A joint conference at Ditchley Park with the World Affairs Council of Northern California
This conference was notable for a high level of agreement on certain fundamental points coupled with strongly argued, and undecided, differences over certain other aspects relating to the effects of investment and to the issue of international regulation. The critics of inward investment however were almost certainly under-represented, by accident, not design.
Thus, it was agreed by all that foreign direct investment (FDI) brought benefits both to the investor and the recipient. At one end of the scale with what was called “plain investment”, investment in real estate or technologically simple manufacture, the benefits to the recipient might be modest, possibly confined only to improved techniques of management or labour relations. At the other, investment in high technology industry could bring large but not easily quantifiable benefits with spin-offs in other areas. In all cases investment was driven by the pursuit of profit, which might be achieved through economies of scale or the greater efficiency of vertical integration, proximity to markets or by-passing protective tariff barriers, or through access to a particular technology.
There was some discussion of the relative attractions of investment through acquisition and green-field development. The former, it was suggested, often produced conflict between the new management and the existing staff and if a flagship business was involved, would provoke nationalistic opposition. The latter was more likely to show an early profit and, because it was seen as creating jobs, was more acceptable to the recipient government. Whether such jobs were in fact additional, or merely a switch of employment from one area to another was much disputed, the practitioners in government and business tending to one view and the economists the other. The fact that many governments offer inducements to investment in areas of high unemployment, suggested that they thought that there was a net addition to employment, at least in the short term. Given the high mobility of capital, this belief fostered intense competition in the scale of inducements offered between regions and governments. In the case of domestic investment, however, the element of additionality was less clear since it was not easy to establish whether the investment would not have been made without the inducement. Most agreed that inducements were probably unobjectionable provided they were offered alike to domestic and foreign businesses and provided the competition did not lead to serious distortion, though there was disagreement whether further measures such as shelter for infant industries, conditions as to local content, local research effort, etc., were justifiable.
Factors which had driven the steep rise in Japanese foreign investment in recent years included the strength of the yen, especially following the Plaza agreement, and the ability of Japanese companies to borrow cheaply in Japan. However, it was suggested that Japanese direct investment had peaked. The fear was expressed that German investment in Eastern and Central Europe might lead to the creation of a zone of German economic dominance: if such a fear was justified, the remedy was for others to invest in the area, which needed all the investment it could get.
This led on to a discussion of the politics of FDI, under basically three heads: popular perceptions and resentment of foreign investment and take-overs and the loss of control that was involved, reciprocation or the level playing field, and the reservation of specific sectors. Under the first head, it was noted that the level of Japanese investment in the US, which seemed to be the principal target, did not justify the current public or Congressional concern, representing as it did a very small proportion of total US assets. Nevertheless, such concern was a fact and gave rise to demands for greater access for American investors to the Japanese market, which was seen as being far from open. British and Dutch investment in the US was larger than Japanese but attracted less hostility, perhaps because it was longer established or because it avoided spectacular acquisitions. Racial prejudice, it was suggested, could not be entirely excluded. A distinction was drawn, too, between Japanese investment in the US, where sometimes the motive seemed to be to latch into a leading-edge technology, and similar investment in the UK, where it took the form more often of revival (cf. the car industry). Perhaps for this reason or because of habit, opinion in the UK, including in the unions, was relaxed, even welcoming, about foreign investment, though there was hostility in some other members of the EC. Nevertheless, it was agreed that the legal provisions of the US, the UK, Germany and Japan did in theory provide for the foreign and domestic investor to be treated alike (national treatment). In practice however there were a number of structural impediments in Japan and, it was claimed, also in Germany, such as cross-shareholdings, the small market in shares, immobility of labour, social and cultural attitudes and so on, which operated to prevent foreign investment, so that the level of foreign investment in Japan, for example, was very small indeed. However, if on economic grounds FDI was of benefit to the recipient, retaliation would not be in its economic interest, whatever the political case; the answer should lie in a longer-term evolution of attitudes, though some of the impediments, e.g. cross-holdings, might indeed be tackled through regulation. There was no case for demanding full reciprocity if that meant applying e.g. American or British practice to would-be investors in Japan: the most that could be required was national treatment and a reduction in those structural impediments that were susceptible to regulation. For the rest, companies must learn to work with the grain.
