Download Is investment protectionism on the rise?

Global Forum on International Investment
2017
Is investment protectionism on the rise?
Evidence from the OECD FDI Regulatory Restrictiveness Index
Stephen Thomsen and Fernando Mistura, OECD Investment Division. This note is provided as background
information at the Global Forum on International Investment, 6 March 2017, OECD.
Investment protectionism can take many forms: new rules or more rigorous enforcement of
existing ones; greater conditionality attached to regulatory approval mechanisms; or a more
expansive notion of strategic industries, the national interest and national security. Sometimes
disapproving pronouncements by the government or fears of a popular backlash are enough to
stop a potential cross-border investment in its tracks.
Given the sustained downturn in global flows of foreign direct investment (FDI), the suggestion
that rising protectionism is partly to blame is gaining currency. Evidence of investment
protectionism tends to be anecdotal, given the difficulties in measuring the different ways a
government might discriminate against foreign investors. The OECD FDI Regulatory
Restrictiveness Index (Box 1) can help to shed light on the question. It measures statutory barriers
against foreign investment in over 60 countries worldwide and how they have changed over time.
By looking only at discrimination on the books and not at how rules are implemented, it can only
provide part of the answer, but it does provide an objective reality check on the question of
whether the global policy trend is turning against foreign investment.
Over time and across countries, policies are moving towards greater openness for foreign
investors
Many OECD countries undertook substantial reforms of the regime covering FDI in the 1970s and
early 1980s. Screening procedures were once common but are now the exception to the rule and
often circumscribed in their ability to reject investments. For emerging economies, reforms came
later – in the late 1980s and 1990s – as the benefits of export-led development driven in part
through FDI became more widely accepted. Since 2000, the pace of reform has slowed in most
countries (Figure 1). This is partly because there are now fewer barriers to remove, but it may also
reflect the fact that the low-hanging fruit of reform has already been picked and remaining reforms
will involve more stakeholder opposition.
Not all countries follow this pattern of reform fatigue. Turkey and Viet Nam, for example, have both
undertaken extensive reforms over the past 15 years, and both China and India liberalised further
in 2016 (not currently shown in the Index which stops in 2015). Overall, however, the average
scores under the Index have tended to remain flat over this period. While this suggests a loss of
reform momentum recently, it does not provide any evidence that countries have become
significantly more restrictive in terms of statutory barriers since the global financial crisis in 2008-
09. There is no upward movement in the curves shown below. The slight variation in the curve for
non-OECD countries is reflects the fact that the sample size has increased over time.
Figure 1. Changes in the overall FDI Index, 1997-2015
OECD
0.4
Non-OECD
OECD FDI Regulatory Restrictiveness Index (open=0; closed=1)
0.4
0.3
0.3
0.2
0.2
0.1
0.1
0.0
1997
(n=45)
2003
(n=46)
2006
(n=47)
2010
(n=55)
2011
(n=55)
2012
(n=59)
2013
(n=60)
2014
(n=60)
2015
(n=64)
Source: OECD FDI Regulatory Restrictiveness Index database, www.oecd.org/investment/fdiindex.htm.
The biggest reformers since 1997 have tended to be those countries that were most restrictive
to start with
The biggest reformers since 1997 have all been in Asia, many of which started with a high level of
restrictions (Figure 2). Liberalisation has often been on a unilateral basis, as host governments
come to recognise the potential benefits of FDI, but the pace and timing of reforms are often
influenced by external factors such as WTO or OECD membership, regional free trade agreements
or economic crises.
Figure 2. The top FDI reformers, 1997-2015
2015
0.8
1997-2015
OECD FDI Regulatory Restrictiveness Index (open=0; closed=1)
0.7
0.6
0.5
0.4
0.3
0.2
0.1
0
-0.1
Source: OECD FDI Regulatory Restrictiveness Index database. www.oecd.org/investment/fdiindex.htm.
Reforms have resulted in increased inflows of foreign direct investment
Reforms of FDI restrictions are only one of the factors which can explain a country’s performance
in attracting foreign investment and such reforms are usually not done in isolation but are rather
part of an overall package of investment climate improvements in different policy areas.
Nevertheless, there is a clear correlation between reforms and FDI inflows for the four countries
presented in Figure 3. In all cases, once a critical mass of FDI-related reforms had been undertaken,
FDI took off.
