Beware of FDI Protectionism

NEW YORK – During their most recent meetings, the G-8 took a strong stance against protectionist measures in the area of foreign direct investment (FDI), echoing calls for a moratorium in such measures issued earlier by the G-20. Both were right to do so.

According to the United Nations Conference on Trade and Development, only 6% of all the changes in national FDI regulations around the world between 1992-2002 were in the direction of making the investment climate less welcoming. That figure doubled to 12% of all regulatory changes in 2003-2004, and almost doubled again, to 21% of all FDI regulatory changes, in 2005-2007. In Latin America, for example, some 60% of all FDI regulatory changes in 2007 were unfavorable to foreign investors.

Overall, countries that had implemented at least one regulatory change that made the investment framework less welcoming in 2006-2007 accounted for some 40% of world FDI inflows during that period – an impressive figure that demonstrates that something very dubious is afoot. And these data refer to formal changes in laws and regulations; no data are available on the extent to which unchanged laws and regulations are implemented in a more restrictive manner, increasing informal barriers to the entry and operations of foreign firms.

Of course, not every measure that makes the climate less welcoming for foreign direct investors is protectionist. Basically, there are two situations that should qualify. In the case of inward FDI, protectionism involves new official measures that are used to prevent or discourage investors from coming to or staying in a host country. For outward FDI, protectionism involves measures that require domestic companies to repatriate assets or operations to the home country, or that discourage certain types of new investments abroad.