Growing Protectionism in Foreign Direct Investment

Since 2000, the United Nations Conference on Trade and Development (UNCTAD) has identified a trend towards greater protectionism against foreign direct investment. Reversing this trend is of great importance, not only for German industry.

Foreign direct investment (FDI) is increasingly hindered by protectionist measures. But what does protectionism in fact mean in this case? How are investors hindered from investing abroad?

In general, measures are deemed protectionist if they are designed to impede direct investment. In its 2012 World Investment Report, the United Nations Conference on Trade and Development (UNCTAD) distinguishes between measures that limit inward FDI and those that restrict outward FDI:

  1. Restrictions on inward FDI: States restrict the inflow of FDI on grounds of national security or consumer or environmental protection. Many countries possess monitoring and approval mechanisms that place FDI under great scrutiny. Such controls are imposed principally in strategic economic sectors, such as defence and health. Often, however, the measures are opaque. Moreover, they are not always in fact necessary to protect the public interest. Instead, states often exploit such measures to protect domestic businesses from foreign competition
  2. Restrictions on outward FDI: These are measures designed to prevent domestic investors from investing abroad. They include state demands for domestic companies to repatriate assets (including production facilities) or to refrain from making particular investments abroad.

The following examples illustrate the forms that protectionist measures may take:

  • In a law passed on 7 May 2012, Argentina partially nationalised two subsidiaries of the Spanish oil company Repsol S.A. In both cases, the Argentine government expropriated 51 percent of the Repsol S.A. stake.
  • In 2011, Russia amended its media law, permitting radio stations with more than 50 percent foreign ownership to broadcast only in certain parts of the country.
  • In 2011, the government of Sri Lanka passed a law creating an agency to control and administer 37 local and foreign companies.

Is there a trend to greater protectionism?

UNCTAD documents all new investment measures introduced by states worldwide. Many state measures are clearly designed to advance liberalization and promote foreign direct investment. This is also reflected in UNCTAD’s data. In 2000, 94 percent of global investment measures served the purpose of promoting foreign direct investment. However, by 2014 the figure had fallen to 84 percent. In recent years, measures to promote FDI have been directed especially towards infrastructure and services. Over the same period (2000 to 2014), the proportion of restrictive measures rose correspondingly from six percent to 16 percent (2014). Such measures related primarily to strategic sectors such as resources, power generation, and agriculture. The figures thus confirm that there is a trend towards greater protectionism in foreign direct investment.

How can the trend to protectionism be stopped?

Unlike trade in goods and services, there is no comparable multilateral regime for investment flows. Only trade-related aspects of investment measures are regulated under the WTO’s Agreement on Trade-Related Aspects of Investment Measures (TRIMs). Attempts to conclude a Multilateral Agreement on Investment (MAI) under the auspices of the OECD failed at the end of the 1990s. In the WTO’s Doha Round, investment rules were initially part of the agenda, but were removed in 2003 at the wish of the developing countries and emerging economies.

In order to combat protectionism in FDI, BDI believes it would be important to improve market access and investment protection.

BDI positions

  • Put FDI back on the WTO agenda.
  • Within the G20, agree on concrete initiatives for market access and protection of FDI as quickly as possible.