EU Investment Policy in the Face of Increasing FDI

Transcription

EU Investment Policy in the Face of Increasing
FDI Flows from Emerging Economies
Maastricht University
Maastricht, August 22, 2013
Dorian Richter
ID-No.: i586552
M.Sc. Public Policy and Human Development
Cohort 2012/13
Supervisor: Dr. Niclas Meyer
Second Reader: Kristine Farla
Table of contents List of Abbreviations ...................................................................................................... I
1. Introduction ............................................................................................................... 1
Context of this Thesis: Project Global Challenges ......................................................... 4
2. Economic Impacts ...................................................................................................... 6
2.1 Economic Benefits ............................................................................................... 6
2.1.1 Consumer welfare ........................................................................................ 6
2.1.2 Employment rate ......................................................................................... 7
2.1.3 Productivity and innovation ......................................................................... 8
2.1.4 Capital increase ........................................................................................... 9
2.1.5 Increasing asset prices ............................................................................... 10
2.1.6 Open access to emerging economies ............................................................ 10
2.1.7 Norms and standards ................................................................................. 11
2.2 Relevant Regulatory Framework of the EU ........................................................ 12
2.2.1 Actual state ............................................................................................... 12
2.2.2 Degree of sufficiency of the EU’s regulatory framework ................................ 15
2.3 Economic Risks ................................................................................................. 16
2.3.1 Macroeconomic dependency ....................................................................... 17
2.3.2 Headquarter effects.................................................................................... 18
2.3.3 Unfair competitive advantage ..................................................................... 19
2.3.4 Deteriorating environmental, labor and corporate governance standards ............................................................................................. 21
2.4.1 Actual state ............................................................................................... 22
3. Political Impact ........................................................................................................ 24
3.1 Political Benefits ............................................................................................... 24
3.1.1 Political stability ........................................................................................ 24
3.1.2 Political feedback loops .............................................................................. 25
3.2.1 Actual state ............................................................................................... 25
3.3 Political Risks .................................................................................................... 26
3.3.1 National Security ...................................................................................... 27
3.3.2 Relevant Regulatory Framework of the EU ................................................ 32
3.3.2.1 Actual state ....................................................................................... 32
3.3.2.2 Degree of sufficiency of the EU’s regulatory framework ........................ 37
3.3.3 Policy Influence ........................................................................................ 38
3.3.4.1 Actual state ....................................................................................... 39
3.3.5 Sustainable Development .......................................................................... 41
3.3.6.1 Actual state ....................................................................................... 43
5. Conclusion ................................................................................................................ 48
References ................................................................................................................... 53
List of Abbreviations BIT Bilateral Investment Treaty CFIUS Committee on Foreign Investment in the United States CIC China Investment Corporation EDP Energia de Portugal EFDI Foreign Direct Investment from Emerging Economy FDI Foreign Direct Investment GCHQ Government Communications Headquarter ICSID International Centre for Settlement of Investment Disputes ICT Information and Communication Technology IIA International Investment Agreement SOE State-‐Owned Enterprise SWF Sovereign Wealth Fund TFDI Technology driven Foreign Direct Investment TFEU Treaty of the Functioning of the European Union I
1. Introduction Political and scientific papers acknowledge the significant contributions of foreign direct investments (FDI) to innovation and sustainable growth. In its long-‐term growth strategy Europe 2020 as well as within the Lisbon Treaty the EU reflects this by making investment policy an essential part in achieving these objectives (European Union, 2011). The promotion of sustainable economic development in the host country has been subject of strategic discussions for many years and in the mean-‐time appears self-‐explaining. It is by now also widely accepted that FDI can promote sustainable economic development in the country of origin as well (Ying Chang, 2008). Economic success stories, such as the economic development of the Asian Tigers or emerging economies show the relevance of managing in-‐
vestments strategically for the purpose of an economic long-‐term strategy. This knowledge and conception has contributed to the increasing popularity and im-‐
portance of FDI and corresponding investment policies over the last two decades. By now it is generally accepted that FDI are an important determinant for total factor productivity. This is a measure for efficiency in the relations between inputs and outputs of a production process. Furthermore, FDI serve as an indicator for a country’s competitiveness and degree of globalization. Unlike other types of capital flows, FDI are not only means for transferring capital, but do also serve to promote the transfer of technology and know-‐how, encourage the development of human capital as well as corporate governance standards (OECD, 2001). The world’s FDI flows have shown a remarkable trend and structural change in recent years. Of around $1.4 trillion in total outflowing FDI worldwide, 34.6% came from developing and transition countries in the year 2012 (World Invest-‐
ment Report, 2013). Considering that in 1970 only 0.36% and in 1990 only 5.0% of FDI outflows came from developing and transition countries (UNCTAD, 2009) this demonstrates a tremendous shift in the economic, and as a consequence thereof also political weight of EU’s trade partners. Especially BRICS countries (Brazil, 1 Russia, India, China and South Africa) are the major sources of outflowing FDI from emerging economies (EFDI). FDI outflows in these economies increased from $7 billion or 1% of world’s total FDI outflows in the year 2000 to $145 billion or 10% of world’s total FDI outflows in the year 2012. Of these FDI outflows 34% went into the EU. Moreover, in 2012 China was ranked as third largest investor for the first time ever, after the US and Japan on first and second place (World Investment Report, 2013). So far, developed countries had been the major source for foreign direct invest-‐
ments for a long time. Increasing investments flows from emerging economies into the EU are a recent phenomenon, which has its beginning in the early 1990s. At that time a number of far reaching events such as the collapse of the Soviet Union, major economic and political changes in Latin America as well as the liberalization of China’s economy caused significant changes in the international political land-‐
scape as well as world markets. Along with these changes came a radical progress in Information and Communication Technology, improved means for transporta-‐
tion as well as reduced trade barriers. Consequently, capital flows increased tre-‐
mendously compared to previous years. As a result growing numbers of multina-‐
tional companies also from emerging economies started to invest and locate part of their businesses in Europe. In some cases this even led to the loss of ownership in domestic landmark companies. For instance, in the car industry the Chinese company Geely has bought the renowned Swedish car manufacturer Volvo (Steuer, 2013). Thus, events like this have put emerging economies in the focus of many policy and economic analysts and created a controversial debate with demands for greater protectionism on the one side (Youngs, 2010) and demands for a regulato-‐
ry framework that welcomes and promotes increasing EFDI on the other side. Given these tremendous structural changes regarding the FDI in the EU and in the light of changing political considerations and long-‐term growth strategies within the EU questions on the suitability of the existing investment policy appear perti-‐
nent. So far the European perspective on the regulatory framework for investment policy was mostly shaped by outward investments from developed countries into 2 emerging or developing countries. Hence, European investment policy seeks to promote FDI flows in the assumption that the majority of investors are from de-‐
veloped countries. This assumption is also reflected in the EU’s institutional re-‐
gime, which emphasizes the interests of investors by providing relatively strong investor protection. As trends in global investment flows are changing the traditional perspective might be obsolete by now. Europe faces new kinds of investors, which raises the question whether the EU’s institutional regime is still sufficient or whether the EU needs to rethink its regulatory framework in order to reshape its economic inter-‐
dependence with emerging economies in a way that is good for both parties and allows the achievement of Europe’s long-‐term growth strategies. Although the im-‐
portance of EFDI has been growing there is practically no scientific literature about the difference between FDI from emerging economies and those from other coun-‐
tries. However, this knowledge is important in order to regulate these forms of investments effectively. For this reason the thesis investigates the following inter-‐
connected research questions: •
How did the EU’s regulatory framework respond to changing EFDI flows? •
Was this sufficient? To answer these research questions this thesis uses a multidisciplinary approach between economic and political science based on a thorough analysis of newspa-‐
pers, scientific publications to this topic as well as other types of formal sources such as official websites and informal documents. Furthermore, the thesis uses relevant information, which is provided by the Fraunhofer Institute for Systems and Innovation Research ISI. The thesis is structured as follows: The second chapter discusses economic impli-‐
cations of increasing EFDI in the EU, which are then classified as either benefits or risks. After a thorough analysis of the EU’s regulatory framework and the question how it responded to this new trend, the EU’s regulatory framework is then as-‐
sessed by how ‘sufficiently’ it meets the challenge between attracting increasing 3 EFDI (need-‐to-‐attract) and protecting the EU from potential risks, which might come from increasing EFDI (need-‐to-‐protect). Chapter three largely follows the same structure as the second chapter and discusses the political implications, which might occur as a result of increasing EFDI in the EU. Finally, the thesis con-‐
cludes by giving a concise answer to the research question of how the regulatory framework responded to changing EFDI flows and whether this is sufficient. Context of this Thesis: Project Global Challenges This master thesis is developed in the context of a large-‐scale research project conducted by the Fraunhofer Institute for Systems and Innovation Research ISI. The project “The challenges of globalization: Technology driven Foreign Direct In-‐
vestment (TFDI) and its implications for the Negotiations of International (bi-‐ and multilateral) Investment Agreements” is based on a cooperation between the Lund University (CIRCLE) in Sweden, the University of Piemonte Orientale (UPO) in Ita-‐
ly, the International Institute of Information Technology (IIITB) in India and the Chinese Academy of Sciences (GUCAS). The project seeks to investigate the follow-‐
ing set of questions: (1) What are the key characteristics of TFDI from both devel-‐
oping and developed countries? (2) Which institutional and firm characteristics constrain or enable TFDI? (3) How does the interaction between public and private interests with regard to TFDI look like? (4) What are the implications of TFDI for the negotiation of international investment agreements? The project is financed by the Stiftelsen Riksbankens Jubileumsfond over a time period of three years. In the context of this research project the Fraunhofer Institute for Systems and Innova-‐
