FOREIGN MERGERS & DIRECT INVESTMENT

1. FOREIGN MERGERS & DIRECT INVESTMENT Janet Davison, Kimberly Clum, Travoris Culpepper

2. Foreign DIRECT INVESTMENT • Foreign Direct Investment, or FDI, is a measure of foreign ownership of domestic productive assets such as factories, land and organizations. Foreign direct investments have become the major economic driver of globalization, accounting for over half of all cross-border investments • The Foreign Direct Investment interrelation, consists of a parent enterprise and a foreign affiliate which together form a transnational corporation (TNC). • In order to qualify as Foreign Direct Investment the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm.

3. FOREIGN MERGERS Primary form of foreign direct investments: • Transfers of existing assets from local firms to foreign firms. Foreign (or cross-border) mergers: • When the assets and operation of firms from different countries are integrated to establish a new legal entity. • Mergers are the most common way for multinationals to do Foreign Direct Investment. Foreign acquisitions: • When the control of assets and operations is transferred from local to foreign company, with the local company becoming an affiliate of the foreign company. • No long term benefits to the local economy - even in most deals the owners of the local firm are paid in stock from the acquiring firm, meaning that the money from the sale could never reach the local economy. • Mergers and acquisitions are a significant form of Foreign Direct Investment.

4. Competing Interests Involved • Multinational Corporations • Developed Countries • Developing Countries

5. Challenges to FDI and Foreign Mergers: • Foreign countries lobby for low standards of living, particularly in third world countries • Employment protection legislation (EPL) • No connection of foreign countries to local community • Uncertainty of economic security for local country • Loss of control of strategic industries • Restrictions: tariff barriers, limit to foreign ownership and governance Good climate for FDI and foreign mergers: • Open borders, remove trade restrictions • Easing of product and labor market regulations Results: • Increase Trade • increase in exports for home country • positive effects on the local economy • generates jobs • increase in tax revenue

7. Strategic Industry • Telecommunications • Energy • Information technology • Natural resources (oil, steel) • Potential weapons technology (North Korea's "satellite" launch)

8. What Influences FDI and M&A? Foreign Direct Investment and Mergers and Acquisitions are not governed by one law or entity. These global transactions are monitored and influenced by several international organizations including: • United National Conference on Trade and Development • International Labor Organization (ILO) • World Bank • WTO • OECD • Host country and country of origin

9. FDI regulatory restrictiveness index, 2010

10. Policies that impact FDI and M&A Policies adopted by the host country and country of origin can have significant impacts on the outbound and inbound flow of FDI and M&A: • Corporate tax policies • Trade Barriers (import and export) • Employment requirements (wage, labor and child laws • Regulatory restrictions

11. US Policies that Influence FDI and M&A The US is the largest recipient of foreign direct investment and has the largest outbound flow of direct investment. In 2009, the US accounted for $2.3 trillion in inbound FDI and $3.5 trillion in outbound FDI. Political and cultural behaviors have influenced US policies towards FDI and M&A: • Committee on Foreign Investments • September 11, 2001 • Foreign Investment and National Security Act of 2007 • USTR-Bilateral Investment Treaties

12. International Issues and Policies that Impact FDI and M&A As the world becomes more global, other nations have raised issues with foreign direct investment and mergers and acquisitions. Nations around the world have started to create policies/guidelines to help protect their industries and citizens from the negative impacts of a global economy. • National Security • Corruption • Environment • State Owned Enterprises • Labor/child labor laws • Competitiveness

13. National Security In an increasingly globalized society, foreign direct investment, particularly in the form of foreign corporate mergers, has become increasingly common and these corporations have become more powerful to the point where they have absorbed majority shares of key industries.

