Tips to Encourage Foreign Investment, While Satisfying Political Pressure

Warning of “a protectionist drift” in attitudes and regulation of foreign direct investment by governments, a Council of Foreign Relations report offers guidelines for countries to satisfy political pressure to better regulate foreign investment while continuing to reap the economic benefits.

The report, “Global FDI Policy: Correcting a Protectionist Drift,” was written by David M. Marchick, global head of regulatory affairs for private-equity firm Carlyle Group and former partner at the law firm of Covington & Burling, and Matthew J. Slaughter, a professor at Dartmouth’s Tuck School of Business and former member of President Bush’s Council of Economic Advisers.

The pair argues that foreign direct investment is a major economic plus both for the countries that receive the investments and the ones that make them. “Investment liberalization has been the strongest driver of growth worldwide,” they say. They say angst about foreign investment is spreading beyond the traditional worries about national security, in part because of the arrival of new players to the game — including emerging market countries and government-run sovereign wealth funds.

Marchick and Slaughter offer four principles to guide government review of foreign investment:

(1) The investment review law should be narrowly tailored and focused on national security, not economic, factors to avoid the appearance and reality of protectionism.
(2) Investment review should be predictable and conduced within a definite timeframe to reduce uncertainty.
(3) Investment review should be confidential.
(4) Countries should avoid designating sectors for particularly scrutiny or, where that’s not politically possible, should make the definition of those sectors as narrow as possible.