The strange paradox of economic nationalism

The strange paradox of economic nationalism
The Financial Times, Aug 9, 2006
By Guy de Jonquières

In his blackly humorous book, Mr China, Tim Clissold relates how he and a US business partner blew some $400m in the 1990s buying mainland companies that turned out to be duds. The pair would have a quite different problem today. Chinese companies are generally better run than a decade ago. But they are becoming harder for foreigners to acquire.

Lengthening official delays in approving deals, combined with a political backlash over foreign companies’ growing role in the economy, have put international investors on guard. China’s door may still be open, but those waiting outside are less sure of a welcome than even six months ago.

Keep-out signs are also being posted elsewhere in Asia. In Japan, “poison pill” defences are multiplying, while takeover rules have been weighted against foreign bidders. In South Korea, where economic nationalism has a long lineage, its latest progeny is the idea of using “golden shares” to block unwelcome bid approaches.

Such reactions are perhaps understandable in long-closed economies that have opened up to foreign capital as never before: most dramatically so in China, whose foreign direct investment stock now equals 28 per cent of gross domestic product. While FDI levels are much lower in Japan and Korea, one-quarter of Tokyo’s stock exchange and almost half of Seoul’s are foreign-owned.

Hostile bids from abroad are still unknown in both countries. But many Koreans seethe at the profits reaped by foreign investors who moved in after its 1998 economic crisis. In Japan, the buccaneering tactics of corporate raiders such as the disgraced Takafumi Horie and the unravelling of cross-shareholdings that long shielded local groups from takeover have left boardrooms fearing that the next wave of “Anglo-Saxon” capitalism could be the real thing.

It should also be no great surprise that economic nationalism is in vogue in Asia when it is already resurgent in the west, with Asian bidders among its prime targets. The US Congress’s veto in 2005 of the bid by CNOOC, the Chinese oil group, for Unocal and European governments’ unsuccessful efforts to stop Mittal Steel buying Arcelor suggest wagons are being circled worldwide.

This outbreak of defensiveness embodies one paradox and several myths. The paradox is that foreign investors offering to build new facilities are courted and fêted almost everywhere. Yet in many countries, trying to buy local businesses, even with their managers’ assent, can lead them into a nationalistic minefield.

The ambivalence reflects a widespread belief that greenfield investments are somehow “better” because they visibly raise national output, employment and exports, while acquisitions diminish local ownership and appear to add little of value to the economy. Yet the distinction is largely meaningless. FDI’s greatest value is as a mechanism for transferring skills, ideas and technology across borders. They can be transmitted just as efficiently – sometimes more so – through acquisitions as through greenfield plants. Renault’s revival of Nissan and the recovery under foreign ownership of troubled Japanese and Korean banks are cases in point.

Another myth is that foreign ownership turns companies into mere branches of remote head offices. Not only is the evidence for that claim moot; it is at odds with multinational companies’ growing tendency to localise decisions and with western workers’ complaints that offshore outsourcing is displacing ever more highly skilled jobs at home. Nor, contrary to popular perceptions, do foreign-owned companies, in general, seem more ruthless than local ones about moving work abroad.

Equally misplaced are fears that foreign takeovers threaten national economic sovereignty. These fears are often greatest in countries such as Korea, where local producers wield excessive power. The critical issue is not nationality of ownership, but the adequacy of market regulation and competition enforcement.

Of course, not all foreign takeovers generate local benefits. But neither do all greenfield projects. The point is that one method of investment is not inherently more beneficial than the other, but that the results depend on the specifics of every case.

The most dangerous myth of all is that some sectors must remain locally owned because of their “strategic” importance. A very few, such as defence contracting, may genuinely qualify. But the idea has more often served to protect weak or failing businesses: airlines in the US, car and computer makers in Europe and steel and shipbuilding companies globally.

The intrinsically elastic definition of “strategic industry” invites its misuse. In France, it has been invoked to defend Danone, a food processor, against the threat of takeover. In China, where the label is applied to thousands of state-owned companies – most far less efficient than their privately owned counterparts – it seems recently to have been extended to a troubled producer of earth-moving equipment.

Typically, the main beneficiaries of such policies have not been national economies, but the managers of “strategic” companies and their bureaucratic overlords. Their status confers state patronage, privileged access to power and, above all, the trump card of protectionist petitioners down the ages: a licence to portray themselves, however misleadingly, as the true representatives and custodians of the national interest.