tion Research ISI focuses on the regulatory environment and investment regime that influence the new FDI flows. The research question and structure of this mas-‐
ter thesis is determined by the overall research focus of the Fraunhofer Institute for Systems and Innovation Research ISI. 4 I owe particular thanks to my academic supervisor Dr. Niclas Meyer, who was a source of inspiration and valuable guidance in the working period of this Master’s thesis. 5 2. Economic Impacts Increasing EFDI in the EU bring a variety of different economic impacts. These economic impacts are not only scrutinized by the means of their quantity, but also their quality. In order to provide a complete picture in the debate about potential necessities for the European regulatory framework to adapt to increasing EFDI, the following sections discuss both benefits and risks of this new FDI flow. This discus-‐
sion will then address the question whether and to what extent the regulatory framework in place has adapted to these changes, whether it needs to be adapted or whether it is already sufficient to deal with the new investment flows from emerging economies, considering both the two need-‐to-‐protect and the need-‐to-‐
attract objectives. 2.1 Economic Benefits Economic benefits of FDI have been widely discussed in academic literature for instance by Borensztein, Gregorio & Lee (1998), Javorcik (2004), Markusen & Ve-‐
nables (1999) and Barrios, Görg & Strobl (2005). However, the existing literature has largely focused on FDI flows either between developed economies or from de-‐
veloped to developing economies instead of the new FDI flows that are the focus of this thesis. This section investigates whether FDI from emerging economies to de-‐
veloped economies is different and whether it might have different impacts. 2.1.1 Consumer welfare According to Hanemann & Rosen (2012) an often associated economic effect of FDI is a resulting increase in consumer welfare. This may come from a greater product variety due to an often differentiated product assortment of additional competitors or lower prices and quicker innovation cycles due to technology spillover and in-‐
6 creased competition in the market. Such welfare effects of FDI may vary according to differences in terms of market participants, degree of market maturation and competition. Hahnemann & Rosen argue that the consumer welfare effect is espe-‐
cially strong in sectors or market segments, which require an active presence of the seller in the consumer market, since they have a more direct contact with con-‐
sumers than upstream companies. For instance, Chinese multinational companies such as ZTE1 already have well-‐established positions in the European markets, which puts pressure on competition and prices. ZTE’s recent decision to lower prices in the 100Gbit/s transport infrastructure market to make it more affordable thereby unlock its potential illustrates these potential positive economic effects on the European market (LightReading, 2013). 2.1.2 Employment rate Next to consumer welfare comes a usually positive contribution of EFDI to the em-‐
ployment rate. This holds true especially for greenfield investments, which directly create additional jobs in the short run. In the long run however, they might drive out other competitors or cause increased layoffs in competitor firms. According to Schumpeter (1942) this is a normal part of creative destruction, which in the very long term benefits society and consumer welfare again. In contrast, brownfield investments can directly cause a decrease in employment or have no effect when it leads to integration and, or restructuring of existing firms. However, brownfield investments can also benefit the employment rate if they prevent existing compa-‐
nies from going bankrupt due to prior liquidity—rather than solvency-‐problems or 1 ZTE Corporation is a Chinese multinational company, which produces telecom-‐
munications systems and equipment. In 2012 is was ranked as fourth largest man-‐
ufacturer for mobile phones (measured in unit sales) and fifth largest manufactur-‐
er for telecommunication equipment (measured in revenues). 7 even help those ailing companies to recover. Particularly during the Euro crisis, this argument is convincing when many European companies struggle to compete against domestic and foreign competitors (Hanemann & Rosen, 2012). According to Hanemann & Rosen the 428 greenfield investments – with a mini-‐
mum value of $1 million – between the year 2000 and 2011 only from China creat-‐
ed approximately 15,000 additional jobs in Europe. Their database also suggests that in the same time period Chinese brownfield investments supported a mini-‐
mum of 30,000 European jobs. Although, these numbers might seem relatively low in comparison to Europe’s total labor force of 240 million people, it is still a strong argument based on the fact that emerging economies are only beginning to catch up. 2.1.3 Productivity and innovation Companies from emerging economies can also bring innovative and productive technologies or management practices to Europe. At the moment, it might seem that companies from emerging economies are still catching up to European innova-‐
tion and business standards. However, this prediction was also made with regard to Japanese companies during the 1960s and 1970s. Less than ten years later Japa-‐
nese electronic and automobile companies had successfully caught-‐up, with some even becoming world market leaders. As a result these companies introduced new management techniques to the West, such as “lean management”, a form of man-‐
agement that aims to reduce waste and idle time. This is positive, since Western companies used these new techniques to increase their own productivity. The same effect can happen with companies from emerging economies. In 2013 the Boston Consulting Group published a report on the top 100 fast growing compa-‐
nies from emerging markets. These so called “global challengers” are currently catching up and some are even surpassing multinational companies from devel-‐
oped countries. According to this report: 8 “Global challengers increasingly see the need to become more innovative and are rapidly increasing their research spending. About 46 percent of Huawei’s 150,000 employees are in R&D. Mindray generates more U.S. patents per reve-‐
nue dollar than many global leaders. Many other companies in emerging mar-‐
kets are making similar moves. In 2011, companies from China were granted more U.S. patents than companies in Israel, Australia, Italy, Netherlands, Swe-‐
den, and Switzerland. India also ranked in the top 15 for the first time.” (Bhattacharya et al., 2013) This report shows that companies from emerging economies are growing and globalizing rapidly. Thus, this might entail that these companies can also bring new technologies, know-‐how or business practices to the EU from which also European companies may benefit. 2.1.4 Capital increase Capital injections by multinational companies from emerging economies into the European economy may seem like a very welcome remedy in times of austerity due to the Euro crisis. While total global FDI flows have been decreasing as a result of the economic crisis Chinese FDI into Europe have been increasing (World In-‐
vestment Report, 2013). This shows even more the importance of fresh capital from emerging economies for Europe. Not only European governments are des-‐
perate for new capital in times of the economic crisis. For instance, the Swedish car manufacturer Saab tried to sell stakes to Chinese companies in order to secure its future operability (The Economist, 2011). Another example illustrates the success-‐
ful venture between the German concrete pump manufacturer Putzmeister and the Chinese company Sany a manufacturer of construction equipment. Although Putzmeister has been a world market leader in its field it realized the need for in-‐
creased investments in order to remain competitive. The merger with Sany seemed the most attractive option (Mayer-‐Kuckuck, 2012). These examples illus-‐
9 trate that increasing EFDI might even help the European economy to overcome the Euro crisis. 2.1.5 Increasing asset prices An important aspect of increasing capital inflows in Europe is the resulting in-‐
creased competition for European companies. While growing competition is al-‐
ways regarded as being beneficial for social welfare, increased investment interest by firms from emerging economies in European assets can also lead to higher pric-‐
es of these assets. In times of austerity the Euro crisis forces many governments to sell large amount of their assets as part of restructuring their debt. Hence, higher asset prices as a result of increased investment interest by firms from emerging economies turn out to be quite beneficial for those governments. For instance, when in 2011 Portugal’s government was selling 21% of Energia de Portugal (EDP), one of Europe’s largest Energy supplier, China Three Gorges Corporation offered a premium of 53% over what other competitors would bid for this share. As a result the Portuguese government earned a total revenue of €2.69 million, which was much higher than originally expected (Kowsmann & Ma, 2011). However, it may be argued that what is a benefit for asset sellers may be a disad-‐
vantage for potential asset buyers. In this context it could be interesting to investi-‐
gate whether increasing asset prices might bring windfall profits to owners of companies in the same industry due to increasing stock prices. However, this the-‐
sis did not find empirical data to confirm this consideration. 2.1.6 Open access to emerging economies The enormous size and rapid growth of emerging economies make those markets indispensable for European exports and investments if European firms want to stay competitive throughout the following years. Consequentially, maintaining 10 open access to these markets is paramount to the European economy and the achievement of Europe 2020. By offering EFDI open access to European markets the EU encourages emerging markets also to keep their doors open for invest-‐
ments from European firms. Since open investment regimes are based on mutual concessions Europe must be careful not to send out misleading signals, which might cause unintended reciprocal consequences. For instance, after the EU sug-‐
gested imposing anti-‐dumping tariffs on imported Chinese solar panels, China ex-‐
plicitly warned the EU to engage in protectionist behavior. Hua Chunying spokes-‐
person of the Chinese foreign ministry said during a press meeting with regard to the EU-‐China solar panel dispute that both parties are “most important trade part-‐
ners.” However, she added: “The EU’s protectionism sends the wrong message to the business world, particularly at a time when Europe is still struggling.” Xinhua, China’s official news agency said that such a move by Europe could lead to a back-‐
lash, which will not only harm European economic interest but might even pro-‐
voke a trade war. Moreover, she made clear that imposing anti-‐dumping tariffs on Chinese solar panels “could open a Pandora’s box that would derail Europe’s solar energy efforts and damage China-‐EU trade relations” and “will only create a lose-‐
lose situation for both sides.” (CCIFC, 2012) This case illustrates that the EU must be aware of any signals, which it might send out by its trade and investment policy, since it cannot afford to renounce the large and rapidly growing emerging markets. 2.1.7 Norms and standards Another potential benefit of increasing EFDI is that companies from emerging economies can adapt business practices and value standards of EU markets, as-‐
suming that these are more developed than in current emerging markets. The rea-‐
soning is that foreign firms, which invest in the EU, are also liable to litigations in European courts. In contrast, this is not the case with foreign firms that merely 11 export into the European Union. Hence, holding assets in European markets puts pressure on foreign firms to adapt to European standards and norms. As a result, these norms and practice standards might spread across emerging economies, be-‐
cause firms, which adapted those standards, have a competitive advantage in in-‐
ternational markets over their domestic competitor firms (Hanemann & Rosen, 2012). From the above-‐mentioned arguments it becomes clear that EFDI provide macro-‐ and microeconomic benefits, which not only help European industries to boost-‐up their competitiveness, but which are essential for the achievement of Europe’s long-‐term goals such as Europe 2020. Thus, the European Union is in a situation in which it has a clear ‘need to attract’ FDI from emerging economies. 2.2 Relevant Regulatory Framework of the EU It is argued that the above-‐mentioned economic benefits create an incentive for the EU to attract increasing EFDI into the EU. Thus, this section refers to the first re-‐
search question by outlining the EU’s current regulatory framework with regard to the objective of attracting EFDI. This section will then address the second research question by discussing how sufficiently equipped the EU’s regulatory framework is in order to meet the challenge of attracting increasing EFDI. 2.2.1 Actual state The existing regulatory framework concerning investment policy has its roots in the Treaty of Rome, which proposed, among other things, to develop a single mar-‐
