THE BLOG

Ownership Restrictions Put the Breaks On Foreign Investment

03/12/2015 08:17 am ET | Updated May 12, 2015

FDI volumes are declining globally, as some national governments take a stronger stance against foreign ownership of their companies and land. The United Nations Council on Trade and Development's recent report on foreign direct investment trends and policies shows that global investment inflows are slowing down. They declined by 8% in 2014, to an estimated $1.26 trillion. Last year saw a rise in restrictions on foreign investments in several key industries, mainly those related to oil production, data communications and media.

The slowdown in foreign investment can be attributed in part to sluggish economic growth in Europe, China's slowing economy and geopolitical risks in various emerging markets. But investment restrictions are also playing a part in a variety of markets around the world, including those of some developed countries.

Several factors continue to drive investment restrictions. Some of the main ones include the perception that certain industries should be controlled by tightly regulated local institutions to avoid market failures, the political pressure to build and support local corporate champions, and the need to continue to provide basic subsidized products and services.

This year is likely to demonstrate a continuation of the trend, especially in regulated industries such as communications, which is hampered by slow growth globally and will be further affected by elections and internal political pressures in several countries.

The Australian government, for example, recently announced a lower threshold for foreign investment review in the agriculture lands space. It did so to better control foreign ownership in farming, so as to secure Australia's national interests. Similar ideas have been proposed with respect to Australia's real estate market. Rising Chinese investments in Australian agriculture have triggered an emotional national debate on food security and foreign ownership of national assets.

Restrictions on foreign investments in the energy sector, however, may loosen globally. Traditionally, concerns about energy security and concentrated state-ownership have led to strong restrictions on energy investments. Low energy prices in early 2015 and shrinking long-term investments in energy infrastructure by many multinational companies may remove some of these barriers in order to foster new cross-border investments.

Although corporate executives are usually introduced to investment restrictions during the market access phase, some of the recent restrictions may impact already-existing investments on the ground. That could lead to a rise in arbitration cases between investors and governments.

Originally appeared on Global Finance Magazine