By James Surowiecki, a writer for the New Yorker and author of The Wisdom of Crowds (Abacus) (THE GUARDIAN, 18/03/06):
In the late 1980s, nine American congressmen held a press conference on Capitol Hill during which one of them picked up a sledgehammer and smashed a Toshiba radio into tiny pieces. The proximate cause of the congressman's ire was Toshiba's supposed violation of national security rules. But the truth is that the congressmen were concerned about a lot more than national defence. They were worked up about the seemingly inexorable encroachment of Japanese firms on the US economy. And they were not the only ones. At the time, anxiety over the apparent annexation of the country by Japan was pervasive. Japanese companies were not just outperforming US firms around the world, they were also acquiring American assets at a rapid pace, including landmarks such as Columbia Pictures. That anxiety prompted the US House of Representatives to pass the Foreign Ownership Disclosure Act, requiring foreign investors to register with the government, and led to much hand-wringing and jingoistic sabre-rattling from pundits and politicians.
The hysteria over a supposed Japanese takeover of America subsided, of course, as soon as the cracks in Japan's vaunted economy revealed themselves. But protectionist hostility to foreign investors has never disappeared from politics in America, and in the past year it has returned with surprising power. In 2005, the US Congress threw a roadblock in the way of the Chinese oil company CNOOC's proposed acquisition of Unocal, and recent weeks have seen a political uproar that led to the quashing of a Dubai firm's acquisition of terminals in a host of American ports. In part because of increased concerns about security, and in part because of growing anxiety about the consequences of globalisation, American voters and politicians seem increasingly comfortable with the notion that, broadly speaking, there are some companies that only Americans should be able to own.
The US, of course, is hardly alone in its scepticism about the virtues of foreign investment. In fact, even now, it is far more welcoming to foreign capital than most European countries. On the continent, all large companies are generally treated as sacrosanct assets and as "national champions", prompting countries, including France and Spain, to go to great lengths to ensure these assets remain in domestic hands. Last year, the French government blocked a merger between the pharmaceutical company Aventis and Switzerland's Novartis and instead helped orchestrate a takeover of Aventis by Sanofi, which is mostly owned by the French oil giant Total. Just last month it orchestrated a deal between two giant utility companies, Suez and Gaz de France, in order to prevent Suez from being acquired by an Italian firm. Spain, meanwhile, is trying to solidify its control over a national power company before the EU puts in place regulations that will limit countries' authority over acquisitions. And even in countries that have less of a tradition of explicit state intervention in the takeover market, such as Germany, hostility to foreign capital runs deep. Last year, the then chairman of the Social Democratic party called foreign private-equity funds "locusts".
In contrast to its continental counterparts, Britain has in recent decades adopted a laissez-faire attitude towards foreign investment. But foreign takeover artists are not exactly being greeted with open arms. The sale of industrial gas giant BOC to a German firm prompted calls from the Trade Union Confederation for the government to block the deal on the grounds that BOC was a "strategic asset". And successive bids from abroad for the London Stock Exchange have prompted furrowed brows at the thought of Britain's chief financial market being run by foreigners. Even traditional supporters of open markets are wondering whether Britain can keep its doors wide open while other countries are shutting theirs.
The anxiety about foreign ownership is intuitively understandable. When we see domestic companies fall into foreign hands, it feels like the nation is getting poorer. But the reality is that the hostility to foreign investment rests upon some fundamental misconceptions about the nature of the global economy and about the nature of corporate behaviour. More important, foreign investment brings with it very real benefits that are felt throughout the whole economy, benefits that make it worthwhile to stay open to foreign investors, even if other countries do not. As the saying goes, just because other countries' harbours are rocky, that is no reason to fill your own harbours with stones.
What is striking about the current backlash against foreign ownership is that it is taking place in countries that have been, up to this point, the most fervent advocates of globalisation and that have, in particular, pushed developing countries exceptionally hard to open up their markets. In just the past few years, for instance, the west has pushed hard (and with increasing success) for China to remove many of its restrictions on foreign ownership, and western companies have begun acquiring and merging with Chinese firms on a regular basis. The Bush administration has also exerted considerable pressure on Russia to get it to open up its energy sector (now dominated by state-owned firms) to foreign investments and partnerships. Yet the lessons that the west has been more than happy to teach abroad are turning out to be increasingly difficult to follow at home.
In one sense, this conflict could be dismissed as simple hypocrisy - "free markets for me but not for thee" - but it's probably more accurate to see it as evidence of a fundamental ambivalence about globalisation and, in some sense, about the stateless nature of modern corporations. Throughout the west, there is a deep-seated anxiety about the way globalisation seems to demolish existing economic and social norms, and erode national sovereignty. Restricting foreign takeovers is a way of defending those norms and of re-asserting that sovereignty.
