EMERGENCY MEASURES DURING THE CURRENT CRISIS WITH A POTENTIAL IMPACT ON INVESTMENT

How do policy responses during the current crisis compare with earlier decades? Emergency measures can be divided into three categories: restrictions on new foreign investments, including on foreign takeovers of local firms; discrimination against existing foreign investment; and impediments to outward investment by local firms. Each one will be considered in turn.

Policies towards inward investment
Many emergency measures are still evolving, but so far there is little evidence of growing restrictions on inward investment or of rising hostility towards any particular category of investor. Some governments and businesses have actively courted sovereign wealth fund (SWF) investors from the Middle East or Asia,and OECD and partner countries have welcomed investments from SWFs as a positive force for development and global financial stability. Ministers representing 35 recipient countries have adopted a Declaration to express their commitment to preserve and expand an open international investment environment for SWFs. In spite of this welcoming policy stance, SWFs have generally been reluctant to
take on the role of “investor of last resort”. Some SWFs have acquired large stakes in major banks such as Citigroup and Barclays but otherwise their forays into Europe or North America have been limited both by the substantial paper losses they have already incurred on existing foreign asset holdings and by the declines in oil prices and export earnings which are the two traditional sources of funds for SWFs.

Discrimination against foreign-owned firms
Emergency measures include i.a. rescue packages and subsidies to key industries, loan guarantees to stimulate demand for consumer durables and “buy national” provisions in stimulus packages. Apart from the implications for trade policies from these measures, there is a potential risk of discrimination against foreign-owned firms or “transplants” in national economies, should they not benefit from the same measures or under the same conditions. Non-eligibility for capital assistance for financial institutions incorporated under national law but controlled by foreigners would be an example. These same issues could arise in any sector receiving government assistance, but much of the policy discussion has tended to focus on the automotive sector.

Automotive sector
Like steel in earlier decades, the automobile industry is characterised by substantial policy-related exit barriers in many countries – the relative importance of the sector within some national economies is such that governments and electorates take the view that firms in this sector are “too big to fail”. Even before the crisis, it was estimated that global capacity in this sector exceeded demand by 25%. Moreover, consumers have opted to forego purchases of new cars during the crisis, and as a result the sector has been one of the most adversely affected.
Many governments have developed policy responses to assist the sector, including in the United
States, France, Germany, Canada, Spain, Sweden, the United Kingdom, Italy, Russia, China and Brazil.
Absent a full survey of stimulus measures across countries in this sector, this aid appears, in most cases, to be offered to both foreign- and domestically-owned producers. Indeed, in some countries almost all production is already foreign-owned. The aim is to preserve domestic employment at all costs, regardless of the ownership of the firm. Nevertheless, there is a risk that targeted interventions discriminate against “transplants” either de jure or de facto as a result of conditions attached. Government measures have generally been to offer loan guarantees to stimulate demand and funds to develop greener car technologies,
but some have offered direct cash injections as an alternative to bankruptcy. Of the countries listed above, only Russia has sharply raised tariffs.
Government bailouts may affect the pattern of the capacity reduction that is, in any case, inevitable in the sector by influencing which firms reduce capacity and by how much. This, in turn, influences all aspects of sectoral operations, including international investment flows. Although such policies may, over the medium term, succeed in supporting the market positions of weaker firms, they also “risk delaying necessary structural adjustment to new circumstances and creating costly dependence on public support.” The experience in steel suggests that using public funds to shield non-competitive producers from market pressures does not create “champions” that are durably viable in markets.

Greater government involvement in the operations and investment decisions of firms
Even if governments refrain from further restrictions on inward investment and provide assistance to all firms in a sector indiscriminately, there are issues for future global integration which arise from the enhanced financial and ownership role of national and provincial governments in domestic firms.
Government involvement in key industries is a broad issue with manifold implications. Of most interest in the context of international investment and the scope for further integration is how this involvement will influence the international investments and operational behaviour of firms.
At a time of rising unemployment will firms receiving assistance face political pressure to favour
domestic over foreign production to serve the local market? Will takeovers of these firms by foreign competitors also be resisted out of fear that post-acquisition rationalisation will reduce domestic employment? Will these firms be allowed to fail in the future if it implies that their market share will be recuperated by foreign-owned transplants?
These questions are not only hypothetical. In past crises, there has been pressure to keep capital at home, and outward investment has sometimes been seen as exporting jobs. This notion was prominent in the 1970s but has also reappeared more recently in the context of outsourcing and industrial “hollowing out”. Will the government‟s financial leverage in these companies and sometimes even a direct ownership share give greater weight to these fears in policy discussions?