ket for goods, services, people and capital. These came to be known as the ‘four freedoms’ of the European Union. The free movement of capital is the core of the 12 regulatory framework concerning capital movements. It allows the European fi-‐
nancial markets to be open, integrated and competitive, which has benefits for citi-‐
zens and companies. For citizens it means that they can open bank accounts, invest and do other financial operations in any other EU-‐member country they want. Companies have the same freedoms, which means that they also can invest freely within the EU and influence the management in other companies within the EU. Prior to the free movement of capital financial operations required official authori-‐
zation by so called ‘exchange controls’. This served the purpose to prevent citizens or companies from carrying out financial operations without having financial inte-‐
gration in place. The free movement of capital was first proposed by the Treaty of Rome in 1957. However, it was not officially agreed until 1988 and came into effect two years lat-‐
er in 1990 – for a few countries even a bit later. The free movement of capital agreement was set in place nearly to the same time as the establishment of the Economic and Monetary Union. With the Maastricht Treaty in 1993 the free movement of capital agreement was extended in that it prohibits all kinds of re-‐
strictions on capital movements between EU-‐member states as well as with third countries. Extending the free movement of capital also to relations with third coun-‐
tries makes it the most far reaching of the four freedoms and also the most liberal investment law in the entire world. No further legislations at national or EU-‐level are required, which means that it is directly effective. Countries that joined the EU after the Maastricht Treaty came into effect removed any restrictions to free capi-‐
tal movements progressively. The EU’s initiative on free movement of capital even stimulated new policy processes in this area at international level outside the EU. The most relevant treaty provision for the free movement of capital is Art. 63 of the Treaty of the Functioning of the European Union (TFEU), which says: “all re-‐
strictions on the movement of capital between Member states and between Mem-‐
ber States and third countries shall be prohibited” (European Parliament, 2013). Hence, this creates an attractive investment environment in which foreign inves-‐
tors have the same legal rights with regard to capital movement as European in-‐
13 vestors. Moreover, the legal right for free movement of capital even with third countries sends a strong signal to foreign investment regimes, which might en-‐
courage them to emulate similar provisions. Another important change in the EU’s regulatory framework with regard to its in-‐
vestment regime is the Lisbon Treaty. It was created to reform the functioning of the EU in response to the rapid extension of its member base from 15 to 27 coun-‐
tries. The Lisbon Treaty was first signed on 13 December 2007 and came into force on 1 December 2009. Among the Treaty’s main aims is an improved coherence and consistency in European actions concerning external issues. As part of this aim it also includes amendments to the free movement of capital. It contributes to the step-‐wise removal of restrictions or barriers to FDI. In this regard the Lisbon Trea-‐
ty expands the EU’s competence in its Common Commercial Policy by including foreign direct investments through articles 206 and 207 TFEU. Allowing the EU to negotiate international investment agreements (IIAs) with third parties, which was previously done at national level, aims at promoting the competitiveness of Euro-‐
pean industries by gaining better access to foreign markets and more foreign in-‐
vestments. With this step the EU is assuring that investors from abroad face the same open investment environment and legal standards throughout the entire EU to reduce any barriers to the free movement of capital (Woolcock, 2010). The EU’s investment policy mostly regard Bilateral Investment Treaties (BITs), which are contractual agreements between two countries that assure specific investor rights and allow investors to sue the governments of host countries before an interna-‐
tional court, namely International Centre for Settlement of Investment Disputes (ICSID), in case of infringements of the BITs. However, prior to the Lisbon Treaty not all EU member countries had concluded such BITs and those that had, showed differences in their quality standards and concessions. Shifting competence over investment policy to the European level tries to address this problem. Neverthe-‐
less, shifting competence over investment policy to EU level will not take all activi-‐
ties related to investment policy away from national governments. Along with those BIT negotiations at national level usually also came strategic investment 14 promotion by the contracting states. Since this is a significant part in attracting FDI into one’s country, it seems unlikely that investment promotion will be an activity that European states want to centralize at a European level. Although the Lisbon Treaty is not a response specific to the phenomenon of increasing EFDI in the EU it is after all a response to the increasing importance of FDI as well as a mechanism to improve the competitiveness of European industries and thereby supporting the achievement long-‐term objectives such as Europe 2020. The EU is also working on international level with other organizations and interna-‐
tional platforms such as WTO, OECD, G20 or G8 in order to liberalize international investment regimes and contribute to further economic development in the world. This is necessary since global interdependencies among countries require a coop-‐
erative approach to deal with global challenges. As discussed in the economic benefits section, increasing EFDI into the EU may provide the change to encourage other countries to adopt European norms and business standards assuming that most European norms and business standards are more developed than in emerging economies. Concerning environmental standards the EU is regarded to have the most comprehensive environmental laws in comparison to all other international organizations (Adelle, Jordan & Turnpen-‐
ny, 2012). 2.2.2 Degree of sufficiency of the EU’s regulatory framework Evaluating the sufficiency of the EU’s existing regulatory framework depends on its ability to meet the challenge between attracting good EFDI and protecting the Eu-‐
ropean economy from any potential harmful effects of EFDI. With the legal right for free movement of capital the EU established a regulatory framework, which proved to be well suited to provide an open investment regime. In fact, this might be an important reason why the world’s largest share of FDI is going into Europe. In this regard it promotes all above-‐mentioned positive economic effects such as 15 consumer welfare, employment, productivity and innovation, increase in asset prices and capital, encouraging open access to emerging markets as well a positive norms and standards. Particularly with regard to encouraging open access to emerging markets the EU’s liberal investment regime is unprecedented and sends a strong positive signal to other investment regimes. The effectiveness and success of free movement of capital in the EU has proved itself for the last twenty years and is even reflected in current official statistics, which show that the world’s larg-‐
est share of FDI is going into Europe (World Investment Report, 2013). With the Lisbon Treaty the EU made a further step to make its investment regime even more attractive by providing a homogeneous investment environment for foreign investors. However, its effectiveness still needs to prove itself and cannot be as-‐
sessed yet, since the EU did not conclude any own IIA yet. This step seems neces-‐
sary, since a recent survey conducted by the EU Chamber of Commerce in China revealed that many Chinese companies complain about difficulties with the many legal systems when investing in Europe. Furthermore, the survey reported that the same Chinese companies experienced regulatory delay, especially with regard to visas. Nevertheless, these companies also expressed that they would invest in Eu-‐
rope again. (The Economist, 2013). Hence, it can be argued that the EU’s regulatory framework proves to be sufficient to attract EFDI. However bureaucratic hurdles remain, which gives the EU still room for improvement. 2.3 Economic Risks Apart from the many benefits increasing EFDI might also bring a few economic risks for the EU. Among them are macroeconomic dependency, headquarter effects, unfair competitive advantage as well as deteriorating norms and values. All of these risks exist mainly due to the enormous size and growth of emerging economies. Furthermore, non-‐democratic elements in combination with close links between private sector firms and politics can have negative economic implications on the 16 European economy as well (Hanemann & Rosen, 2012). In the following sections each risk will be discussed in more depth with regard to these characteristics. 2.3.1 Macroeconomic dependency Macroeconomic dependency generally refers to a situation in which the amount of FDI is so large that changes in the foreign economy can have significant effects on the recipient’s economy. These unintended effects increase macroeconomic volatil-‐
ity and thereby pose a threat to any economy. For instance, increasing amounts of capital from emerging economies can make the European economy more vulnera-‐
ble to economic crises and disruptions in those transition countries. This holds true especially if transition countries pull large amounts of money out of the Euro-‐
pean economy, because of political or economic reasons. Hence, this could lead to a major destabilization of the European economy. However, it seems unrealistic to assume that profit-‐oriented investors follow political motives, when this can harm them and might even put them out of business. In addition, this concern seems marginal when looking at the actual numbers of EFDI flows into Europe. According to Eurostat (2013) FDI outflows from transition economies in 2011 were only €56.4 billion compared to the EU’s total GDP of €12.6 trillion in the same year. Thus, this shows that recent EFDI flows into the EU were relatively little. Hence, it is unrealistic that EFDI might create real macroeconomic dependency for the en-‐
tire EU. However, smaller economies such as Greece with a GDP of €208,5 billion in 2011 (Eurostat, 2013) might be much more vulnerable to large-‐scale invest-‐
ments from emerging economies. Due to the enormous size and rapid growth of emerging economies this effect might become even more significant in the future. Moreover, it might become an issue in selected sectors that become subject to overinvestment. This might lead to an inflation of asset prices in overinvested sec-‐
tors. Experience has shown that this concern mostly exists with regard to natural resources, as they are most likely subject to overinvestment. The resulting effects in those recipient economies are often called “Dutch Disease”. This term was first 17 used by The Economist in 1977 in reference to the economic deterioration of the Netherlands’ manufacturing sector after a natural gas field was discovered in 1969. The resulting gas revenues lead to the appreciation of the Dutch currency, which made other sectors less competitive and lead to a current-‐account deficit (The Economist, 1977). However, resources do not seem to play a big role for EFDI into the EU and it is subject to debate how likely it is to become an issue due to discov-‐
eries of new natural resources in Europe. Hence, such resource related concerns might not apply very well to the European continent, since it’s pool of natural re-‐
sources is currently rather limited compared to other world regions. Still those concerns can be applied to other sectors as well. 2.3.2 Headquarter effects An often-‐discussed fear about FDI is that investors could restructure the acquired assets in a way that benefits the investor’s home country at the expense of the FDI host country. Brownfield investments are often times subject to this allegation, which is the reason why they are usually seen more critically than greenfield in-‐
vestments. In contrast to this, current research suggests that brownfield invest-‐
ments are actually better prepared and carried out than greenfield investments, which suggests higher returns in the long run (Klossek et al., 2012). Another concern is that investors could carry out the investments simply for the purpose of acquiring know-‐how and other valuable assets in order to transfer them back to their home countries. Especially, China and a few other Asian coun-‐
tries have a reputation for such a strategic behavior of using international ventures as source for exploiting technical knowledge (Hanemann & Rosen, 2012). This stirs up the concern that Chinese investors could acquire European assets only to shut these down after their exploitation. Experience has shown that such cases of ex-‐
