Investment protectionism hampers cross-broader investments - ICC

Cross-border investment and openness of markets to receive such investment are essential to sustaining economic progress and stability in developed and developing countries.

The benefits of foreign investment and open investment regimes have also being recognised by governments and enshrined in various intergovernmental instruments such as the Organisation for Economic Co-operation and Development's Declaration on International Investment and Multinational Enterprises.

ICC urges governments in all parts of the world to safeguard the freedom of investment by avoiding investment protectionism and upholding their domestic and international commitments to welcome market-driven foreign investment.

According to UNCTAD, there has been a sharp increase in cross-border investment worldwide in the past few years. The total value of global foreign direct investment (FDI) inflows soared in 2006 to reach US$ 1,306 billion an increase of 38% compared to the previous year. The growth was fuelled in large part by cross-border mergers to acquisitions.

Concern over the worldwide increase in investment protectionism. In parallel with the increased cross-border investment activity, the markets have witnessed a rise in investment protectionism and the potential for investment protectionism in both industrialised and emerging economies.

In its 2006 and 2007 annual surveys of changes in national laws and regulations relevant to foreign direct investment, UNCTAD noted that the proportion of these changes that made host countries less welcoming to foreign direct investment has been rising steadily from 5% in 2002 to a peak of 20% in 2005 and remained at this 20% peak in 2006.

This trend is manifesting itself in any of the following ways: Legislation, the misuse of legislation or consideration of legislation to tighten rules on foreign investment.

Protection and enhancement of "national champions" impeding foreign investment or forcing the sale of foreign investment to the State, and the use of informal measures and political pressure to impede or deny foreign investment activity.

The International Chamber of Commerce (ICC) - the world business organisation - is concerned that these actions dampen the climate for the relatively free flow of investment, and reduce the benefits it brings to home and host countries. Government regulation should be "least investment-restrictive".

While governments of sovereign nations have a right to regulate economic activity and protect national security with respect to cross-border investment, it is critical that they do so in a manner that does not impede unnecessarily the overall cross-border flow of investment and/or disrupt the benefits it brings to home and host countries.

Where regulations establish a review process, the process should be fact-based, analytically rigorous, and directed to individual transactions.

Further, such processes should assure procedural and legal certainty by being timely, transparent, non-discriminatory and by providing finality for the investing parties.

In those few instances where a government review concludes that action should be taken to protect national security, governments should first exhaust the use of existing rules and regulations before adopting any special measure, as existing rules are usually sufficient to cover all relevant risks.

When, however, special measures are deemed necessary, they should be strictly proportional to the identified national security risk inherent to the transaction and limited to only what is required to meet that risk.

All Governments must remain committed to freedom of investment and the promotion of an open investment environment worldwide.

Much work has already been done in intergovernmental organisations, including the OECD and the United Nations Conference on Trade and Development (UNCTAD), both on identifying and disseminating good regulatory practice and on peer review mechanisms. The G8 mandate should seek to build on this existing body of work.

Governments should involve representative global business organisations in these discussions, whose members have much experience in advising governments and intergovernmental organisations on improving conditions for cross-border investment.

(Article based on a ICC policy paper.)