In past posts I’ve been critical of the Japanese government and various forces inside Japan for their sometimes anti-foreign capital mentality. Given a recent spate of similar behavior spanning three regions of the globe, I thought it would be a good opportunity to turn the focus away from Japan momentarily just to show that there is nothing uniquely Japanese about the fear of foreign capital.
As most everyone reading this is aware, Congress is currently outraged over the decision by the Committee on Foreign Investment in the United States (CFIUS) to approve the sale of terminals at six ports to Dubai Ports World. The ostensible reason is, of course, national security. Speculation as to alternative motives (political and otherwise) is rampant, and coming on the heels of CNOOC’s failed bid for the California energy firm Unocal, it is only natural that parallels will be drawn.
Receiving slightly less attention is the French government’s decision to allow Gaz de France, in which the government holds an 80 percent stake, to merge with a privately held energy and water company, Suez. The deal itself would likely not have raised any eyebrows (or tempers) had the announcement not come just days after Italian energy company, Enel, had made a bid for Suez. The government was not at all coy about its intention and much like Congress was quick to play the national security card. According to the NYT:
Speaking at his central Paris office in the presence of his finance minister and the chief executives of the two companies, Prime Minister Dominique de Villepin said the merger was important to protect France’s energy supplies.
“The independence of our country for energy supplies is of strategic importance for France,” Mr. Villepin said. “The merger of Gaz de France and Suez seems the most appropriate solution.”
Last up, we have South Korea, where the government has announced it is considering strengthening measures to protect domestic firms from foreign takeover. The announcement follows a rejected bid for the country’s largest tobacco company, KT&G, by American investors Carl Icahn and Warren Lichtenstein.
These three cases touch upon a fundamentally important question that governments, corporations and private citizens all must consider in a world so intricately interconnected by trade and capital flows.
The global nature of corporate ownership and free flow of capital across borders has made it possible to invest in foreign assets ranging from real estate, to government debt to private equity, the latter of which can result in foreign ownership of domestic firms. Yet, the change in attitudes has failed to keep pace with economic globalization and such investments often incite fierce opposition in countries where it takes place. Sometimes this opposition is motivated largely by xenophobia or ignorance, but one must ask if there are cases where such caution is warranted and indeed necessary.
In some instances the distinction is obvious. There is a clear difference between foreign ownership of a cannery verses foreign ownership of a firm that produces ballistic missile components or some kind of sensitive dual-use technology.
But tobacco? From the scant statements coming out of Seoul, I am inclined to write this one off as a combination of anti-foreign sentiment and a clash of capitalisms, possibly amplified by still smarting wounds from the 1997 financial crisis, which was in part caused by (some would say) hasty removal of capital controls in order to join the OECD.
According to one Song In Ho at Kyobo Investment Trust Management in Seoul:
“It’s still unclear whether Icahn and Lichtenstein are here for a quick profit or are really serious about the takeover.”
I’d say a little bit of both. People out to make a profit are generally pretty serious about it. But few people in Korea would be happy to see these guys come in, hack up the company, drive up the share price and dividends, and then make out like bandits at the expense of the employees — especially since this baby used to be state-owned. On the other hand, and I really hate to sound like Thomas Friedman here, FDI is really a double-edged sword. It can bring with it new and more productive technologies, better management techniques and fresh capital that can really benefit a company (But that still leaves the question of whether the company = shareholders or employees. Let’s save that nasty debate for another post.)
So, how about something like energy?
This one is a much tougher question. For starters, energy is a fungible commodity. Under normal circumstances (by this I mean the moron from whom you import hasn’t cut off the supply, or your country has no outstanding UN embargoes, etc…) as long as the market is functioning properly it is reasonable to expect that as long as one is willing to pay the price the market bears, actually purchasing it should present no problem.
Of course, this might one day change if the world nears the end of its finite supply, no suitable alternative energy technologies have been developed, and governments decide it is to be a game of every man for himself. But for now, even if China buys up oil fields somewhere, should it really matter in the long run? If they don’t get it one place, they can always buy it elsewhere. (The real problem is the growth in Chinese demand, their inefficient usage of energy, and the effect these have on global prices. But let’s save that too for another post.)
As for the French, I think I’ll hold off on judgment until we know a little more. While the Italians have already been throwing around the p-word, there is some evidence that the deal could cut French dependence on Russian gas imports (which recently falls under one of those abnormal circumstances I mentioned above.)
One final and very important consideration to which the above indirectly points is how worrisome are such attitudes? Blocking sales of sensitive assets to foreigners in the interest of national security is an understandable and necessary measure that must sometimes be taken and isolated incidences of such behavior are no real cause for concern. But in the absence of a genuine threat, governments in this day and age should not use national security as a fig leaf to cover protectionist sentiment motivated by xenophobia or a desire to protect inefficient or well-connected domestic industries. In theory, such desires may sound reasonable (especially in election years), but in practice they send the wrong message to would-be investors and that message is: don’t bring your money here. Openness is the very foundation upon which is founded the prosperity of the United States and other developed countries. And it is one potential tool for this prosperity to spread to less-developed economies. Where would Japan or China be today without access to U.S. markets? And for that matter, where would the U.S. be today if it weren’t for Japanese and Chinese access to our government financial markets?