Multinationals at Bay? Why the Liberalization of Host Countries Towards Foreign Investors is Still Alive

Abstract:     
The global number of regulatory changes less favourable to foreign direct investment increased significantly in 2004 and 2005. But before declaring an end to the era of liberalism and the advent of a new era of protectionism, or perhaps of strategic interventionism, one should add a word of caution here. The large majority of regulatory changes are still more favourable to investors. This dualism of current policies can be explained on the basis of the obsolescing bargain theory, according to which investors and host governments agree to a covenant with each other regulating the entry and operations of the investment project. This covenant, however, can change over time because the bargaining positions of the two parties are changing. In resource-seeking projects, in which investors are looking for assets which are geographically confined to a given host country, the obsolescing bargain is alive and well, and is shifting in favour of host governments. This is the case particularly in some Latin American countries and natural-resource-rich members of the Commonwealth of Independent States that have recently decided to increase their national control over those resources. As for market-seeking investment, it has been and continues to be welcomed by host countries, although the question of ensuring fair competition looms large over these activities. Finally, in the area of efficiency-seeking investment, which aims at optimizing the cost structure of production by locating each activity at its most cost-effective place, national policies still offer favourable treatment for investors. As for the future, it is not at all certain yet that we are entering a phase of new protectionism, or the current pressure on natural-resource investors would gradually ease.

Keywords: multinationals, governments, foreign direct investment, obsolescing bargain, liberalism, protectionism, natural resources

JEL Classifications: F21, F23, L78, M16, O24

Accepted Paper Series