Therefore,
the recent proposal of the EC to introduce screening measures has more to do
with political economy, wider geopolitical or even security reasons. For
instance, one of the biggest concerns is that some of the recent FDI coming into
the EU is from various emerging economies such as China, Kazakhstan and Russia,
which still have many State-Owned Enterprises (SOEs) in their economies.
This
according to economists is a problem, but a simple back-of-the-envelope
calculation tells me that the share of this FDI in some sensitive sectors
flowing from these countries with much SEOs involved is at most 3.5 percent of
EU’s total incoming FDI. Hence, a first question appears: does that warrant an
overall screening measure? Some trade-offs are involved as obviously economics doesn’t
stand on its own here.
However, my
intervention was about the future of foreign investments. In particular, the
changing nature of investments the EU has received in recent years, namely
investments in digital sectors. This should force policy makers to think about
when proposing investment regulations, including screening.
First,
although it is right to state that FDI brings along a great “footprint” as
economist say, this is in fact much lower for digital investments. With
“footprint” we mean economic activity such as employment, value-added and
greater output. Footprints for tangible investments such as manufacturing are known
to be high, but the recent UNCTAD (2017) report shows that this footprint from
multinational digital companies is actually much lower.
This can be
seen in the figure below that measures this footprint by taking the ratio from
foreign sales over foreign assets. For manufacturing and telecoms this ratio is
actually 1:1 (in case of telecoms the assets are high because of infrastructure
investments). Yet for FDI coming from digital multinationals, foreign assets
are typically lower leading to a much higher ratio (because of higher sales),
which means a lower footprint.
Source: UNCTAD WIR (2017)
Second, intangible capital such as investment from digital companies are extremely mobile. A nice example of this intangible capital is given in a book by Haskel and Westlake (2017). They state that a company like Starbucks does invest, but not as grounded as for instance a multinational car company does in machines. The goodwill, management and coordination in which Starbucks needs to invest can be pulled out a country relatively easily. Intangible investments are much greater in digital sectors.
Third,
spillovers from digital investments are much greater. This phenomenon can
translate itself into positive wider productivity effects for the sector or
country at large. But, there is a twist to this story: as spillover effects are
greater and often digital (i.e. quick and non-physical), they may also lead to
fast “idea-stealing” by competitors, leading companies to ardently reduce
competition with much less productivity effects taking place due to lower
spillovers.
All this
leads me to think that if any policy maker wants to propose new investments
regulations in what kind of form whatsoever, the policy maker should think
about these changing features of FDI. The more so as sensitive sector in which
some investment policies appear to be needed are in fact extremely
digital-intensive, such as finance, utilities, computer technology and air
transport.
I suspect that most if not all of these sectors will
show similar signs of these new features of digital investments – if not now,
then probably tomorrow.
Great to know! Thank you
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