At last year’s meeting of the Group of Eight rich countries in Germany, leaders issued a strident call against what they referred to as “investment protectionism”. It was a statement that took on an increasingly hollow ring as the months wore on. Usually regarded as a trait of developing countries suspicious of western-based multinational corporations, scepticism about foreign direct investment (FDI) now appears to be spreading among the rich nations.
A succession of developed countries has recently tightened up their laws and declared high-profile assets off-limits to foreign investors. Nor does this simply reflect suspicion of sovereign wealth funds from oil-rich autocracies. Stable, mature democracies are blocking public and private investments from each other.
Japan last week rejected a bid from The Children’s Investment Fund, a UK-based hedge fund, to raise its stake in the Japanese energy company J-Power, a decision sharply criticised by Peter Mandelson, European Union trade commissioner. New Zealand recently blocked a move by a Canadian state pension fund to buy a stake in Auckland airport, while Canada itself prevented Alliant Techsystems of the US from buying the space technology division of MacDonald Dettwiler, which specialises in satellites and space robotics.
Karl Sauvant, executive director of the programme on international investment at Columbia University in New York, says there are clear signs of a re-evaluation of the benefits of FDI. Usually, around 90 per cent of the new laws governing FDI passed around the world each year made it easier for foreigners to invest, he says. “But in the last three years, 30 or 40 per cent of the laws have gone in the other direction of being less welcoming to investment,” Mr Sauvant says. “Something is definitely cooking.”
Australia is tightening up its rules on foreign ownership of assets, along with referring to its foreign investment review board a bid by Chinalco, the state-owned Chinese metals company, for a bigger stake in Rio Tinto, the mining company. In March, South Korea’s new conservative government outlined plans to introduce a “poison pill” and other possible voting restrictions to protect South Korean companies from hostile takeovers.
Even in America the climate has darkened. The question facing companies and funds seeking to invest in the US is how to get difficult deals through the tough vetting process and avoid the risk of falling victim to a political wrangle. Fanning the concerns of some investors in America – both foreign and domestic – is the increasing scepticism about the benefits of trade that has been aired by both Barack Obama and Hillary Clinton in vying for the Democratic presidential nomination, as well as signs that sovereign wealth funds could come under increasing scrutiny in Washington.
Mr Sauvant notes the irony that, from the 1970s, rich countries have tried to persuade developing nations to open up to foreign investment. “Now it is the developed countries themselves that seem to be taking the lead in questioning the benefits of FDI,” he says. “This is liable to cause developing countries to change their own attitudes.”
Yet he and other experts counsel against assuming that there is an indiscriminate shift towards rejecting foreign capital. Mark O’Connell, chief executive at OCO Global, an FDI consultancy of which part was recently acquired by the Financial Times, says suspicion of foreign investment is concentrated in particular sectors and specific forms. In particular, he says, there appears to be a broadening definition of what constitutes a sensitive asset, where loss of control would threaten national security.
The power sector is an obvious one, given the threat of disruptions to global oil and gas supplies. “Utilities have often been seen as a strategic asset and there is a great sensitivity about energy, in particular in today’s world,” Mr O’Connell says. But worries over security have also increased concerns over other assets essential to the smooth running of a modern economy, such as airports.
As well as New Zealand’s reluctance over Auckland, airport ownership has also become increasingly controversial in the UK, where BAA – operator of London’s Heathrow, Gatwick and Stansted hubs – was sold in 2006 to Ferrovial of Spain. After operational fiascos at Heathrow, BAA’s near-monopoly positions in London and Scotland are coming under official scrutiny.
Japan has had a fierce political debate in recent months over whether Tokyo should curb foreign holdings in Japanese airports ahead of the planned listing of Narita, Tokyo’s main international hub. The discussion has been fuelled in part because Macquarie, the Australian bank that invests in infrastructure, acquired a 20 per cent stake in a company that runs Haneda, the capital’s other airport.
Japanese law requiring foreign investors to obtain approval before buying more than 10 per cent of the shares of a company with business in a regulated industry was extended last year to include a broader range of sectors.
Mr Sauvant says confusion and mutual suspicion has arisen from the fact that the definition of “national security” tends to vary between countries, leading to accusations that it is being used as an excuse to protect the commercial interests of domestic owners.