14. The Issue Threat to economic security affects the security of the country as a whole. When MNCs acquire majority control of a host country's "strategic industry", that nation no longer has control over its natural resources, forcing it

15. Argentina vs. Repsol In extreme cases, states turn to nationalization of industries. In the midst of the Argentine Crisis in 1999, the Spanish company Repsol purchased at a steal. Now, despite having the third largest natural gas reserve in the world under its soil, still suffers from an energy crisis. This is one of the reasons that Argentina has decided to nationalize Repsol YPF. The Argentine government claims that nationalization will end its dependence on energy imports and that Repsol was not investing enough money in developing production. YPF produced 34% of the country’s oil and 23% of its natural gas last year, yet the company was forced to import (and thus invest aggressively) to make up for an important, and growing, energy shortage. Talks of a free trade agreement between the EU and Argentina have been put on hold.

16. Policy Options 1) International organizations to monitor mergers: Pro: Unbiased (as can be) entity for arbitration Con: No enforcement capability on the state level Ex: OECD, World Bank, WTO 2) Monitoring and regulation by individual states Pro: Is acutely aware of the needs of its people and its own economy Con: A country has little restraint if it chooses to nationalise an industry Ex: Argentina 3) Self-monitoring by companies Pro: If all MNCs were to follow the rules, everyone would prosper Con: No MNC will follow the rules while pursuing its own interests Ex: Wal-Mart

17. Suggested Policy Option The WTO already works closely with the OECD. To become more effective, the WTO should assume OECD legislation to enforce MNC compliance with the OECD Declaration and Decisions on International Investment and Multinational Enterprises: • improve the investment climate • encourage the positive contribution multinational enterprises can make to economic and social progress • minimize and resolve difficulties which may arise from their operations The key is to give incentives to nation states to keep their markets open to FDI without trampling on their sovereignty.

18. Policy Proposal - Pro • Enhance international cooperation • Respect state sovereignty • Build off of existing and trusted institutions • Give states and MNCs a venue for dispute settlement • Have a medium to enforce FDI rules • Further encourage open market economies

19. FDI liberalisation in selected countries

20. Policy Proposal - Con • States still retain their sovereignty • Imperfect knowledge = Imperfect application of punishment and rewards • Possibility that the states, particularly developing nations, will back out of WTO • Difficult to define "threat to national security". Preventive strike.

21. Impact on US Foreign Policy The United States would be hard pressed to barricade foreign MNCs from acquiring power in certain industries. However, this will also open up other countries' economies to the same susceptibility.

22. Impact on US Trade Policies • Openness of US economy will result in a larger amount of FDI and would thus create more American jobs.

23. Impact on the Private Sector US would not be able to impose as many sanctions and subsidies to promote American industries. With the lobbying power of the private sector, our policy proposal, while the best case solution, is unfeasible in today's global climate.

24. Sources • Malawer, Stuart, Global Mergers and National Security (December 22, 2006). Virginia Lawyer, Vol. 24, December 2006. Available at SSRN: http://ssrn.com/abstract=1169583 • http://www.investmentsandincome.com/investments/foreign-direct-investments.html • http://www.whitehouse.gov/sites/default/files/microsites/cea_fdi_report.pdf • http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1169583&http://www.internationaltraderelations.com/ITR603.Assignments%20%28F2002%29.htm • http://www.oecd.org/dataoecd/8/17/48684001.pdf

25. Sources • http://www.forbes.com/sites/afontevecchia/2012/04/17/shale-gas-wars-on-argentinas-nationalization-of-repsol-ypf/2/ • http://www.nytimes.com/2012/04/21/business/global/spain-stings-argentina-over-nationalization-of-repsol-ypf.html • http://www.bloomberg.com/news/2012-04-04/repsol-worst-debt-swaps-on-ypf-seize-threat-corporate-finance.html • http://www.oecd.org/dataoecd/43/29/48004323.pdf • http://economics.stanford.edu/files/Theses/Theses_2006/Post.pdf • http://elibrary.worldbank.org/content/workingpaper/10.1596/1813-9450-3192

26. Sources • http://www.wto.org/english/thewto_e/coher_e/wto_oecd_e.htm • http://www.oecd.org/dataoecd/24/31/2956472.pdf • i.cfr.org/content/publications/attachments/FDl_CSR34.pdf • http://www.marketwatch.com/story/argentina-ypf-takeover-feeds-investor-worries-2012-04-25