* Although China’s foreign investment regime is significantly open but acquisitions of Chinese firms by foreign investors are increasingly being questioned amidst a growing mood of “economic patriotism.” The National Development and Reform Commission of China has emphasized the need to shift to a “quality, not quantity” approach towards attracting foreign investments. The Commission asked the government to encourage foreign investments in higher-value-added sectors and discourage low-value export-processing and assembly-type manufacturing. In its policy document for the 11th Five-Year Plan released in November 2006, the Commission suggested closer scrutiny of future mergers in sensitive sectors and called for new legislations on foreign takeovers. Since 2005, the rapid entry of foreign banks in the Chinese financial sector has raised serious concerns in the policy circles about the benefits of a liberalized financial regime.

* There has been a phenomenal increase in the disputes between TNCs and host governments in recent years. More than 200 international arbitration cases concerning investment projects have been initiated in the past few years. The disputes are expected to increase further given the rethinking on the benefits of foreign investments by some host governments.

* Of late, the growing engagement of private equity funds (such as Kohlberg Kravis Roberts & Company, Blackstone, and Carlyle Group) in the cross-border mergers and acquisitions has generated considerable public criticism in some developed countries. In 2005, Mr. Franz Müntefering, the then chairman of the Social Democratic Party (SPD), described private equity funds and hedge funds as “swarms of locusts that fall on companies, stripping them bare before moving on.” In the case of South Korea, the activities of private equity funds came under scrutiny following reports of non-payment of taxes. Private equity funds earned billions of dollars by taking over sick banks in the post-crisis period and later re-floated them in the Korean financial markets. After the strong public outcry, the regulatory authorities in Korea undertook stern actions against such funds. In the U.S., there are growing calls for strict regulation of private equity funds following the failed $50 billion takeover bid of Vivendi Universal of France by Kohlberg Kravis Roberts & Company in 2006. In the UK, the Financial Services Authority (FSA) reviewed the operations of private equity funds and found several areas of potential risk to the financial system because of their market abuse and anti-trust practices. The FSA called for closer regulation and supervision of private equity funds.

Similarly, the phenomenal rise of hedge funds, known for their short-term investment strategies and lack of transparency and accountability, has come under considerable criticism in many developed countries. The UK’s FSA has taken a tough stand against hedge fund industry. In a discussion paper, the FSA warned that “some hedge funds are testing the boundaries of acceptable practice concerning insider trading and market manipulation.” The FSA also announced the establishment of a dedicated new unit which would monitor and supervise the trading behavior of hedge fund industry. This is a significant development given the fact that the bulk of European hedge funds are located in the UK and they account for at least 30 per cent of trading at the London Stock Exchange, which is the biggest stock market within the Europe. Even in the U.S., the Securities and Exchange Commission is examining new measures to increase its surveillance on hedge funds.

* The corporate scandals (from Enron to Worldcom to Parmalat) have further dented the benign image of TNCs worldwide. The scandals have exposed systemic flaws in the corporate governance model based on self-regulation. Despite much-touted claims of corporate transparency and disclosures, the basic norms of governance were completely flouted by these corporations. Regulations related to accounting and reporting were either circumvented or followed in letter rather than in spirit. What is even more disturbing is the fact that most of these corporations had their own codes of conduct, illustrating that voluntary codes of conduct are clearly insufficient to ensure that TNCs conduct their business operations responsibly. Such codes therefore should not be considered as a substitute for state regulations.

* Outsourcing has become a contentious political issue in many developed countries (for instance, U.S.) because of the fear of white-collar job losses in the service sector.

How far these developments could lead to a major backlash against foreign investment remain to be seen. Nevertheless, there is an increased onus on the foreign investors and their advocates to prove (both theoretically and empirically) that foreign investments are always beneficial to the host country. Nowadays there are now very few supporters of the earlier market-friendly approaches that focused exclusively on investors’ rights and nations’ obligations. Even within the corporate world, questions related to investors’ obligations in both home and host countries are being raised. Thus, any attempt to launch multilateral investment agreement that intends to serve the interests of foreign investors exclusively at the expense of weakening the regulatory framework is unlikely to succeed in the present geo-political context. No wonder, the policy focus has shifted away from multilateral to bilateral and regional investment agreements. Posted by
(Bulatlat.com)

Kavaljit Singh is Director, Public Interest Research Centre, New Delhi. He can be reached at kaval@vsnl.com. The above article is based on his latest report, Why Investment Matters: The Political Economy of International Investments (FERN, The Corner House, CRBM and Madhyam Books, 2007).
The full report could be downloaded from: http://www.thecornerhouse.org.uk/pdf/document/Investment.pdf

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