Trade protection faceoff.

• Author: Beattie, Alan
• Position: Company overview

Why all blocks on foreign investment are not created equal

BY ALAN BEATTIE

1. It's Not Investment "Protectionism"

   A new specter is stalking the world--that of investment protectionism. Not the practice, but the concept. Traditional protectionism--blocking cross-border flows of goods and services--is being conflated with restrictions on international flows of capital and corporate ownership. This confuses rather than illuminates the debate on international economic governance. Here's why.

   The arguments against trade protection are well rehearsed. By preventing trade in goods and services with other countries, tariffs and other restrictions stop countries specializing in what they do best, those specialisms having arisen as a result of having particular endowments (cheap labor or abundant land) or having built up a cluster of expertise (information technology from India, movies from Hollywood).

   But as economists from Jagdish Bhagwati on down have shown, and even International Monetary Fund research has accepted, the arguments for liberalizing capital flows are conceptually and empirically weaker. Financial markets, as we have painfully discovered, are subject to bubbles, panics and crashes. For smaller and poorer economies in particular, the efficiency benefits of deeper capital markets can easily be outweighed by their higher volatility. Chile and Malaysia have become cliched examples of highly successful trading nations that nonetheless kept capital controls on the books for long periods. Calling them protectionist is misleading and unfair.

   The argument against "investment protectionism" as a concept can go yet further. It applies not just to portfolio flows of footloose capital but to cross-border takeovers, the international market in corporate control.

   Take one of the most famous examples: the warning from the Elysee Palace against PepsiCo's abortive bid for the French food company Danone in 2005. The official intervention was widely and rightly mocked as France's "strategic yogurt policy". But would it have made any difference? What matters to most French people is whether there is a (forgive me) liquid and competitive market in yogurt, not the nationality of those who own the dairies and the brands.

   Import tariffs are very likely to interfere in this, by restricting trade with countries where it is cheaper to produce. Weak antitrust policy might also interfere in it, if competitors to Danone are preventing from setting up in situ and producing better yogurt. But the only way in which cross-border investment restrictions would interfere is by stopping more efficient foreign managers coming in and taking over Danone's operations.

   That would be a serious concern if hostile takeovers were a good way of disciplining underperforming firms. But, no matter what M&A lawyers and financiers tell potential clients, they are not. The targets of successful takeovers are not systematically more...