Governing global FDI flows

The Council on Foreign Relations just raised a red flag on FDI flows with its recently released Global FDI Policy: Correcting a Protectionist Drift. (You can read a condensed version in an op-ed today in the FT.) David Marchick and Matthew Slaughter, the authors of the paper, offer up some numbers to show that the long-term global trend of increasing openness to FDI inflows is starting to reverse. While in the 1990s, most national regulatory changes around the world favored FDI, that is less and less the case. According to data from the United Nations Conference on Trade and Development, "37 of 184 policy changes—20.1 percent—were unfavorable to FDI [in 2006]." One of the most obvious examples of this has been the United States, which passed the Foreign Investment and National Security Act after debacles with Dubai Ports World and the China National Offshore Oil Corporation. Russia has also adopted a strategic industries law that allows government review of foreign investments.

The authors indentify three main culprits behind this global change:

1. The emergence of new countries as major sources of FDI
2. The growth of government involvement in FDI, coupled with concerns about national security
3. Ballooning current-account surpluses, which have helped countries such as Russia and China amass large foreign currency reserves

Marchick and Slaughter's explanations seem pretty spot-on to me. They then go on to suggest ways that governments can go about stemming "the drift into protectionism." Their suggestions are primarily technical fixes that apply to the way that governments review foreign investments. In particular, the authors recommend that "[t]he investment review law should be narrowly tailored and focused on national security and not on economic factors."

In practice, though, it seems impossible to separate the issues of national security and economic factors, or at least to force a government committee to ignore economic factors. Rather, part of the solution must come in developing mechanisms for FDI-source governments to create more of a buffer between their political interests and their financial interests in state-owned companies and sovereign wealth funds.    

Update: I didn't know about it when I originally wrote this post, but the IMF was apparently in the process of negotiating a voluntary code of conduct for sovereign wealth funds. It looks like there should be a code some time this October. You can read more in this article in Forbes.