The problem, though, is that the hostility to foreign acquisitions represents a resurgence of what is usually called mercantilist thinking. The basic premise of mercantilism is that nations are in economic competition with each other, and that this competition is a zero-sum game, so that when one nation is better off, another country must be worse off. As Voltaire put it: "It is clear that a country cannot gain unless another loses and it cannot prevail without making others miserable." On this reading, a foreign takeover is something like an invasion, with the foreign company adding territory and hard assets to its coffers. Even on its own terms, it is not clear why acquisitions would automatically be seen as victories for acquirers: the Japanese, for instance, overpaid by billions in many of their American deals in the late 80s and early 90s, which meant the deals actually made them worse off. But the more important point is that the image of countries at economic war with each other is simply wrong. Trade and investment between countries are not zero-sum games. They are games that actually can (and do) make all the participants better off. Countries do not gain when others lose. For the most part, they gain when others gain, because that makes the global economic pie, as it were, bigger.
At the same time, much of the defence of domestic-ownership rules, and the desire for national champions, is predicated on a strangely naive fantasy of corporate behaviour. The assumption seems to be that a company's domestic allegiance will, in the end, trump its allegiance to the profit motive, that having a company owned by, say, American owners makes it more likely that the company will look out for US interests. This assumption was explicit, for instance, during the fight between CNOOC and Chevron over Unocal. In lobbying against CNOOC, Chevron - who ultimately won - stressed the fact that it was a US company, and that it was essential to keep energy assets in US hands. The reality, though, is that corporations do not, as it were, play for the national team. Chevron, for all its patriotic rhetoric, does not charge Americans less for petrol than it charges foreigners. It does not reserve a set amount of petrol for American buyers, or make sure that Americans get their products first. Instead, Chevron, like all companies, sells its product to the highest bidder, and goes where the market takes it. In the same vein, the Stock Exchange is not, now that it has remained in British hands, going to give British investors an extra break on commissions or listing fees.
The dangers of foreign ownership, then, are largely imaginary. Unfortunately, the costs of limiting foreign ownership are very real. Preventing foreign takeovers insulates CEOs and corporate managers from competition, making it easier for them to run firms as something like corporate fiefdoms. In today's world, it is nearly impossible for shareholders to remove a CEO who is doing a poor job, and too many boards of directors are unwilling to pull the plug. As a result, one of the most important checks on poor performance is a robust takeover market. If a CEO does poorly, the company share price will fall, making it more likely that the company will be bought, leaving the CEO without a job. Limiting the chance of a foreign takeovers - particularly in industries where there are only a few big players - makes it easier for underperforming CEOs to remain ensconced. It also makes it easier for them to cut excellent deals for themselves when sanctioned mergers - such as the one between Suez and TK - finally occur.
The hostility to foreign investment also makes it harder for markets to work the way they are supposed to. In general, markets work best when assets gravitate to the people who value them most, because we assume they will have the best incentive to make those assets valuable. But when foreign investors are effectively barred from the market, it means that domestic companies are able to pick up assets on the cheap. CNOOC's bid for Unocal, for instance, was higher than Chevron's, but Chevron was not forced to meet it because the CNOOC bid never got off the ground. Opposition to takeovers on the basis of nationalist feeling is a way some businesses defend their interests against others, to the detriment of the economy as a whole. Even if you set aside the question of why the French government believes it knows which company is the best partner for Suez, is engineering a huge corporate merger really the most productive use of a state's time and money?
Though you would never know it to hear domestic businessmen talk, foreign investment also has very real benefits for an economy. In the simplest sense, after all, foreign investment is about putting money into an economy, not taking wealth out. When foreign investors acquire a firm or build a factory, they are putting their money to work in the country. Without investment, you get no economic growth, and that is true whether the investment comes from home or abroad. In addition, foreign companies often bring with them new expertise and new technologies. When Japanese auto companies began investing in the US 20 years ago or so, they sparked the creation of entire networks of new auto suppliers, and they imported a host of manufacturing techniques that have now filtered into the entire American auto industry. When Nissan, decades ago, announced that it would open a plant in Sunderland, doubters felt it would be unable to adapt English workers to Japanese ways. But that plant is now one of the most efficient in the world.
The real irony is that while much of the world is still hungry for capital from abroad - ask Kenya if they would like foreign investment - the developed world is awash in it and yet uncomfortable with it. Paradoxically, people in the west are simultaneously unhappy with outsourcing, which involves companies sending capital and jobs out, and unhappy with foreign investment, which involves companies bringing capital and jobs in. Apparently, we would all be better off if we just stayed home. Foreign investment and takeovers have meant that in the US alone, millions of jobs have been effectively insourced over the past two decades. If the choice is between an Italian company buying a French firm or that same Italian company sending its capital to China, there's little doubt that the former is much better for French workers and the French economy.
And that, ultimately, is what the question of foreign takeovers really comes down to. From the perspective of most of us, the important thing is not who owns what but where they own it. Those Japanese auto factories in the south are far more valuable to the average American worker than the factories that Motorola owns in China, even though it is Motorola, not Japan, that is the American company. The point is not that we should stop Motorola from opening plants in China (Chinese workers deserve the chance). The point is that we want to keep Toyota and Nissan opening plants in the US and Britain. In the end, the nationality of the person who signs the paycheck matters a good deal less than the nationality of the person who cashes it.