ploitation are rare. One reason, amongst others, is that Europe is partly a service economy, which depends to a large extent on intangible skills. These are hard to 18 disassemble and transfer to other locations. Still European companies need to guard their know-‐how, which gives them a competitive advantage. At some point they might have to make a trade-‐off by choosing either between tightly guarding critical know-‐how or undertaking ventures with Chinese companies in order to gain improved access to one of the largest and fastest growing markets in the world. It is to say that China only serves as an illustrative example in this case. The same argument holds also true for other emerging economies. 2.3.3 Unfair competitive advantage Unfair competitive advantages for firms from emerging economies is another wor-‐
ry, which regards the state capitalism in some transition countries such as China and Russia. The argument is that state capitalism causes firms to act under differ-‐
ent cost and incentive structures, which will undermine the otherwise market based valuation of global assets. For example, in the case of China this claim is sup-‐
ported by the argument that China’s industrial policy and its state-‐controlled fi-‐
nancial system are quite different from that of the European Union. Eventually, this can have negative effects for shareholders and stakeholders. Another effect is that Chinese firms might have an unfair competitive advantage in comparison to Euro-‐
pean firms in the bidding for assets. Moreover, capital in the financial system is not purely allocated through market forces, but also by political objectives and exclu-‐
sive relationships. Again this makes some Chinese companies less capital con-‐
straint than European firms. The reason for this worry is the enormous size of most emerging economies that could make them price setters, which could even-‐
tually lead them to affect the market-‐based pricing system even at a global scale. A highly dangerous economic threat is that subsidized but less productive firms might drive more productive but non-‐subsidized firms out of the market. However, while this can be observed rather frequently in order to boost exports, such cases are less known in the host countries of EFDI (Hanemann & Rosen, 2012). 19 Figure 1: Formal FDI Restrictiveness, 2012 Source: Hahnemann & Rosen, 2012. *Calculation based on available OECD data for 24 of 27 EU member countries. Another argument concerns the lack in mutual openness for investment. Claims are that it is for instance easier for Chinese firms to invest in Europe than it is the other way around. The figure above illustrates this argument by showing a vast difference in measured FDI restrictiveness between China and EU average. Infor-‐
mal barriers are an additional element that makes investments in some emerging economies more difficult. This FDI restrictiveness argument is supported by this figure. However, contrary to this claim it is to mention that there are more invest-‐
ments in China than Chinese investments somewhere elsewhere (Hanemann & Rosen, 2012). 20 2.3.4 Deteriorating environmental, labor and corporate governance standards This type of economic risk refers to a situation in which firms from emerging economies can bring lower labor standards and regulations into the European market, while European officials will be afraid to prevent those in fear of deterring investments and harming employment levels. The argument is that state support-‐
ed companies may have a competitive advantage as explained above, however it might also favor poor corporate governance and inefficient behavior within the companies that would usually be eliminated or reduced by competitive pressure in the market. Thus, the concern among European policy makers is that increasing EFDI might bring lower labor standards and business ethics to Europe, which could then cause a race to the bottom. Several examples support such concerns, such as Huawei’s difficulties with complying with Swedish labor regulations in 2011, or tax evasion and labor rights violations by Chinese textile manufacturers in Italy. However, it is important to know that those are exceptional examples. The example of the misbehavior by Chinese textile manufacturer rather shows that the enforcement of those legal standards is not well enough (Donadio, 2010). 2.4 Relevant Regulatory Framework of the EU The previous section outlined the negative economic effects that EFDI might bring for the European economy. This section of chapter two uses these scenarios in or-‐
der to address the main research question of this thesis, namely: How did the regu-‐
latory framework respond to the above-‐mentioned risks and benefits resulting from increasing EFDI in the EU? After that this section will refer to the second research question by discussing how sufficiently the EU’s regulatory framework meets the challenge to protect the EU from the discussed negative economic implications of EFDI. 21 2.4.1 Actual state As already mentioned Art. 63 TFEU prohibits all restrictions on the free movement of capital also with third countries. Still the European Union’s member states can protect themselves from foreign investments that pose a threat to their national interest or security. For this reason the free movement of capital includes a few exceptions. One is Art. 64(1) TFEU for ‘grandfathered restrictions’. This exception allows member countries to maintain any restrictions, which they had before 31 December 1993. Another exception to free movement of capital provide Art. 65(1b) and Art. 52(1) in case of ‘public policy and public security’ reasons. In addi-‐
tion, Art. 65(1) TFEU allows EU member countries a ‘prudential supervision’ in case of infringement of national law. Furthermore, member countries can apply different tax regulations to investments according to their country of origin. In its jurisprudence the Court of Justice of the European Union clearly says that excep-‐
tions to Art. 63 TFEU must be proportionate and transparent. Moreover, excep-‐
tions cannot unilaterally be determined by a single member country but must be agreed by community institutions according to Art. 17 in C-‐54/99a>, Art. 47 in C-‐
503/99, Art. 48 in C-‐483/99, Art. 72 in C-‐463/00. In addition to these exceptions at member country level the Treaty allows also the EU itself to restrict the free movement of capital in two cases. Art. 64(2) TFEU of-‐
fers the EU to introduce new measures to free capital movement that involve the provision of financial services, direct investment and the admission of securities to capital markets. Art. 64(3) provides the opportunity for the EU to restrict free capi-‐
tal movements with third countries in case all EU member states agree unanimous-‐
ly and the EU parliament was contacted with this request. Art. 66 TFEU allows the EU to use temporary protecting measures in case free capital movements from or to third countries pose a serious threat for the European economic and monetary Union itself (European Commission, 2013). 22 2.4.2 Degree of sufficiency of the EU’s regulatory framework Unlike for economic benefits, it can be argued that the current version of the EU’s regulatory framework is not sufficient to provide proper protection against the economic risks, which were mentioned above. Although macroeconomic depend-‐
ency is not a problem at the moment, the EU’s regulatory framework does not con-‐
tain any instrument, which could address this indirect problem once it became more serious. It is questionable whether the EU would actually be able to create any applicable option to address this issue without harming its objective of attract-‐
ing EFDI. One option would be to restrict stocks of foreign investments from one country or region by a certain threshold, however this option would most likely come at the expense of Europe’s open investment regime. Concerning potential headquarter effects it is arguable whether the EU or any government should even be responsible to deal with this problem. Usually, ventures between companies are preceded by thorough analysis and long-‐term planning. Thus, it lies in the respon-‐
sibility of any profit-‐oriented company itself to weigh the benefits and risks of ven-‐
tures with foreign companies. With regard to unfair competitive advantage through subsidized companies or SOEs from emerging economies the EU’s regula-‐
tory framework includes exceptions to free movement of capital, which allow it to deal with such problems. For instance, tax differentiation could be used to tax for-‐
eign SOEs higher than private companies. Still, such a general measures would then affect all SOEs even if they do not have an unfair competitive advantage. Again, this could harm the EU’s principle of an open investment regime after all and might even send out misleading signals. Only the potential risk of deteriorating norms and values seems sufficiently addressed in the EU’s regulatory framework. Its strong environmental and labor standards do also apply to all foreign investors, which hold assets in the EU. Hence, the risk of deteriorating norms and values and a resulting race to the bottom is marginal. 23 3. Political Impact According to Hanemann and Rosen (2012) potential political impacts of EFDI are increased political stability, threats to national security, reduced ability of govern-‐
ments to follow sustainable development objectives as well as strengthened politi-‐
cal leverage for emerging countries to influence EU politics. These impacts consti-‐
tute risks and benefits, which create a challenge between the need-‐to-‐attract and need-‐to-‐protect objectives. For this reason the subsequent sections will discuss the different political impacts in turn. This follows an assessment how the EU’s regula-‐
tory framework responded to these political impacts and whether the current framework is sufficient to meet the challenge between need-‐to-‐attract and need-‐
to-‐protect. 3.1 Political Benefits 3.1.1 Political stability According to Mansfield and Pollins (2003), countries with high amounts of mutual FDI are less likely to be in conflict with one another. The reason is that ownership of foreign assets encourages increased engagement, which goes beyond promotion of services and goods. This creates interdependence and can stabilize political rela-‐
tionships. Unlike portfolio investments, FDI, such as factories or retailers, cannot be withdrawn on short notice from the recipient’s economy. As a result, firms that have direct investments in other countries are required to develop a deeper un-‐
derstanding of the respective culture and mentality differences in order to plan ahead. Moreover, political stability reduces risks for firms with direct investments in one country. Thus, countries that have large shares of FDI in one country are generally interested in maintaining political stability in this country. The post WW II history of the EU itself is a fine example of enhanced political stability due to in-‐
creased intra-‐European economic relations (Hanemann & Rosen, 2012). 24 3.1.2 Political feedback loops Countries that have large shares of FDI in other countries might take a more holis-‐
tic and differentiated perspective on the relationship with those countries. This is due to the creation of feedback loops to their own political systems and valid in both ways politically as well as economically. For instance, having large shares of FDI in foreign countries gives governments and enterprises alike reasons to appre-‐
ciate legal security and properly functioning jurisdiction in these countries. Conse-‐
quently, this can enhance awareness about a country’s own political and legal sys-‐
tem. Moreover, large shares of FDI in foreign countries create economic interde-‐
pendencies which provide incentives to cultivate better relationships as well as to work responsible with one another rather than against each other. Increased eco-‐
nomic interdependency also makes countries more vulnerable to certain political instruments such as sanctions. This political pressure could be used to promote bilateral and multilateral cooperation in international issues such as dealing with Iran’s nuclear program or the conflict in Syria (Hanemann & Rosen, 2012). 3.2 Relevant Regulatory Framework of the EU 3.2.1 Actual state With regard to the first research question positive political implications of increas-‐
ing EFDI in the EU are addressed by the same regulations as positive economic implications. This means, Art. 63 TFEU extends the free movement of capital even to third countries, which creates an investment environment in which foreign in-‐
vestors have the same legal rights with regard to capital movement as European investors. Furthermore, the Lisbon Treaty includes FDI in the EU’s Common Com-‐
mercial Policy. With this step the EU is assuring that investors from abroad face the same open investment environment and legal standards throughout the entire EU. 25 This reduces further barriers to free movement of capital and thereby contributes to making the EU an attractive and reliable investment environment. 3.2.2 Degree of sufficiency of the EU’s regulatory framework Positive political implications of EFDI, such as increased political stability and posi-‐
tive feedback loops clearly create an incentive for the EU to attract more EFDI. In this regard it can be argued that the EU’s regulatory framework is sufficient for the same reasons that were mentioned in chapter two of this thesis. With Art. 63 TFEU the EU extends its free movement of capital also to third countries, which makes it the most liberal investment regime in the world. In addition, the proper function-‐
