Recently, the FDI market seems to be facing a harsh wind both quality and quantity wise. FDI has been a major index of a country’s economic growth but the scale of the investment in advanced countries has seen a rapid shrink for the last 3 years after a momentary increase in 2015. Developing countries, however, have enjoyed yearly 2% growth for the last 10 years and in scale wise, they beat the advanced countries of $5,570 billion with $7,060 billion as of 2018.
Changes of trend in global FDI
For national security and technology competitiveness, advanced countries are introducing protectionism-based FDI laws that can strictly control influx of selective industries. 55 countries have announced revised FDI laws in 2018 alone and 1/3 of them toughened the fields of security, core technologies and other sensitive industries.
And in fact that same year, 22 cases of large scale M&A went to void for the reasons of these new regulations or of political issues, and it was the double the number of 2017. Interestingly, they rather eased regulations on investment for promoting their own cutting edge technologies and activation of regional economies.
Changes of national stance in FDI
The US is highly sensitive about leak of cutting edge technologies and firmly determined to keep its global technology leadership. They legalized the Foreign Investment Risk Review Modernization Act 3 (FIRRMA 3) by reinforcing the rights of the Committee on Foreign Investment in the United States 2 (CFIUS2) which made the CFIUS possible to screen on FDI that could leak overseas the core technologies, infrastructure, intellectual properties and other sensitive information of the people of the United States.
In other words, they expanded the scope of interpretations on FDI when it involves potential or possible threats to national security. As a result, the FIRRMA 3 forces all responsible parties to report the procedures or be fined otherwise the amount of the trade that has been made; also the CFIUS 2 can directly take a step to stop FDI without the order of the President of the United States
EU’s toughened FDI screening
The European Commission runs a legal system to screen and to regulate FDI that can threaten security and public order of the member states of the EU. All kinds of FDI, except for investment in portfolio, are subject to screening including energy, logistics, communication, data store, aerospace and sensitive facilities. The European Commission has rights to bring up written opinion when it decides a certain FDI is affecting public interests of the EU; and the member states must take it seriously; if not followed the written opinion, the state, or states, must explain to the commission why it is not following it.
China as the main target of the toughened US and EU regulations
Most trade act specialists see the toughened FIRRMA of the US as to hold China in check. The recent, and ongoing, US-China trade war and security issues of Huawei are propelling the toughness and the Trump Administration is proactively defensive against any possible leak of cutting edge technologies and important information of the United States to China.
There was a case in 2014 that the toughened regulation of the US put a hold on Alibaba’s attempt to enter the cloud computing business in the US and also to takeover MoneyGram. The case indicates that any FDI related to military facilities, major infrastructure, real estate and even small scale of investment can be seen as possible threats to national security and thus could be subject to screening and limitation.
Alongside the US, the EU also included in its related regulations the items that can potentially affect security of the member states such as AI, robotics, semiconductor, space technology and military technologies. A condition also was added to the screening that whether the FDI is financially supported from overseas or controlled by overseas government. This move is interpreted that the state fund of China, even if it is non-dominant investment, or whether they influence the board of directors, can be subject to screening.
China counteracts with bidirectional policies
China in counteract announced the Foreign Investment Act in March 2019 which included reduced benefit of the existing FDI to protect their manufacturing industry. As a result, the benefits for foreign investors was adjusted as equal to domestic investors while regulation on FDI has become toughened; FDI must report investment and finance information or get fined and the names must be opened to the public through the credit information system; this way, the central government holds local government in check of indiscriminate attraction of FDI.
Yet, China is rather strengthening protection of intellectual property rights of foreign investment companies in the field of cutting edge technology and culture industry. This is interpreted that China’s poor intellectual property standard can make foreign investment companies rush out of the country and they need to make sure of its protection in order to prevent the rush.
For this reason, the Foreign Investment Act states legal responsibility for those who infringed intellectual property rights alongside banning the technology transfer of foreign companies. And it seems to be working that for the last 1 year, Lego (Demark), DreamWorks (US) and Dyson (UK) won the legal battle over intellectual property in China.
FDI in South Korea
South Korea runs relatively friendly FDI policy. The IMF that hit South Korea in 1997 put the government in much need of investment from foreign companies, and the related laws and systems have maintained the friendly stance ever since in order to promote and activate shipwrecked national economy and industry in balance.
Right the next year in 1998, the Korean government turned the existing loan-based and closed policies to direct investment and open policies, and started to offer benefits for tax, land and cash through the Free Economic Zones, the Foreign Investment Promotion Act and other special acts.
Foreign Investment Promotion Act: Incentives (key contents)
Tax reduction – corporate tax, income tax, acquisition tax, registration tax, property tax.
Rent or selling of state properties – up to 50 years of rent or selling of state owned lands, factories and other assets on private contract; rent fee is more than 1% of the and price.
Cash support – of land purchasing, building, materials and employment if the investment involved with cutting edge technology, technology transfer or job creation.
Administrative support – through Foreign Investment Support Center and Ombudsman.
Local government support – land, loan and subsidy from central government to local government.
Source: National Assembly Budget Office (2019)
The Foreign Investment Promotion Act does not limit certain items unless otherwise specified and the focus lays on promotion and support of investment. When required by the competent Minister regarding foreign investment limitation, the Trade, Industry and Energy Minister must answer back with relative information within 90 days through the screening by the Foreign Investment Review Board.
The areas of limitation include discordance with national security, health and environment, public order, and traditional customs. It is notable that there has been not a single case which was subject to the limitation so far and most of the discussions have been focused on incentive support.
The improvement, however, needs to be made in the difference of benefits between foreign investment and domestic investment: the former gets far more than the latter which gets little or none at all in some regions. This biased benefit can waste capability of domestic capitalists and discourage home financiers.
The Foreign Investment Promotion Act of South Korea needs to review in connection with global trend. And the review should better be made on the point of promoting competitiveness and advancement of domestic economy and industry. If the existing act has focused on quantitative growth of foreign investment since 1997 (IMF), the act now must reflect the newly formed industrial structure of the world and current economic issues quality-wise.
Foreign investment in manufacturing industry, in particular, must be cautious as it could be ended in zero sum game (no gains of both parties at the end of the play) and it also could make the industry goes backward. Therefore, foreign investment should better be made in cutting edge technology and services sectors by differentiated incentive give out.
It is important for both central and local government involve in FDI to prevent unbalanced attraction or indiscriminate attraction to a certain region only by holing each other in check. Also, the government needs to bring up fair benefit policies for both foreign and domestic investors so that the policies do not discourage one side.
What is more? The government needs to turn the incentive and deregulation to specified economic zones rather than giving it out only because they are foreign investors. This way the government can focus the investment on the targeted industry.