Over the past few decades, developed countries have strived to put in place a multilateral investment agreement to prevent countries from controlling transnational corporations’ investment activities with special regard to portfolio investors. The first notable attempt towards attaining this was the proposal to put in place a Multilateral Investment Agreement. This initiative however failed and was shelved for some time. It has since come up in the category of “Singapore issues” in WTO meetings.
This agreement was supposed to provide a fertile ground for negotiating multilateral trade agreements in the WTO meeting that was supposed to take place in Cancun Mexico in 2003. Developed countries have always stressed on the benefits of trade policies and other policies that encourage foreign investors. From this perspective, they try to push developing countries to sign free trade and liberal investment agreements so that they can also develop.
This essay will outline the purpose of foreign investment regulations by listing and discussing a number of foreign investment regulations. The essay will also discuss issues that should concern management when they are screening potential markets and sites. Moreover, the steps involved in the screening process will be listed and discussed.
What is the purpose of foreign investment regulations?
Investment regulations are meant to promote local productivity and technological development by minimizing unfair competition that is posed by foreign investors in areas that are served by locally owned businesses. This strategy encourages the participation of local companies and helps protect critical or sensitive areas.
Two issues that concern management when screening potential markets and sites
The management of a business enterprise, while screening potential markets and sites they can invest in, should generally try to keep the cost of searching at its level low. They should also critically examine every potential market and location.
List and discuss foreign investment regulations
In the United States, any national is welcome to invest in both direct and portfolio investments. There are no restrictions to foreign investors as witnessed in many other countries.
Non-citizens are free to establish a US subsidiary or branch without much control from the federal, local government or state authorities. However, there are some restrictions in circumstances when a foreign investment intends to enter sensitive areas and highly regulated businesses. Foreign investors, just like the US citizens, enjoy financial flexibility. One is not required to seek for formal approval from financial authorities for them to do business in the United States. Moreover, foreign exchange controls are nonexistent.
The foreign investors are free to make their own arrangements as pertaining to financing their business enterprise. One must not register the investment of foreign equity capital or loans. The United States tax authorities can scrutinize interest and royalty rates charged to the company despite the fact that these can be freely established. Business enterprises owned by foreigners in the United States can freely remit profits accrued abroad.
The owners of the enterprise can also freely repatriate their equity or debt capital investment. The United States government is entitled to withhold tax of 30% on dividends, interests, royalties, and service fee that can be freely repatriated abroad. These businesses are only taxed where applicable. A general system for licensing foreign investments does not exist.
Foreign investments with relevant qualifications are free to apply for incentives from federal, state, and local authorities. The incentive programs, at federal level, are meant to promote export of United States manufactured goods.
Such programs are sustained by U.S. Export-Import Bank, Overseas Private Investment Corporation and Agency for International Development. No special federal tax incentives designed to encourage foreign investments exist. However, existing federal tax laws are quite alluring to non-US based individuals especially under circumstances where a tax treaty is involved.
In order to improve the local business environment, state and local government authorities have undertaken to encourage foreign investment by offering incentives. This has been beneficial because through such investments, the authorities manage to increase jobs, create a larger tax base, and reduce social welfare costs. The incentives include offering of direct loan services, tax relief and grants (Goldman, 2006).
There are ownership limits in sensitive and highly regulated sectors like the aviation, banking, communication and broadcasting, defense, insurance, maritime, mineral leases and resources, power generation and utility services, and real estate.
The federal law expressly limits the percentage of foreign ownership in such sectors. Some of these restrictions can be avoided by putting in place a U.S subsidiary. However, in the restricted sectors, the government scrutinizes the nationality of the owners to determine if a United States subsidiary can be established.
Domestic air transport carriers have to be U.S registered. The owners of the aircrafts have to be American citizens or permanent residents and the stocks have to wholly owned by U.S citizens. Foreign corporations that are lawfully recognized are free to register their aircrafts so long as the plane is used in America. For cases or mergers and acquisitions, the approval of Department of Transportation has to be sought.
This implies that the thresh-hold of U.S citizens must just be met. In the banking sector, the input of federal and state government is very significant. Foreign banks must sign certain legal forms and must have a government charter or a license. Before obtaining a government charter, a foreign bank must receive approval from Federal Reserve Board. When a bank is affiliated to a foreign bank, the Comptroller can waive the requirement that all directors be US nationals.
Foreign banks undergo rigorous regulation and supervision. To operate a radio or a television business in U.S., one must acquire a license from the Federal Communication Commission. The Federal Communications Act of 1934 does not allow any foreign government or its agents to be granted licenses. This act also applies to U.S corporations whose capital stock is controlled by 20% of foreigners.
However, the Telecommunications Act of 1996 allows foreign enterprise licenses regardless of the nationality of its owners. The State Public Service Commission is charged with regulating telecommunication mergers, acquisitions, and financing transactions in communicates that involve more than one state. The Public Service Commission handles certification procedures for foreign investors.
Foreign investors have to submit report to them. Companies under excessive foreign control normally placed under close scrutiny, especially when sensitive information is involved. State authorities heavily regulate insurance companies. Such companies must extensively disclose their operations.
For them to operate, they have to seek approval from the State Insurance Commissioner. Some states insist that the insurance companies that want to operate in their localities have to be predominantly owned by US citizens or those under permanent residency. Coastal and fresh water shipping is a preserve of vessels owned by American citizens.
These vessels must be registered in the U.S. Vessels that tow or engage in rescuing operations in American territorial waters have to be registered and owned by US citizens. Mineral lands leasing act only allows American citizens to lease mineral lands owned by federal g9overnment to corporations organized in the U.S. The Atomic Energy Act prohibits foreign ownership of nuclear power plants. States with extensive farming areas have instituted laws that restrict foreign investment in real estate (Goldman, 2006).
With regard to national security, if the President of the United States observes that a foreign acquisition is likely to compromise national security, he has the power to suspend or block the acquisition. This is commonly known as the Exon-Florio Law. Other than these regulations, there are a series of foreign investment regulations like the industrial security regulations, reciprocity requirements, reporting requirements, Buy America Act, and licenses for specific countries (Goldman, 2006).
List and discuss the steps in the screening process
Steps that are involved in the screening process include country identification, preliminary screening, in depth screening, final selection and direct experience (Doole and Lowe, 2001). The world being a global village, one can choose to do business in any destination he or she wants.
It is very important that before settling on a country, the country’s culture, its political ideologies, and religion are known. Preliminary screening involves examining countries that have been identified outwardly (Johansson, 2000). At this point states are ranked on basis of their currency stability, exchange rates, and domestic consumption levels. In-depth screening is done to countries that make it to the third stage.
These countries are considered feasible for market entry (Keegan, 2002). The final selection involves making a final decision on potential shortlist. Finally, personal experience is very important if one is to consider doing business in another country (Muhlbacher, Helmuth, and Dahringer, 2006).
Doole, I. and Lowe, R., (2001). International Marketing Strategy – Analysis, Development and Implementation, 3rd Ed. New York: Thompson Learning.
Goldman, M.G., (2006). Chapter 4: U.S. Regulation of Foreign Investment. Retrieved from http://thelenreid.com/index.cfm?section=articles&function=ViewArticle&articleID=1533
Johansson, J.K. (2000). Global Marketing – Foreign Entry, Local Marketing, and Global Management. New York: Johansson International Edition.
Keegan, W.J., (2002). Global Marketing Management, 7th Ed. New York: Prentice Hall
Muhlbacher, H., Helmuth, L. and Dahringer, L. (2006). International Marketing – A Global Perspective, 3rd Ed. New York: Thomson.