ing of positive feedback loops depends on at least one party with exemplary value standards, which can serve as an example to the other party. In this respect, Eu-‐
rope’s strong labor rights and well-‐defined norms and values, which it develops in cooperation with other OECD countries can serve as a good example. Furthermore, a common investment policy as a result of the Lisbon Treaty provides a uniform quality in investment treaties, which furthermore promote positive feedback loops and political stability. Consequently, it can be argued that the EU’s regulatory framework is sufficiently designed to attract additional EFDI and to support their positive political implications. 3.3 Political Risks Increasing EFDI bring a variety of different political risks, which require different kinds of instruments by the EU’s regulatory framework. The following sections will discuss three different aspects in which increasing EFDI may pose political risks to the EU. First it will discuss the risk of harming national security, second the risk of using EFDI as an financial leverage to influence European policy and third the risk that international trade agreements may reduce governments’ ability to pursue 26 sustainable development objectives. Unlike chapter two this chapter discusses the response in the EU’s regulatory framework directly after each type of risk has been addressed. The reason for this slightly different structure is that the political risks are very different from each other, which requires a separate discussion of the EU’s regulatory framework in each case. 3.3.1 National Security In contrast to portfolio investments, FDI provide the possibility to influence the management of the asset in which money was invested. Consequently, this can pose a threat to national security if foreign companies or governments invest in strategically relevant companies or sectors and use this influence to harm the na-‐
tional economy or society’s wellbeing. More specifically national security is in dan-‐
ger if at least one of the following four areas is affected: (1) Strategically important assets, for instance pipelines or ports; (2) Defense industries and critical resources for defense, for instance semiconductors for military use; (3) Strategic know-‐how and sensitive technologies and (4) destructive action, sabotage and espionage. Such a clear definition of what might pose a threat to national security is essential in order to assess the EU’s regulatory framework with respect to its ability to deal with these threats (Graham & Marchick, 2006). As already discussed in the previous chapter, EU treaties allow exceptions to free movement of capital in case of national security (European Commission, 2013). Still two questions arise, first why FDI particularly from emerging economies can pose a threat to national security in the EU and second, how those EFDI might pose a threat to national security. Thus, the following sections will discuss each question in turn in order to assess the usability of the EU’s regulatory framework after-‐
wards. The question why FDI particularly from emerging economies might pose a threat to national security mostly relates to the type of political regime that prevails in 27 emerging economies such as China and Russia. Hanemann & Rosen (2012) identify 5 different reasons why especially FDI from China might pose a political risk to the EU. First, the enormous size and rapid growth of China’s economy provides it with the financial means but also the political leverage to be able to shape global na-‐
tional security. This is supported by predictions, which conclude that China will become the largest economy most likely within the coming twenty years. Second, China’s government-‐driven and sometimes politically motivated investments cre-‐
ate concerns among European countries. This is especially the case because of its authoritarian one-‐party system as well as its different values and commercial standards in place that are quite different from these of OECD countries. Third, in contrast to other countries with major outflows of FDI, such as the US or Japan, China is no direct or close ally of the EU. With its strong military it is an emerging power that openly aspires to replace the existing power balance by gaining greater influence in international organizations, most likely at the expense of Europe’s in-‐
fluence. Although, China and the EU generally have a good relationship, there are some conflicting issues, such as the stance towards Iran’s and North Korea’s nucle-‐
ar programs. Therefore, it is uncertain what path China will follow in the future. Fourth, China is not only supporter but also proliferator to critical regimes like North Korea, Pakistan and Iran and in addition has a record of not always follow-‐
ing international export rules. Finally, China is often subject to allegations of politi-‐
cal and economic espionage, by Western countries. According to Graham & Mar-‐
chick (2006) as well as Metzl (2011), there are vast amounts of classified and un-‐
classified records of espionage in the West conducted by China. The second question, how EFDI can pose a threat to national security, refers to two different types of investors, namely state-‐owned enterprises (SOEs) and Sovereign Wealth Funds (SWFs). Although they are different types of investors, they still share the common feature that they are both owned and controlled by the state. The following sections will discuss these two types of investors in more depth and explain exactly how they might pose a threat to national security, since responding to SOEs and SWFs require different aspects in the EU`s regulatory framework. 28 State-‐Owned-‐Enterprises The concept of SOEs is not new. What is new is that increasing amounts of SOEs now operate at a global level. According to the Chinese Ministry of Commerce (2011) at least 70% of Chinese FDI in 2010 came from SOEs. This relatively high share makes sense when considering that Chinese SOEs have several advantages over private companies, such as capital support by the state and easier approval for international ventures by Chinese authorities. In contrast, the majority of Eu-‐
ropean FDI comes from companies with at least 80% non-‐government ownership (Hanemann & Rosen, 2012). Apart from economic challenges as described in the previous chapter, increasing FDI by SOE also pose political challenges. A common concern in this regard is that SOEs could be used as political instrument to gain and exert influence in strategic sectors of foreign countries or solely to acquire strategic know-‐how. Thus, the mo-‐
tive for investment might not be commercially but politically driven. Several cases of potentially politically driven FDI in the EU fueled a discussion about national security threats coming from direct investments by SOEs. One such case is illus-‐
trated by currently increasing investments of the Chinese multinational telecom-‐
munication company Huawei in the UK market. According to the British Intelli-‐
gence and Security Committee (2013) the Huawei case revealed flawed security controls. Thus, the following section will briefly outline the case and demonstrate how investments by SOEs may pose a threat to national security. Huawei Huawei is a Chinese telecommunications equipment company that was founded by a former People’s Liberation Army officer in 1987. With an annual turnover of ap-‐
proximately EUR 23 billion and more than 150,000 employees it is the second largest company for telecommunications equipment worldwide. Huawei is a global supplier for many other telecommunication companies. Currently, its UK based 29 labor force counts around 650 employees. In 2012 Huawei unveiled plans to invest £1.2 billion in the UK over the next five year, of which £600 million will be in the form of direct investments. Huawei says that this investment will create 700 addi-‐
tion jobs in the UK (Ruddick & Warnan, 2012). What makes the Huawei case so alarming is the company’s perceived link to the Chinese government. This is worrying, since the British Intelligence and Security Committee noted in its 2012 Annual Report that 20% of all noticed cyber attacks in the UK were so sophisticated that they indicate to be state-‐sponsored. According to the Intelligence and Security Committee (2013) China is one of the most active ac-‐
tors in state-‐sponsored cyber attacks. This makes the close links between Huawei and the Chinese state worrisome, because it is difficult to tell whether Huawei’s actions are purely commercially or also politically oriented. Huawei strongly denies direct links to the Chinese state by saying that its employ-‐
ees own 98.6% of its shares and that it does not receive any financial support by the government. However, according to the British Intelligence and Security Com-‐
mittee Huawei’s financial structures are not clear. Furthermore, it is surprising that Huawei is denying any links to the Chinese government, since according to the British intelligence agency GCHQ (Government Communications Headquarter) some links to the government are considered to be normal in China. “This close relationship between commerce and the state is seen in China as normal and ac-‐
ceptable because success is deemed to be for the benefit of all.” (Intelligence and Security Committee, 2013) In the context of the current economic crisis Huawei’s investment of £1.2 billion was highly appreciated by the government. Huawei used this investment in a me-‐
dia campaign to emphasize their reliability. Nevertheless, this media campaign did not achieve its intended goal, because of the critical perception of other countries, such as the US, against Huawei. In the US the House Permanent Select Committee on Intelligence (HPSCI) published a report (2012) on Huawei’s reliability saying that: “the risks associated with Huawei and ZTE’s provision of equipment to US 30 critical infrastructure could undermine core US national-‐security interests.” On the same ground of reasoning the Australian Government excluded Huawei from any involvement in the Australian National Broadband Network (Lu Yueyang, 2012). It seems that the suspicion, which both Australian and US politicians have against Huawei remains because of the perceived link between the company and the Chi-‐
nese government. Former CIA analyst Chris Johnson expresses this view in an in-‐
terview with CBS 60 minutes (2003): “I think it really boils down to an issue of will the company take some steps to make themselves, you know, more transparent about their operations, and what their ultimate goal is, especially this relationship with the Chinese Government, with the Chinese Communist Party and with the People’s Liberation Army.” The case illustrates the potential threat that may come from FDI by SOEs. Still a lack of a properly functioning independent legal system, low corporate governance standards as well as government involvement can all harm an efficient market and can be found in some cases of emerging economies. This can lead to a situation in which governments not only have influence over SOEs, but also private firms. Thus, an overall claim about the sufficiency of European merger control emerged (Hanemann & Rosen, 2012). SWF The same type of risk may also come from another type of investor, namely Sover-‐
eign Wealth Funds (SWFs). These are state-‐owned investment funds, which derive their money from a country’s reserves such as trade surpluses from oil or gas. The first SWFs date back to 1953, however since the 2000s their numbers have been growing rapidly. This rapid growth has been attracting close attention for several reasons. Some countries fear that SWFs can be used as political instrument, which may pose a threat to foreign countries’ national security. SWF owning states could use these to invest and gain influence in strategically important sectors of other 31 countries. Especially their lack of transparency is a great concern (European Com-‐
mission, 2008). So far, China Investment Corporation (CIC), which is China’s pri-‐
mary SWF has only made two investments, which can be classified as FDI. One was in 2011 when CIC invested $3.2 billion in the French electric utility company GDF Suez S.A.. The other direct investment took place in 2009 when CIC invested $340 million in the British Songbird Estate PLC, the owner of London’s major business district Canary Wharf. Although, there have not been many investments by Chinese SWFs in the EU, the potential risk that increasing EFDI might bring poses a chal-‐
lenge to the EU’s regulatory system (Thatcher, 2012). The following section will address the question how the EU’s regulatory framework responded to these chal-‐
lenges. 3.3.2 Relevant Regulatory Framework of the EU 3.3.2.1 Actual state So far it remains controversial how Europe should deal with increasing invest-‐
ments by SOEs. In December 2010, Antonio Tajani, European Commissioner for Enterprise and Industry, stressed his concern about the rapidly growing influence of China in some strategic industries in the European market. He suggested that the EU should establish an institutional body, similar to the CFIUS (Committee on Foreign Investment in the United States), which would control all acquisitions of foreign companies with regard to potential threats to national security and the European economy (Fountoukakos & Puech-‐Baron, 2012). Together with Michel Barnier, the European Commissioner for Internal Market and Services, Antonio Tajani send a letter to the President of the European Commis-‐
