Investment Screening to Support Better Markets
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Foreign investment is traditionally perceived as a positive input in a country’s economy, as it increases the amount of capital available to finance productive activities. Moreover, foreign capital often comes with technology spillovers, human capital formation, and international trade integration, increasing the productivity of industries in recipient countries. However, capital inflows into a country are not without harm or peril. In specific situations, governmental authorities have identified risks to the national security or more broadly, national interest, arising out of foreign takeovers, capital infusions, and loans, among others.
Recently, emerging market economies have faced an influx of foreign capital that “lacks transparency, accountability, and market orientation flowing from authoritarian regimes into new and transitioning democracies”. (CIPE. Channelling the Tide: Protecting Democracies Amid a Flood of Corrosive Capital. Washington DC, 2018. P. 2). This type of investment can corrode institutions and undermine the rule of law. In addition, in recent years emerging economies’ governments, international organizations, and scholars have inquired about the characteristics that foreign investment should have to contribute to the sustainable development of host states. Moreover, efforts have been made to classify the dimensions in which inward capital can aid to these goals, namely: economic, social, environmental and governance. (Karl P. Sauvant and Howard Mann, “Making FDI more sustainable: Towards an indicative list of FDI sustainability characteristics”, Journal of World Investment & Trade, vol. 20 (December 2019): 916-952).
On their account, advanced economies have largely relied on investment screening mechanisms to suspend, condition, or even block transactions that they deem incompatible with their national security. Countries like Australia or Canada use investment review to assess more broadly whether a transaction is consistent with the national interest or generates net benefit to their economy.
This notion could be used by emerging markets wishing to deploy investment screening mechanisms with the objective of blocking or conditioning corrosive capital, while not deterring the entry of constructive capital that would further sustainable development.
In their attempt to do so, emerging markets must bear in mind their international obligations. Concerning the international investment regime, they should endeavor to exclude pre-establishment national treatment and performance requirements commitments in their international investment agreements, or, at least, carve-out their investment screening legislation as non-conforming measures. With regard to the WTO, an investment screening mechanism should be applied with special caution concerning transactions related to the services sector, considering the specific commitments made by each country within the General Agreement on Trade in Services (GATS) and must not impose conditions deemed inconsistent with national treatment obligations specified in the Agreement on Trade-Related Measures (TRIMs Agreement), such as local content requirements for goods. Finally, if a country is considering adhering to the OECD Code of Liberalization of Capital Movements, it might try to lodge a reservation stating that it will conduct investment screening.
All in all, investment review could be a powerful policy tool by emerging economies to maximize the contribution that international investment generates in their markets.