The case for a receiving country to prohibit foreign ownership in certain sectors rested entirely on political grounds, the conference having failed to find any respectable economic arguments for such action. All however agreed that most if not all countries would reserve defence industries working with classified information, while some, possibly a minority, were prepared to accept reservation of other industries relevant to national security (e.g. railways, telecommunications, merchant marine), the media, public utilities and core financial institutions, the last two on the grounds perhaps that their continued satisfactory operation was so essential that governments would have to intervene to ensure it and would not wish to face the political onus of bailing out a foreign-owned company. One suggested that if in any international agreement, a nation was permitted to reserve a sector in this way, it should be forbidden to invest abroad in that sector.
The general political point was made that the prudent foreign investor would avoid targeting a flagship company, and after acquiring ownership should take pains to be a good corporate citizen. Given that, however, the conference saw no objection to a foreign-owned company lobbying in Congress or parliament to protect its interests.
Finally, there was discussion of the possible need for some international machinery to ensure fair play in this field and of the form it might take. The businessmen on the whole were sceptical of the need, fearing that it would lead to more regulation and greater governmental intervention. The academics made a strong case for such a mechanism, arguing that the purpose would be to take the heat out of the issue and prohibit undue governmental intervention; and that if the GATT, with its dispute-resolution procedures, had been found necessary, and was generally thought to have worked well, in the field of physical trade, there was no reason not to extend the concept to the flow of capital. The principal elements of such a mechanism would be “national treatment”, the application in the field of investment of the most-favoured-nation principle and a machinery for the resolution of disputes. The GATT, which needed to be re-invigorated, might not itself be the right forum, and might in any case look a bit different after the conclusion of the Uruguay Round. There might be a case for a new umbrella body, or the expansion of another organisation such as the OECD. In any case it would be necessary to permit subsequent accessions, or, if universal, allow derogations.
In sum, FDI was “a good thing”, benefitting giver and receiver; government intervention should be kept to the minimum, consistent with ensuring national treatment for foreign firms; there was a need for greater transparency so as to counter adverse public perceptions; but the need for an over-arching international agreement and a mechanism to police it remained an open question.
This Note reflects the Director's personal impressions of the conference. No participant is in any way committed to its content or expression.
Chairman: The Rt Hon the Lord Armstrong of Ilminster GCB CVO
Chairman, Biotechnology Investments Ltd (1989-); Director: BAT industries; Bristol and West Building Society, Inchcape; Lucas Industries; N M Rothschild & Sons; RTZ Corporation; Shell Transport and Trading Company; a Governor of the Ditchley Foundation
LIST OF PARTICIPANTS
BRITAIN
Mr Christopher Beauman
Group Planning Director, Morgan Grenfell Group pic, Director, Morgan Grenfell & Co Limited, London
Mr Bill Callaghan
Secretary, Economic Department, Trades Union Congress
Mr Peter Corley
Under Secretary, Investment, Development and Accountancy Services Division, Department of Trade and Industry
Mr Clive Crook
Economics Editor, The Economist, London
The Rt Hon the Lord Donoughue
Life Peer, (Labour); Executive Vice-Chairman, London and Bishopsgate International Investment Holdings; Member, Civil Service College Advisory Council; Board, Centre for European Policy Studies, Brussels; Associate Member, Nuffield College, Oxford; International Fellow, Roosevelt Center for Policy Studies, Washington DC
Mr Angus Grossart
Managing Director, Noble Grossart Ltd, Merchant Bankers, Edinburgh; Chairman: Edinburgh Fund Managers pic; Scottish Investment Trust pic; Director: American Trust pic; Alexander & Alexander, USA; Royal Bank of Scotland pic; Globe Investment Trust pic
Dr DeAnne Julius
Chief Economist, Shell International
Mr John Morrell
Chairman, Baring International Investment Ltd, Director, Baring Asset Management Ltd; a Governor, the Ditchley Foundation
Professor Aubrey Silberston CBE
Emeritus Professor of Economics, Imperial College of Science and Technology, University of London, Senior Research Fellow, Imperial College, London; Secretary-General, Royal Economic Society
Mr Christopher Taylor
Economics Division, Bank of England
Mr Frank Vibert
World Institute for Development Economics and Research, United Nations, Helsinki; Senior Research Fellow, Institute of Economic Affairs, London
Mr Harry G Walsh
Under Secretary, Financial Institutions and Markets, HM Treasury
CANADA
Mr Angus MacNaughton
President, Genstar Investment Corporation; Member of board: American Barrick Resources Corporation, Canadian Pacific Ltd, Stalco Inc., Sun Life Assurance Company of Canada and Varian Associates Inc
Dr Grant L Reuber
Bank of Montreal: retired as Deputy Chairman, (1987-90)
Dr A Edward Safarian FRSA
Professor of Economics, University of Toronto; author; member: Canadian-American Committee, Canadian National Committee on Pacific Economic Co-operation.