sion, José Manuel Barroso, arguing that national review committees as used by some European countries should be replaced by a European version: "It is notably legitimate for the Commission, as guardian of the treaty and general public welfare in Europe, to ask itself if the fragmentation of [review boards] might hamper the 32 single market and the competitiveness of our industries." They make clear that they are not in favor of protectionism and that the EU’s open investment regime is a good thing, "but this openness cannot be naive and must belong, we believe, on a 'level playing field', with a principle of reciprocity." (Miller, 2011) So far the Euro-‐
pean Commission appears to be still analyzing the case as no information over a response to this letter is available. Another debate concerns the option to use existing merger regulations to deal spe-‐
cifically with investments, which are carried out by SOEs from non-‐European coun-‐
tries. However, the European Competition Commissioner Joaquín Almunia stressed in his speech during the Competition Law Forum in 2011 that the European Com-‐
mission will not regard political aspects and sensitivities in its decisions over mer-‐
ger cases. The Commission will also make no distinction between public or private companies. Instead, it will continue to base its decisions on market reality and competition analysis only: „in the cases that we have examined, we have used the same criteria we adopt to assess mergers involving companies controlled by the Member States. […] I remain firmly convinced that EU merger control must remain anchored to its own rules and purposes at all times, irrespective of the nationality of the companies concerned”. Current EU merger regulation gives member countries the possibility to intervene in or prevent mergers in order to protect appropriate interests, which are restrict-‐
ed to public security, prudential rules and plurality of the media. Other public in-‐
terests apart from these must be submitted by a member state and approved by the European Commission. But unlike the United States and as discussed above the EU does not have a separate institution such as CFIUS, which reviews foreign in-‐
vestments with regard to their implication on national security (Baker and McKen-‐
zie, 2011). In 1990, when the original EU merger regulation came into effect it stressed that no distinction should be made between private and public sectors, when applying merger regulation rules. This principle is still existent in the current version as 33 follows: “The arrangements to be introduced for the control of concentrations should, without prejudice to Article 86(2) of the Treaty, respect the principle of non-‐discrimination between the public and private sectors”. These rules were mainly applied to European SOEs. The EU adopted a ‘wait and see’ approach, which leaves many things open to be decided later. Nevertheless, SOEs bring particulari-‐
ties with them, which require additional consideration in comparison to private companies. Such considerations include dealing with questions such as: 1. How should merger regulations regard the role of a state, either as a person or an undertaking? And, therefore do investments by state owned compa-‐
nies fall in the jurisdiction of the merger regulation? 2. Should two companies owned by the same state be considered as a concen-‐
tration in the market, due to a change of control? 3. How much does the state exert control over the SOEs and how should this be accounted for? 4. Which other SOEs of the same state should be taken into account when as-‐
sessing market concentration? The same questions have always been considered as well when assessing invest-‐
ments by European SOEs. However according to Fountoukakos and Puech-‐Baron (2012) finding accurate answers to these questions turn out to be quite difficult in some cases of SOEs from emerging economies like China. As a result the EU Com-‐
mission adopted a ‘wait and see’ approach and left some questions open to be an-‐
swered. This unclear approach may pose a threat to national security, since it may underestimate the risk of investments by such SOEs. To address the widespread concern that SWFs might be driven by politically driv-‐
en objectives instead of commercially driven motives the EU demands more clarity and understanding over SWFs’ motives and their structures. This means having clear information about their size, their governance structure, their financial re-‐
sources as well as their investment strategies and objectives. In this sense the Eu-‐
ropean Commission released a Communication on SWF and financial stability in 34 2008. In this Communication it endorsed a uniform approach by the EU for im-‐
proved accountability, predictability and transparency of SWFs. The purpose of this is to establish international standards as well as a code of conduct in these areas. With regard to financial stability, the European Commission requested the European Council to approve principles for improved transparency of financial markets as well as setting out guidelines of action. Alluding to the Commission’s Communication on SWFs José Manuel Barroso, the Commission’s President, said: “Europe must remain open to inward investments. Sovereign wealth funds are not a big bad wolf at the door. They have injected liquidity and helped stabilize financial markets. They can offer reliable long-‐term investments our companies need. To ensure this, we need global agreement on a voluntary code of conduct – it is to this end that we make a contribution today. It must avoid some funds being run in an opaque manner or used for non-‐economic objectives. The EU should take a common approach, without different responses from Member States that could fragment the single market. I have already made clear that we may propose European legislation if we cannot achieve results by voluntary means. On international financial markets in general, we are asking EU leaders to confirm loud and clear that Europe will take an effective common approach to tackling the weaknesses exposed by the recent turmoil.” Thus, the European Commission states its concern that uncoordinated responses by member countries towards increasing SWFs’ investments could lead to frag-‐
mentation of the ‘internal market’. Furthermore, the Commission expressed that this would undermine the main objective of Europe’s trade policy, which is offering an open market also to third country investors. This goal would be difficult to con-‐
vey if the EU appears to have internal barriers. Since SWFs is a global topic its proper treatment requires a multilateral approach at international level. For this purpose the EU attempts to be a driving force in cooperation with international organizations, such as the OECD and the IMF. The OECD formulated best practices for host countries of SWF investments, whereas the IMF created behavior guide-‐
lines for SWFs. As a result the Commission’s Communication formulated five gen-‐
35 eral principles as code of conduct for both SWFs and the investment’s host coun-‐
tries. 1. “Commitment to an open investment environment both in the EU and else-‐
where, including in third countries that operate SWFs 2. Support of multilateral work, in international organizations such as the IMF and OECD 3. Use of existing instruments at EU and Member State level 4. Respect of EC Treaty obligations and international commitments, for exam-‐
ple in the WTO framework 5. Proportionality and transparency.” (Europa Press releases RAPID, 2008) Since the European Commission tries to follow a unified approach that aims at making the European market more attractive for investments from third countries it has refrained from restrictions towards SWFs so far. The European Commission has considered regulation as a concern of economic governance. Thereby, the EU promotes free capital flow and responds to concerns by referring to the need for good governance of SWFs. According to Thatcher (2012) this can be assessed by the extent of political influence in the decisions, by the quality of separating re-‐
sponsibilities, by the extent of transparency and the availability of operational au-‐
tonomy. In addition to the five principles of the Commission’s Communication, the “Interna-‐
tional Working Group of Sovereign Wealth Funds” released the so-‐called Santiago Principles in 2008. The process was coordinated and facilitated by the IMF. The Santiago Principles are 24 voluntary principles that constitute best practices for operations of SWFs. These are underpinned on four general objectives for SWFs: 1. “To help maintain a stable global financial system and free flow of capital and investment 2. To comply with all applicable regulatory and disclosure requirements in the countries in which they invest 36 3. To invest on the basis of economic and financial risk and return-‐related considerations 4. To have in place a transparent and sound governance structure that pro-‐
vides for adequate operational controls, risk management, and accountabil-‐
ity.” By now 26 countries have officially agreed to these guidelines. From member countries it is expected to support these and implement these principles, although they are voluntary (IWG, 2008). 3.3.2.2 Degree of sufficiency of the EU’s regulatory framework With regard to national security and the second research question the EU’s regula-‐
tory framework already has the sufficient means, provided by Art. 65(1b) and Art. 52(1) TFEU, to protect itself from capital movements in case of national security or public interest. Nevertheless, it can be argued that the review process of FDI with regard national security is flawed. Although, EU merger regulations give clear in-‐
struments to deal with potentially harmful FDI, there is still no consensus about how to assess direct investments done by SOEs. For instance, a review process may come to a different result depending on whether several SOEs from one country are accounted as single entities or one common business entity. Furthermore, re-‐
viewing FDI is currently undertaken in most cases by national governments, even when FDI in one country may pose a potential danger to several EU countries or even the entire EU. Thus, this underlines the need also for a European version of a reviewing committee on foreign investments, such as the American CFIUS. Such a review committee at EU level only seems reasonable given that investment policy has been made an exclusive EU competence by the Lisbon Treaty. The EU’s approach towards increasing SWFs seems appropriate. Considering that Art. 65(1b) and Art. 52(1) TFEU and EU merger regulation allow restrictions to free movement of capital in case of national security, there is no need to formulate 37 further regulations with regard to SWFs. Still the potential danger originating from investments by SWFs should be addressed somehow. Formulating a general code of conduct and thereby addressing the issue of good governance of SWFs seems like a perfect compromise between confronting the issue of politically motivated investments by SWFs and preventing misleading signals by maintaining an open investment regime. 3.3.3 Policy Influence Foreign governments could use increasing EFDI as well as stronger economic in-‐
terdependency as leverage to influence EU politics. For instance, in 2011 China offered Europe financial support to fight the ongoing Euro crisis in exchange for the official recognition of China’s status as a market economy. For Europe this meant that it would renounce its major legal basis to defend its economy against Chinese dumping prices. The reason for this is that after classifying China as a market economy Europe would not have the same legal rights to impose trade tar-‐
iffs on Chinese exports, which are offered at unfair dumping prices. Linking further investments in the EU to specific conditions with regard to Europe’s trade policies shows that China is willing to use financial measures as an instrument to influence European politics. With currently $3.4 trillion in foreign reserves (Rabinovitch, 2013) China has the capacity to significantly impact the European economy, which it may use as strong leverage. However, when making the offer, Mr. Wen Jiabao was not specific about the type and extent of financial support. He did not clarify whether China would raise its monthly lending to Europe or whether it would con-‐
sider buying European government bonds or even acquiring more European busi-‐
nesses. Mr. Wen Jiabao merely said: “We have been concerned about the difficulties faced by the European economy for a long time, and we have repeated our willing-‐
ness to extend a helping hand and increase our investment.” (Bradsher, 2011) 38 This is not the only example of China’s attempt to influence foreign politics by us-‐
ing financial means. According to Bradsher (2011) China already used economic leverage in attempts to influence European positions in international issues such as the recognition of Taiwan as part of the People’s Republic of China, the protests in 1989 on Tiananmen Square as well as official relationships with Dalai Lama. In 2007 China bought $300 million of Costa Rica’s sovereign debt also in return for the official recognition of Taiwan as part of the People’s Republic of China (Bowley, 2008). According to Hufbauer et al. (2007) even some OECD countries already tried to use FDI as an instrument to influence politics of specific target countries, however with minor success. In contrast to this argument Hanemann & Rosen (2012) suggest that Chinese firms are less subject to political influence then often assumed. As already mentioned, direct investments cannot be withdrawn on short notice, since they usually are long-‐term investments that require extensive planning and that have significant impact on the economic future of the investing company. This means that even SOEs only follow political guidelines as long as they are economically reasonable. At the moment FDI from any emerging economy are too small to be used as politi-‐
