Striking the Balance Between Open Investment, Mergers and Acquisitions, and National Security

Remarks Delivered to the Federation of German Industries (BDI) G8 Business Summit

Berlin, April 25, 2007

William G. Parrett

Chairman, United States Council for International Business and

CEO, Deloitte Touche Tohmatsu

  1. Introduction

Thank you Herr Gloss.

It is a pleasure to be here and participate in this timely and important event.

I wish to congratulate Chancellor Merkel for the vision and foresight to seek the views of the private sector on three critical issues being considered by G-8 governments: investment, intellectual property rights, and climate change.

I have been asked to speak on striking the right balance between keeping markets open for foreign investment/mergers and government measures to protect the national security.

Let me state the U.S. business position at the outset:  Governments need to re-gain self restraint in the use of national security as a reason to interfere with foreign investment and mergers and acquisitions!

  1. Why Liberal Investment Regimes Are Important

As the Chairman of the United States Council for International Business, an organization representing some 300 multinational companies who trade and invest globally, the benefits of open investment regimes are readily apparent.

Our members know that open investment regimes by governments enables them to compete in global markets on the basis of their best offerings—their product design, development, production, sales and service.

And over the years, governments have recognized and welcomed the contribution foreign investment brings to their economies in terms of increased employment, output, productivity, technology and managerial skills and the like.  Increasingly from the mid 1990’s and into the mid 2000s, governments tore down their barriers to foreign investment.

The data on foreign investment flows reflect this attitude of governments.  In 2005, the value of global cross border investment flows throughout the world exceeded ten trillion dollars, nearly triple the amount of 1995.

III.  The Beginnings of Change

In the early years of this century, the drive to continue liberalization of barriers to foreign investment began to change in the United States and throughout the world.

September 11, and subsequent bombings in Spain, UK, India and Bali led to heightened security concerns in the U.S. and eventually these concerns found their way into the world of international investment.    

The failed attempt by a Chinese firm, CNOOC, to acquire a medium size U.S. oil company Unocal, raised questions in Congress and the public about foreign investors acquiring vital assets in the U.S.  Subsequently, the Dubai Ports transaction, which cleared the U.S. CFIUS national security review process, was unwound in the face of intense Congressional and public pressure.

Examples of government interference or potential interference with foreign takeovers are not limited to the U.S.:

  • Legislation has been proposed in Canada to amend the Investment Canada Act to provide clearer authority to review and prohibit if necessary foreign investments that could threaten the national security.
  • Japan is enhancing its pre-notification system regarding foreign takeovers of Japanese firms.
  • China has issued new rules that allow the government to vet foreign investments that involve a major industry, the impact of the investment on its economic security or the transfer of famous Chinese trademarks.
  • India is considering a new law to intensify its rules to restrict foreign investment in sensitive areas.
  • Russia is adopting legislation that would restrict foreign investment in natural resources and selected other industries and the ability of foreign enterprises to develop natural resource industries.

Beyond these pending legal changes there are a number of other disturbing developments:

  • The investment community has witnessed public declarations by political officials that certain industries were “off limits”
  • Market observers readily noted Pepsico’s failed bid for Danone Yougurt and Arcelor’s bid for Mittal Steel to foreign investors.
  • Italy had informed a foreign bidder for its toll road system that their investment “would not be welcomed” and the potential investor withdrew. (Since then Italy’s new Central Banker stated that Italy will not interfere with foreign takeovers in the financial sector).
  • French Presidential candidate Sarkhozy stated in a campaign speech that if elected President, French owned companies would be off limits to foreign buyers.

The investment community also witnessed seizing of property or forced sale of companies by Bolivia and Venezuela and Russia’s pressure on a large Western oil company (Shell) to sell a major stake in its Sakhalin Island oil project to a state-owned firm, Gazprom.

The point here is not to cast stones at the practices of others, but to demonstrate that in my view the cumulative effect of these actions has created a new policy challenge for global business and governments—to combat investment protectionism

  1. The Task Ahead

Business recognizes governments’ responsibility to protect the national security whether the threat comes in the form of military action or is imbedded in some aspects of a commercial transaction.

The difficulty for business is that governments seem to be losing self-restraint as the concept of national security has become extremely elastic when applied to foreign takeovers.  Moreover, in addition to national security constraints, governments are using their political influence to protect “strategic industries” and establish “national champions” from foreign takeovers.

Contributing to these developments, informal barriers such as public declarations or statements from high level officials that a bid for one of their companies “would not be welcomed,” and/or tacit arrangements with leading firms/financiers in the private sector supported or condoned by the authorities also have a deleterious effect on foreign investment.

Structural and cultural barriers may also have an adverse impact.  In many countries shares are not listed, some countries maintain a golden share, which can be used to block a takeover, and there may be cross holdings of shares that deter takeovers.  In some countries it just is not possible to undertake a “hostile” takeover.

  1. Recommendations

Transparency:

Last fall, the OECD Secretariat compiled an inventory of member practices to restrict investment on grounds of national security. Transparency of such measures can be an extremely helpful tool to hold governments accountable to their commitments.

Recommendation:

The OECD should update this inventory on an annual basis, and expand its scope to include the use of informal barriers, as these types of barriers can be quite powerful in deterring foreign takeovers.

Protecting the National Security:

Business recognizes that the world has changed dramatically since 9/11 and that governments must pay more attention to national security issues. But a legitimate concern for national security should not serve as an excuse to impede foreign investment. Blocking a foreign takeover for reasons of national security should be an extremely rare occurrence and should be taken as a measure of last resort, only when all other rules or tools that are designed to protect the national security are not adequate or effective. Further, blocking a foreign investment should not be used to obtain a commercial advantage for domestic firms.

Recommendation:

Governments need to take action at the highest level to avoid investment protectionism and to affirm in word and practice, their commitment to open, cross border investment.

Further, the G-8 should encourage the OECD to reach out to the Business and Industry Advisory Committee to the OECD to provide their input on the ways in which informal barriers can impede foreign investment and engage in a dialogue with OECD governments on ways in which these barriers can be reduced.

Taken together, these actions can make a difference and will serve to encourage the free flow and benefits of foreign investment.

Thank you for your attention!

Staff Contact:   Kira Yevtukhova

Deputy Director, Marketing and Communications
Tel: 202.617.3160

Kira Yevtukhova manages USCIB’s print and online publications, including the website, e-newsletter and quarterly magazine, and serves as the organization’s digital media strategist. Prior to this role, Kira worked for over five years within USCIB’s Policy Department, focusing on climate change, environment, nutrition, health, and chemicals related policy issues. She is a graduate of Mount Holyoke College and is currently pursuing an MBA at Georgetown’s McDonough School of Business.
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