Figure 3. Country experience with FDI reforms and the impact on FDI inflows, 1997-2015
OECD FDI RR Index (left axis)
Foreign Direct Investment, inward stocks (% of GDP)
Brazil
0.4
FDI Index (open=0; closed=1)
Korea
% of GDP
35 0.8
FDI Index (open=0; closed=1)
% of GDP
16
0.3
30 0.7
14
0.3
25
0.6
12
0.2
20
0.5
10
0.4
8
0.2
15
0.3
6
0.1
10
0.2
4
0.1
5
0.1
2
0.0
0
0.0
0
Viet Nam
1.0
0.9
0.8
0.7
FDI Index (open=0; closed=1)
Philippines
% of GDP
60 0.7
50 0.6
40
0.6
0.5
0.2
0.1
0.0
% of GDP
25
20
0.5
0.4
15
30
0.3
0.4
0.3
FDI Index (open=0; closed=1)
20
0.2
10 0.1
0
10
0.0
5
0
Source: OECD calculations based on the OECD FDI Regulatory Restrictiveness Index methodology and UNCTAD statistics.
FDI restrictiveness still varies greatly across countries and regions
Countries in the Asia-Pacific region – both OECD and non-OECD – tend to have higher scores under
the Index on average (Figure 4), with a greater propensity to screen inward investment and more
frequent use of foreign equity limits at a sectoral level. This finding may seem at odds with the
common notion that these countries have often relied on foreign investment as part of their exportled development. This is because the regime in export processing zones in these countries, which is
often more liberal, is not captured in the Index. EU countries collectively have the fewest
restrictions on FDI. Larger countries also tend to be more restrictive, partly because they may be
richer in natural resources, but also because they often have larger markets which offer host
governments more scope to impose discriminatory conditions on investors without discouraging
inflows. Many of the most restrictive countries under the Index fall into one or both of these
categories (Figure 5).
Figure 4. FDI regulatory restrictiveness per country, 2015¹
Source: OECD FDI Regulatory Restrictiveness Index database. www.oecd.org/investment/fdiindex.htm
Note: (¹) Countries without shading are not covered in the Index. Scores are preliminary for Thailand and Singapore (base year 2014),
Cambodia (base year 2015), Namibia, Mozambique, Mauritius and Seychelles (base year 2013).
Equity restrictions have usually been the most common form of discrimination
Figure 5 shows the overall score for each country and by type of measure. For most countries,
sector-specific limits on foreign equity ownership have been the most common form of
discrimination faced by foreign investors. Countries often impose such restrictions to allow
domestic investors to share in the rents from the project and in the expectation that having a
domestic investor involved will help to facilitate linkages with the domestic economy and enhance
technology transfers and other potential spill-overs. The extent to which joint venture
requirements or foreign equity limits are an effective way to achieve these spill-overs is an open
question. Many investors prefer majority ownership and hence equity limits may deter potential
investors.
Figure 5. Discrimination against foreign investors by type of restriction, 2015
Equity restriction
0
0.05
Other restrictions¹
Non-OECD average
OECD average
Luxembourg
Slovenia
Portugal
Romania
Czech Republic
Netherlands
Estonia
Finland
Spain
Germany
Latvia
Colombia
Hungary
Greece
Denmark
Lithuania
Argentina
Belgium
Ireland
France
Singapore
Slovak Republic
Costa Rica
Cambodia
Japan
Italy
South Africa
Chile
Turkey
Sweden
United Kingdom
Egypt
Mauritius
Morocco
Poland
Peru
Kyrgyzstan
Switzerland
Seychelles
Norway
United States
Mongolia
Brazil
Austria
Mozambique
Viet Nam
Israel
Ukraine
Korea
Kazakhstan
Australia
Canada
Iceland
Russia
Lao PDR
Mexico
Namibia
Tunisia
Malaysia
India
New Zealand
Thailand
Jordan
Indonesia
Saudi Arabia
Myanmar
China
Philippines
Screening & approval
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
OECD FDI Regulatory Restrictiveness Index (open=0; closed=1)
Source: OECD FDI Regulatory Restrictiveness Index database, www.oecd.org/investment/fdiindex.htm
Note: (¹) Other restrictions refer to those on the employment of key foreign personnel and other operational restrictions. Scores are
preliminary for Thailand and Singapore (based on 2014), Cambodia (2015), Namibia, Mozambique, Mauritius and Seychelles (2013).