cal leverage in Europe. With increasing EFDI this can change and the examples above make clear that the willingness exists to use financial incentives for political reasons. 3.3.4 Relevant Regulatory Framework of the EU 3.3.4.1 Actual state It is difficult to define an instrument, which deals specifically with foreign influence in EU politics. This is especially the case, because foreign relations are to a large extent a diplomatic matter of national governments. At times when the EU member countries attempt to act uniformly and speak with one voice foreign relations mat-‐
ters can be coordinated by the High Representative of the Union for Foreign Affairs 39 and Security Policy. For defining the general priorities and directions in EU politics the European Council is responsible. The European Commission is the executive body, which is in charge of implementing decisions and proposing legislation to the European Parliament and the Council of the European Union. Thus, no clear regula-‐
tion of instrument can be named, which might deal with threats of foreign influ-‐
ence in EU politics. Instead, claims that agreements, which are linked to certain conditions are considered as foreign influence in EU politics is a matter of defini-‐
tion. Thus, this requires an objective assessment of all foreign relations by the above-‐mentioned EU bodies with respect to the potential of foreign influence in EU politics. 3.3.4.2 Degree of sufficiency of the EU’s regulatory framework As described above the EU does not possess sufficient regulatory instruments, which allow to deal with the potential risk of foreign governments using FDI as leverage to influence EU politics. However, it is questionable whether any regula-‐
tory instruments could sufficiently meet this challenge. First, the fact that foreign governments are willing to use financial means as leverage to influence foreign politics is a diplomatic issue. It is a matter of definition where negative foreign in-‐
fluence starts and where common foreign policy agreements begin. This would rather require an objective assessment of each individual case than fixed regula-‐
tions or EU institutions. Second, the fact that foreign governments might be able to use FDI as an effective political leverage depends also on the ratio of FDI stock from this country to the host country’s GDP. Reducing the effectiveness by intro-‐
ducing a threshold to FDI stocks from country could be one option. However, such a measure would more likely harm the EU’s principle of an open investment re-‐
gime. 40 3.3.5 Sustainable Development The impediment of sustainable development policies by international investment treaties is another aspect of increasing EFDI, which may pose a political risk to the EU. Hence, this raises the question whether the EU’s regulatory framework is suffi-‐
cient to meet this new type of challenge. Most of Europe’s outflowing and inflowing FDI are protected by BITs. These trea-‐
ties define terms and conditions for investments between foreign investors and the host countries. Moreover, investment treaties provide investors with rights, which protect them against expropriation and other arbitrary undertakings by the gov-‐
ernment of the host country. In case of infringement, the investor can sue the gov-‐
ernment directly before the ICSID, without the need to address national courts first. This serves the purpose to create a reliable institutional environment, which promotes investment flows between the two countries. On May 23, 2013 the European Commission asked its member states to agree on a mandate for open negotiations about an investment treaty with China. Such an agreement would streamline the currently existing BITs between 26 EU member countries and China into one common agreement. This would be the first stand-‐
alone investment treaty at EU level since the Lisbon Treaty made foreign direct investments an EU competence. Referring to this step Karel De Gucht the EU Trade Commissioner said: “An EU-‐China investment agreement will help deepen our ties and sends the signal that we are firmly committed to building a strong partnership.” […] “The agreement needs to secure existing openness and deliver new liberalization of the conditions for accessing each other’s investment market. Crucially, it should also improve the treatment of investors and their assets – including key tech-‐
nologies and intellectual property rights. I look forward to working with the new Chinese government to reach a deal.” (European Commission, 2013) 41 In contrast to these positive expectations Hallward-‐Driemeier (2003) examines the negative sides of BITs by saying: They “demonstrate that the rights given to foreign investors not only exceed those enjoyed by domestic investors, but expose policy makers to potentially large scale liabilities and curtail the feasibility of different reform options.” More specifically, BITs mainly provide investor protection, often without defining investor obligations. Normally, they do not include standards to protect labor rights, social provision or the environment. Consequently, these aspects are usual-‐
ly also not regarded in decisions by arbitration tribunals. So far, over 300 different cases of arbitrations were started. The majority of them were filed against devel-‐
oping countries and disputed over public services such as water, waste manage-‐
ment, electricity or natural resources (ICSID, 2013). As a result these legal disputes make it more difficult for states to fulfill their obligation to promote environmental objectives and social well-‐being. The cost for these arbitrations will be burdened by taxpayers and can drain budgets for other important areas such as education or health care. In addition, the apprehension of potential legal disputes can make governments more reluctant to pursue such sustainable development objectives. So far the EU has rarely been accused in such investment dispute arbitrations. However, with increasing EFDI into the EU this situation might change. As a result measures, which are used by the EU to fight economic crises or to pursue devel-‐
opment and environment goals may become subject to litigations for investment disputes. The current legal dispute between the Swedish energy company Vatten-‐
fall and the German government illustrates this concern. Vattenfall vs. Germany In 2009 the Swedish electricity company Vattenfall sued the German government before the ICSID, because of alleged German infringements of the Energy Charter Treaty – a multilateral treaty to manage investments in the energy industry. Vat-‐
tenfall claimed a financial reimbursement of €1.4 billion from the German state for 42 the introduction of environmental regulations, which limited the discharge and use of cooling water for the power plant, which Vattenfall was building at the Elbe riv-‐
er. The company argued that the new regulations came into effect despite contrary commitments by authorities from the city of Hamburg, which would affect the power plant’s profitability. Conversely, the public authorities responded that the new regulations on water quality were imposed by the EU and affected all compa-‐
nies along German rivers. Both contesting parties reached a settlement in August 2010, however no detailed agreement has been made public (Knottnerus, 2010). Although this case does not relate directly to investments made by companies from emerging economies, it still illustrates the potential negative effect that BIT sup-‐
ported FDI might have on governments’ ability to pursue environmental aspects. Similar scenarios could become more likely as more EFDI come into the EU. 3.3.6 Relevant Regulatory Framework of the EU 3.3.6.1 Actual state The particularity in this case is that the regulatory framework itself is the problem. With the Lisbon Treaty the EU created a window of opportunity to address the problem of inadequate investment agreements and adapt its regulatory framework accordingly. By expanding its competence to FDI, it set the legal basis to define and conclude IIAs at European level, where in the past these were concluded at nation-‐
al level. Thereby the main purpose of the EU’s new investment policy focuses on two aspects, increasing market access and promoting transparency as well as legal certainty. In order to do this the EU examines different national treaties to define uniform provisions throughout the EU, which shall provide best practice and in-‐
vestor protection in future EU IIAs. So far there is no version of an EU model BIT as well as no clear guideline of what will be included in any EU BIT concerning inves-‐
tor protection. Still, current negotiations with Canada suggest that future EU BITs will be shaped by the content of current BITs of EU member states. The problem is 43 that with respect to investor protection standards current IIAs of EU member states provide relatively little detail compared to more developed IIAs from other countries. In its attempt to define new European investment agreements the EU tries to be coherent to other objectives, especially with respect to sustainable de-‐
velopment. So far Belgium and Luxembourg are the only member states, which included provisions with respect to sustainable development in its BITs. According to Art. 11 TFEU the EU is required to include environmental protection in its poli-‐
cies and activities. The question is how this will be implemented and whether it will find its way in future EU BITs. The outcome also depends on the opinion of EU member countries. If these demand more discretion in environmental issues than corresponding EU provisions could be rather vague, which might lead to a situa-‐
tion in which countries with strong environmental rights might follow EU envi-‐
ronmental provisions quite closely, whereas countries with low environmental regulations might follow EU environmental provisions not at all (Woolcock, 2010). Although, only two EU countries included provisions for sustainable development in their BITs, many more countries have agreed that newly defined BITs should support sustainable development. However, there is no consensus over a clear def-‐
inition of ‘sustainable development’ and how this could be achieved. Consequently, to achieve the aim of balancing public and investor interests more effectively the EU tries to make the process of defining EU investment agreements very transpar-‐
ent and accountable, by including all important stakeholders in the process (Woolcock, 2010). Still, there are few complications with regard to the effectiveness of EU investment agreements. First, EU coordinated investment policy will not be able to bring sig-‐
nificant changes in the short run. The reason is that most EU member countries still have effective BITs in place, which did not expire yet. Some of those BITs will even remain effective for up to 20 years from now. A second complication is the challenge to establish compatibility between an EU BIT version and the currently existing national BITs. Consequently, this might even result in legal uncertainty, 44 which can in turn also have negative consequences on existing BITs’ effectiveness (Woolcock, 2010). On January 9th, 2013 a new EU regulation (EU) No 1219/2012 for “establishing transitional arrangements for bilateral investment agreements between Member states and third countries” came into affect to deal with these above-‐mentioned issues. This regulation defines how existing BITs between EU member states and third countries will be enforced under the new investment policy of the EU. Fur-‐
thermore, it defines how future BITs between the EU and third countries will be negotiated. This new EU regulation represents a major development in Europe’s investment policy, since it reinforces the legitimacy of still existing BITs until these will be replaced by new EU BITs. With this regulation the EU demonstrates that it attaches great importance to preserving existing investor protection as previously negotiated (Freshfields Bruckhaus Deringer, 2013). According to this new regulation the existing BITs between EU member states and third countries will be handled as follows. BITs that were signed before December 2009 will continue to be active until these are substituted by new agreements be-‐
tween the EU and the respective third countries. BITs, which were signed after November 2009 will be reviewed by the EU Com-‐
mission to check their accordance to European law. Although EU member coun-‐
tries cannot be directly forced by the EU Commission to renegotiate or end any existing BIT, which they might have, they do have to consult with the EU Commis-‐
sion in case at least one provision in the existing BIT could impair future negotia-‐
tions of investment agreements between the EU and the relevant third country. The outcome of this consultation with the EU Commission will decide whether the respective EU member state will have to end or renegotiate its BITs. After all, the regulation does not regard any ‘survival clauses’, which are included in most liber-‐