FRANCE
Mme Françoise Nicolas
Institut Français des Relations Internationales
GERMANY
Mr Michael von Brentano
Managing Director, Deutsche Bank Capital Markets, London
JAPAN
Mr Keikichi Honda
Director, The Bank of Tokyo Ltd
Mr Sciichi Masuyama
Director, Investment Strategy Group, Nomura Research Institute Europe Ltd, London
Professor Takahiro Miyao
Professor of Economics, Institute of Socio-Economic Planning, University of Tsukuba
Dr Kiichi Mochizuki
President and Director, Nisshin USA Inc, New York
Professor Heizo Takenaka
Assistant Professor, Faculty of Policy Management, Keio University
OECD
Mr Anthony Kleitz
Trade Directorate, Organisation for Economic Co-operation and Development (OECD), Paris
USA
Dr William B Bader
Senior Vice President, Policy Group, SRI International; Member of the Advisory Council, American Ditchley Foundation
Mr J Dennis Bonney
Vice Chairman, Board of Directors, Chevron Corporation
Mr Alexander Calhoun
Partner, Graham & James, Lawyers, San Francisco
Mr Lewis B Coleman
Vice Chairman of boards of Bank of America and BankAmerica Corporation, and head of World Banking Group; responsible for wholesale and international banking activities in 42 countries
Ambassador Theodore L Eliot Jr
Vice Chairman, World Affairs Council of Northern California; senior Research Fellow, The Hoover Institution, Stanford University
Mr William G Gaede
Associate Managing Partner, Capital Markets Services, Deloitte & Touche, San Francisco; Member, Touche Ross International Board of Governors
Professor Norman J Glickman
State of New Jersey Professor of Urban Planning and Director, Center for Urban Policy Research, Rutgers University
Mr Paul B Hannon
Director, Gerard Atkins & Company Ltd, London; Vice President and General Counsel, General Atlantic Group Ltd, London and Bermuda; Trustee: American University in Cairo, Physicians for Peace; Fellow, Institute of Directors; Member: American Bar Association, California State Bar, District of Columbia Bar, International Bar Association; author
Mr Mark Hoffman
Principal and Chief Executive, Hamilton Lunn Ltd; Chairman: Campden Hill Associates Inc, IFM Trading Ltd, Cambridge Capital Ltd
Professor Paul R Krugman
Professor of Economics, Massachusetts Institute of Technology; Research Associate, National Bureau of Economic Research; Member: Board of Advisors, Institute of International Economics, Board of Economists, Los Angeles Times
Professor David J Teece
Mitsubishi Bank Professor, Walter A Haas School of Business and Director, Center for Research in Management, University of California, Berkeley; co-director of numerous university programs, including The Management of Technology and The Consortium on Competitiveness and Cooperation
Professor Laura D’Andrea Tyson
Professor of Economics, University of California, Berkeley and Director of Research, Berkeley Roundtable on International Economy (BRIE); Member: Cuomo Commission on Trade and Competitiveness, The Leadership Council of Rebuild America, Council on Foreign Relations
Mr Mason Willrich
President and Chief Executive Officer, Pacific Gas and Electric Enterprises and member, Management Committee, Pacific Gas and Electric Company
Mr Hans A Wolf
Vice Chairman and Chief Administrative Officer, Syntex Corporation, California
Mr Casimir Yost
President, World Affairs Council of Northern California