Restrictiveness also varies greatly by sector
Although some countries still have horizontal measures which affect all foreign investors, such as
approval mechanisms or a prohibition on foreign ownership of land, most restrictions are sector
specific limits on foreign equity. In general, FDI in manufacturing is allowed without restrictions,
except when a horizontal measure applies across the board, but many primary and service sectors
remain partly off limits to foreign investors, holding back potential economy-wide productivity
gains (Figure 6). Even within OECD countries, restrictions on foreign investment remain in some
key network sectors such as energy and transport. The sectoral pattern of restrictions tends to be
similar in both advanced and emerging economies, but the extent of restrictiveness is generally
higher in the latter group of countries.
Figure 6. FDI restrictions in OECD and non-OECD countries by sector, 2015
OECD
0.40
Non-OECD
OECD FDI Regulatory Restrictiveness Index (open=0; closed=1)
0.35
0.30
0.25
0.20
0.15
0.10
0.05
0.00
Source: OECD FDI Regulatory Restrictiveness Index database, www.oecd.org/investment/fdiindex.htm.
Conclusion: No grounds for complacency
This analysis based on the OECD FDI Regulatory Restrictiveness Index provides very little evidence
of backtracking of investment policy reforms but rather shows a continued reform impetus in those
countries which traditionally have been the most restrictive. Governments worldwide recognise
the potential benefits that FDI can bring under the right conditions. Indeed many remaining
restrictions are designed more to try to maximise those benefits than they are to restrict foreign
investment. Foreign investors have often responded with enthusiasm to reforms in many of the
countries currently covered by the Index.
At the same time, the gradual re-imposition of screening mechanisms, often tied to national
security considerations, could provide the means for backtracking in the future if the notion of
national security is later stretched to encompass strategic sectors or firms. Governments are
increasingly concerned about the potentially non-commercial objectives of investments by stateowned enterprises or sovereign wealth funds and about the lack of potential reciprocity in terms of
the market for corporate control in the country of the investor. Multinational enterprises may also
face a resurgence of restrictions on outward investment from their home country. All of this
suggests that governments and stakeholders should avoid complacency in this area.
Box 1. Calculating the OECD FDI Regulatory Restrictiveness Index
The OECD FDI Regulatory Restrictiveness Index covers 22 sectors, including agriculture,
mining, electricity, manufacturing and main services (transport, construction, distribution,
communications, real estate, financial and professional services).
For each sector, the scoring is based on the following elements:




the level of foreign equity ownership permitted,
the screening and approval procedures applied to inward foreign direct investment;
restrictions on key foreign personnel; and
other restrictions such as on land ownership, corporate organisation (e.g. branching).
Restrictions are evaluated on a 0 (open) to 1 (closed) scale. The overall restrictiveness
index is a weighted average of individual sectoral scores.
The measures taken into account by the Index are limited to statutory restrictions on FDI,
typically listed in countries’ lists of reservations under FTAs or, for OECD countries, under the
list of exceptions to national treatment. The Index does not assess actual enforcement and
implementation procedures. The discriminatory nature of measures, i.e. when they apply to
foreign investors only, is the central criterion for scoring a measure. State ownership and state
monopolies, to the extent they do not discriminate against foreigners, are not scored.
Preferential treatment in special-economic zones and for export-oriented investors is also not
considered.
More information on the Index can be found at www.oecd.org/investment/index
This work is published on the responsibility of the Secretary-General of the OECD. The opinions expressed and the arguments herein do
not necessarily reflect the official views of the OECD or the governments of its member countries. This document and any map included
herein are without prejudice to the status of or sovereignty over any territory, to the delimitation of international frontiers and
boundaries and to the name of any territory, city or area.
The data for Israel are supplied by and under the responsibility of the relevant Israeli authorities. The use of such data by the OECD is
without prejudice to the status of the Golan Heights, East Jerusalem and Israeli settlements in the West Bank under the terms of
international law.
OECD Global Forum on International Investment
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how to address the backlash against globalisation from an international investment perspective.
Debates will address options for reforming the international investment policy regime across
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