High time for a global investment agreement
Just as trade has joined dozens of economies closer together in recent years, burgeoning foreign direct investment (FDI) is contributing an even more powerful global imprint. In terms of international transactions, FDI is more important than trade.
While annual global exports of goods and services are in the region of US$24 trillion a year, sales of foreign affiliates of multinational corporations (MNCs) come in at some US$30 trillion. And about one-third of international trade flows are intra-corporate transactions.
Everyone knows that FDI among industrial countries has expanded greatly over the years. Less appreciated, perhaps, is the rapidly growing participation of non-OECD economies in outward FDI flows.
In the decade up to 2012, intra-OECD FDI grew at an average 6 per cent per year. The comparable number for flows from non-OECD to OECD economies was 17 per cent, admittedly from a much lower base.
But by 2013, emerging markets accounted for almost 40 per cent of outward FDI. The quality of FDI has been improving too. Emerging economies now also account for 40 per cent of R&D expenditures, compared to one-tenth a decade ago.
Even as FDI flows shrunk by 8 per cent globally in 2014, emerging markets accounted for some 60 per cent of the year’s increase, repeating an unbroken pattern established for a third year in a row. Asia is a big part of that story.
Despite the catch-up, advanced economies are still home to 92 of the largest 100 non-financial multilateral enterprises (MNEs) ranked by foreign asset holdings. But the community of nations with stakes on both sides of the investment game – inward and outward flows – is growing fast.
In laying out some of this background at an international meeting of investors in Dubai last month, Karl Sauvant of Columbia University – a leading authority on FDI – also emphasised a shifting policy environment.
Virtually every government runs some kind of investment promotion authority offering informational and other facilitating support. But most governments provide a lot more besides.
Four issues stand out. The first of these is the impact of government incentives for FDI. Possible supports include financial incentives, fiscal exemptions, investment insurance, and double taxation agreements. Certain of these may serve both inward and outward investments, while some only work for one or the other.
Second, the role of SOEs in FDI has attracted growing attention, especially from industrial countries with less extensive public asset ownership than some emerging economies. They see this as unfair investment competition. One retort is that regardless of whether state ownership implies subsidization, financial and fiscal incentives tilt the competitive landscape.
Third, governments have brought national security arguments to bear, as well as notions of national patrimony, in blocking foreign asset ownership. No international understandings appear to exist on the legitimate scope of such actions.
Finally, investor-state dispute settlement (ISDS) arrangements have been a major source of contention. These give private investors standing in international tribunals to sue host governments. The negotiations between the United States and the EU under the Trans-Atlantic Trade and Investment Partnership initiative have been affected by public opposition to ISDS.
This is not an exhaustive list of issues, but it offers a flavour of the policy disarray besetting a vital and generally beneficial link joining up the global economy. That disarray is nowhere better illustrated than in the bewildering plethora of preferential trade agreements and bilateral investment treaties (BITs) that regulate FDI.
More than 3000 BITs exist globally. Admittedly, the EU and the United States have built templates that they entice partner economies to sign. But this hardly substitutes for the coherence of an international investment agreement in a world no such agreement exists, despite past efforts to establish one.
Crafting a global agreement is an obvious and needed step towards better global economic governance. Expanding constituencies of countries on both sides of the aisle – outward investing economies looking for new opportunities who are also host economies seeking growth-enhancing and development-friendly inward investments – create greater interest than ever before in getting this right.
Patrick Low is vice-president of research at Fung Global Institute