al BITs. These survival clauses usually assure investor protection even 10 to 15 years after the BIT has been ended. Thus, such sunset clauses would also affect BITs, which had to be ended or renegotiated at the request of the EU Commission. 45 According to the new regulation future BITs between the EU and third countries will be handled as follows. EU member countries still have the option to initiate negotiations over investment agreements with third countries as long as these do not have concluded any BIT with the EU yet. These negotiations need still to be supervised and authorized by the EU Commission, which can call for specific pro-‐
visions to make the agreement compliant with European law (Freshfields Bruck-‐
haus Deringer, 2013). 3.3.6.2 Degree of sufficiency of the EU’s regulatory framework At this moment the EU’s regulatory framework is not sufficiently equipped to pro-‐
tect the EU from the potential risk that IIAs with emerging countries might reduce the ability of European governments to pursue environmental and social objec-‐
tives. Nevertheless, the question of sufficiency is difficult to assess, since the reformation of the EU’s regulatory framework in this regard is still under way. Def-‐
initely the extension of the EU’s competences in its Common Commercial Policy created a window of opportunity, which allows it to address the problem of imbal-‐
ance between private and public interests in current IIAs. However, the question whether this transformation in the EU’s regulatory framework will turn out suffi-‐
ciently depends how well the EU deals with certain difficulties that come together with the implementation of effective environmental and social provisions in its future IIAs. First, the applicability of any new EU provision largely depends on cur-‐
rently existing BITs, which had been signed before December 2009. Some of these BITs will remain effective for nearly 20 years, which reduces the effectiveness of EU provisions in these countries. Hence, success of European provisions is not ex-‐
pected to take place in the short run. A second aspect deals with the question how effectively future IIAs will address the issue of sustainability. In this regard the ef-‐
fectiveness strongly depends on the definition of sustainability. A concise defini-‐
tion strongly contributes also to legal clarity in its IIAs. In turn, an increased legal clarity promotes a reliable investment environment, which supports the EU’s need-‐
46 to-‐attract. However, it can be expected that it might be difficult to find consensus over a clear definition among EU member countries. For instance, countries with already strong sustainability regulations in place might also call for stronger sus-‐
tainability provisions in future IIAs, compared to countries, which have weaker sustainability regulations in place. The same holds true for how narrowly or vague such an EU provision will be defined. Although, the implementation of new IIAs by the EU cannot be assessed yet, it can already be argued that the Lisbon Treaty is a good first attempt, which contains the potential to promote global standards with respect to sustainability. 47 5. Conclusion The flow of FDI from emerging economies has increased substantially during re-‐
cent years. This development renders the consideration of the consequences thereof a highly important subject in the economic and political discussion. The findings of this thesis in response to the research questions contribute to this dis-‐
cussion by investigating the questions how the EU’s regulatory framework has re-‐
sponded to changing EFDI flows and whether the regulatory framework is suffi-‐
cient to deal with these changes. The study reveals different economic and political implications of increasing EFDI in the EU, which show that the challenge for Europe consists in the combination and reconciliation of two goals: On the one hand there is a need for attracting in-‐
creasing EFDI in order to promote the economic and political benefits, on the other hand it is necessary to protect the EU from potential negative effects of increasing EFDI. The EU draws substantial benefits from EFDI that provide good reasons for attract-‐
ing additional FDI from emerging markets. The main findings on micro-‐ and mac-‐
ro-‐economic benefits include: Enhanced consumer welfare through lower prices and greater product variety. The employment rate may go up as a result of increas-‐
ing greenfield investments. Spillover effects may cause improved productivity and innovation capabilities among domestic companies. Increasing capital as well as higher asset prices through increased competition may be a welcome injection for the European economy in times of austerity due to the Euro crisis. Moreover, the EU’s open investment regime may encourage emerging economies to open their markets as well, which in turn improves business chances for European investors. Finally, increasing EFDI might help promoting European norms and business stand-‐
ards in these economies. Also this effect will facilitate the market entry of Europe-‐
an companies. Both effects may also lead to more employment in Europe. After all, this might contribute to overcoming the current Euro crisis and reaching economic long-‐term objectives as defined in the Europe 2020 strategy. 48 With Art. 63 TFEU the EU’s regulatory framework extends the legal right for free movement of capital also to third countries, which renders the EU the most liberal investment regime in the world. Moreover, by making investment policy an exclu-‐
sive EU competence the Lisbon Treaty attempts to reduce even further barriers in the European market. Hence, with regard to both research questions the EU’s regu-‐
latory framework is sufficiently designed to attract increasing EFDI and thereby promote the above-‐mentioned economic benefits. At the same time, increasing EFDI might also have negative economic implications such as macroeconomic dependency, headquarter effects, unfair competitive ad-‐
vantage as well as deteriorating norms and values. Macroeconomic dependency may occur when the amount of EFDI is so large that changes in the foreign economy can also have a significant effect on the European economy. While this is relatively un-‐
likely for EU as a whole, given its economic size, it could rather affect smaller econ-‐
omies inside the EU. Headquarter effects, which may occur when direct invest-‐
ments are carried out to acquire foreign assets only to transfer these back to their home countries could develop easier into a threat. The exploitation of know-‐how may not only threaten single European companies but eventually the entire do-‐
mestic industrial sector, if its lead is based on such know-‐how. Unfair competitive advantage might occur when subsidized firms from emerging economies drive non-‐subsidized domestic firms out of the market. Consequently, this can have a negative impact on the European employment rate. Deteriorating norms and values could be the result of FDI from emerging markets bringing lower labor standards and business ethics to Europe, which might lead to a process of downward conver-‐
gence. Although, the overall risk of these negative implications is relatively small at the moment they might become more significant in the future due to the enormous size and rapid growth of current emerging economies. Hence, this potentially threatening outlook requires the EU to prepare and protect itself accordingly. Unlike for the economic benefits, the EU’s regulatory framework seems less well designed to protect it from the above-‐mentioned potential economic risks. Macro-‐
economic dependency is an indirect effect, which is difficult to address, unless the 49 EU restricted the stock of EFDI from one country to minimize the dependency. Since this would counteract the EU’s objective to attract increasing EFDI it is un-‐
likely that such measures will be introduced. With regard to headquarter effects this thesis argues that it should not be a responsibility of the EU but rather of com-‐
panies, which undertake the ventures with foreign companies to deal with this is-‐
sue. The EU could address the problem of unfair competitive advantages of SOEs by using regulatory instruments such as tax differentiation to tax SOEs higher than private companies. However, this is unlikely since such a measure would also af-‐
fect SOEs, which do not have any unfair competitive advantage and thereby conflict with the EU’s principle of an open investment regime. Deteriorating norms and values seem to be the only economic risk, which is sufficiently addressed by the EU’s strong labor and environmental standards. Increased political stability as well as positive feedback loops stand out as main findings for political implications. Increased political stability results from the ef-‐
fect that high amounts of mutual FDI reduce the likelihood for countries to be in conflict with one another. Positive feedback loops may appear when increasing FDI from one country increase that country’s interest in a reliable and positive invest-‐
ment environment of the host country. Both effects create a need to attract EFDI, which is sufficiently met by the same regulatory measures as discussed for positive economic implications. In contrast, increasing EFDI can also lead to the following negative political impli-‐
cations. National security might be threatened when state-‐owned or controlled companies make politically motivated investments in strategically important Eu-‐
ropean sectors such as ICT, electricity or military. Another potential threat is that governments of emerging countries could use direct investments as a leverage to influence EU politics, as it has been shown by recent examples with China. Finally, rising EFDI could increase the likelihood that IIAs with these countries could re-‐
duce the ability of European governments to pursue own sustainable development objectives. 50 The EU’s regulatory framework seems sufficient with regard to national security. Art. 65(1b) and Art. 52(1) TFEU allow it to restrict free movement of capital in case of national security or public interests. This includes all investments regardless from what type of investor. Only the review process and assessment of FDI shows room for improvement. For instance, it is not clear how investments by SOEs should be assessed. Furthermore, this thesis argues that EFDI in one country may pose a risk to several European countries. Thus, this creates a need for a European review committee, instead of current national review committees. With regard to the risk of foreign influence in EU politics, this thesis argues that using financial means as leverage is a matter of foreign policy and diplomacy, which – apart from other instruments of foreign policy -‐could only be addressed by reducing the effec-‐
tiveness of the leverage effect. However, this would come at the expense of an open investment regime. The imbalance between investor and public interests with re-‐
gard to sustainability in current IIAs is not sufficiently addressed at the moment. With the Lisbon Treaty the EU created a window of opportunity to address this issue in future IIAs. Since no EU BIT has been concluded yet there is also no evi-‐
dence whether the EU has used this window of opportunity yet. Nevertheless, many European countries already agreed that newly defined BITs should include more support for sustainable development. Therefore it is likely that the EU will account for a more equal balance between investor and public interests in the for-‐
mulation of future investment agreements. Generally speaking, the EU’s regulatory framework is very well suited to attract more FDI from emerging economies and thereby to promote the discussed eco-‐
nomic and political benefits. After all it has the most liberal investment regime in the world and shows great endeavor to maintain and signal its open investment environment. In contrast, all discussed economic and political risks, with exception to national security, are not sufficiently addressed by the EU’s current regulatory framework. This raises the question why no appropriate response had been devel-‐
oped so far. Certainly, the main reason for this may lay in the EU’s democratic sys-‐
tem. A side effect of pluralistic systems is that consensus among stakeholders is 51 often difficult to come by. This holds especially true in a heterogeneous environ-‐
ment as the EU and for controversial issues as the one over an appropriate re-‐
sponse to increasing EFDI. The current situation suggests that for some EU coun-‐
tries the fear of reciprocity and sending out misleading signals is stronger than the fear of potential negative implications of increasing EFDI. Due to this difficulty to find consensus it can be argued that pluralistic systems make drastic change less likely and thereby create a predictable environment. Such predictability in turn is preferred by most investors. Hence, the EU’s democratic system and reliable rule of law create a situation that promotes the objective of attracting increasing EFDI quite well. Compared to this the instruments supporting the objective of protecting the EU from potential harmful effects of EFDI appear less sufficient. Thus, the ad-‐
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policies 58

EU Investment Policy in the Face of Increasing FDI

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