonable regulations, provided the regulations apply equally to domestic firms as well as foreign-owned firms. The treaty would limit the power of governments to expropriate property without compensation, but this is a basic right already enshrined in the U.S. Constitution.
The Multilateral Agreement on Investment remains a work in progress and its prospects are far from certain, but its core principles, if enacted, would promote not only trade and investment across borders but also the global expansion of property rights, due process and equal treatment under the law for American companies investing abroad.