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Debate: Limitations on foreign investment

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Should countries place some limitations on foreign investments?

Background and context

Historically overseas investment in land and companies has been a key part of many countries’ economic growth. In an era of globalisation, this is truer than ever before. However, such involvement is controversial – especially where it is seen to facilitate rich foreigners’ benefit through economic involvement in land. This can lead to political controversy surrounding land ownership, as currently seen in many southern African countries. In Europe the issue has become contentious in the context of the enlargement of the EU, as it has been feared that rich westerners will buy up property in the new member states cheaply. This fear is particularly strong in Poland, where there is a strong popular resistance to Germans, in particular, buying up large tracts of Polish agricultural land.[1]

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Investment sources: Is it economical to limit foreign investments, and inward investment?

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Yes

  • Economic growth is best when it comes from within. The available money supply within the economy is a fairly accurate indicator of its ability for self-sustained growth. If too much reliance is placed on overseas money, there is a “bubble”, so that when overseas investors withdraw their money suddenly, there will be a disproportionate shock on the local economy – which it will not have enough funds to counter itself. This was seen in the 1997 Asian Crisis, when foreign investors rapidly withdrew money from countries such as Thailand and South Korea.[2]
  • Putting a cap on foreign investment and so reducing the likelihood of a bubble economy developing acts as a spur to local investors to invest their money in the home economy. Its prices are likely to be lower, because the investment money supply has been tightened. They will also feel that they have more protection against aggressive overseas investors than they would have in the absence of an upper limit.[3]
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No

  • A cap would reduce foreign investment, which is critical to economic growth. At the straightforward level of analysis, imposing a cap means limiting the amount of inward investment. This may have disadvantages, but inward investment can be crucial to economic growth. The Asian Tiger economies relied heavily upon inward foreign investment in creating their economic success, and China is doing much the same thing today. The true story of the Asian Crisis of 1997 has to be put in context; the countries concerned rapidly returned to growth and have continued to benefit from foreign investment. In any case, the risks of having an open economy are reduced by the role of the International Monetary Fund in easing such shocks.[4]
  • The message a cap sends out will scare off investors. Even if they are able to invest because, for example, the cap has not yet been reached, investors will consider that the government has a nationalistic economic policy that they are willing to vary to suit the home economy. Prospective investors will therefore wonder whether, in future, the government might make other economic interventions against their interests e.g. expropriating property? They will be less keen to invest, when they can invest in more transparent regimes elsewhere.[5]
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Administration: Could the administration of a limit proceed successfully? Would it be affordable?

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Yes

  • The system is flexible and so can meet needs as they change throughout the economic cycle. For example, having decided in principle to impose a cap on foreign investment, this level can be raised or lowered in line with what is best for the economy at any given time.[6]


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No

  • Regulation would impose new transaction costs. Policing the limit would cause delay and cost money. These additional transaction costs, and the even greater uncertainties of operating within a flexible system (i.e. one subject to government whim) would discourage inward investment.[7]


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Global integration: Is globalization and the integration of economies a good thing?

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Yes

  • A cap would insulate the home economy from the extremities of the global economy. The cap would limit the amount of foreign competition. Therefore, in times of bitter rivalry between different economies and businesses, the domestic economy would receive some protection as part of it is not exposed to the same global pressures. The impact of any global or foreign economic downturn would also be reduced. In recession, companies often withdraw their overseas investment and this causes a further economic downslide in the host economy. By limiting the foothold foreign companies can achieve in the first instance, this trend would be limited in its impact.[8]
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No

  • Trade and openness is in the interests of countries. Globalisation means that economies are becoming more not less interdependent. Therefore, now more than ever it is impractical as well as undesirable to introduce trade barriers. Other countries will be offended at this snub and will respond, economically or diplomatically, by further isolating the country concerned. There is also a clear link between economic openness and good government, because the global investment markets demand high standards of accountability, fiscal competence and political responsibility from governments. Because citizens also benefit from cleaner government and better policies, they also have an interest in an open economy.[9]
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Capital flight: Does a cap on foreign investment help limit the potential for fast capital flight?

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Yes

  • A cap acts as a disincentive to swift withdrawal of funds. Given that there is a limit on investment, any existing foreign investor will think carefully before withdrawing funds from the economy. Given that they can easily withdraw and redeploy (in better times) in other economies, they will not be as keen to withdraw from an economy where subsequent redeployment may turn out to be much more difficult.[10]
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No

  • A cap would raise the cost of capital and so slow the economy. A cap would limit the pool of capital available for business. This would increase competition for those funds, so the cost of capital would rise. This would increase the costs of doing business locally, a cost which may well be passed on to customers. Independently of the question of the cost of capital, a cap would damage the economy overall. Inward investors would be more circumspect about investing, while the fact that domestic businesses enjoyed a protected semi-monopoly would discourage them from efficiency because they would be subject to a weakened market discipline.[11]
  • Any cap may be subject to challenge or reciprocation by other countries. It could spark some form of trade sanctions, which would be damaging to the economy, especially its export industries.[12]
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Ideology: Would the adoption of a cap be based on sound ideological principles?

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Yes

  • A cap sends a clear message to the world that a nation is serious about preserving its interests. This represents a strengthening of the expression of national interest and so is a good thing in itself. A ban also sends out a confident message on the world stage. It communicates to other countries that the host country has a strong sense of national identification and it may not be bullied by economic giants.[13]
  • Limiting foreign investment protects the national interest. Inward investment is nothing more than a form of economic imperialism. Therefore, reducing it simply reduces the effective power of rich foreigners to impose their will on the host economy, for example by buying up the majority of productive land. It is also important in uncertain times for a nation to control its own destiny by ensuring strategic and sensitive industries (e.g. arms manufacture, broadcasting and print media, pharmaceuticals, food production) do not fall into foreign hands.[14]
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No

  • The whole idea of investment curbs affronts the ideal of the free market. Any such curbs are a form of barrier to free trade and a step towards protectionism. In an era of trade liberalisation, this is undesirable on ideological grounds. Strategic interest arguments can be made for almost any industry but are simply excuses for protectionism. Increased peace between nations will come through mutual interdependence rather than aggressive displays of national self-sufficiency, which have no place in a peaceful post-cold war world.[15]

See also

External links and resources

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