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Economía Negocios

How to put off foreign investors

Mexico City, August, 28, 2019
Andrew L. Davis

Since the 1980s, countries such as  Mexico, Brazil, Argentina, South Africa, Poland, Turkey, India, South Korea, the ASEAN region (Indonesia, Thailand, Malaysia, Singapore, and Vietnam), and the Chinese Economic Area (China, Hong Kong, and Taiwan) have opened their economies to foreign investment and foreign trade.

These ‘emerging economies’ have embraced any combination of democracy, market economy and/or capitalism, have experienced considerably high economic growth, have benefitted from promarket reforms, and are going through considerable economic structural change. Their economic and political environments are, however, unstable compared with their more developed counterparts; governments of these host countries must be mindful of the importance of minimizing country risk, as much outgoing foreign direct investment originates in Western Europe and North America, where security is favoured over the thrill of speculation.

Government is not completely responsible for the economic performance of a nation, yet the new Mexican administration is doing its bit to stoke the fire. The Mexican president, Andrés Manuel López Obrador, sensing the need for financing the ballooning government budget, has repeatedly stated that Mexico is open to foreign business and investment. As a left-wing politician with a preference towards a command economy, he publically declares that governmental involvement is a priority. He privately concedes that private investment is required, acknowledging that services rendered for his megaprojects will necessarily be subcontracted. The problem is that he is discouraging the private investor, and the foreign investor understandably feels even less empathy for the AMLO effect than the domestic counterpart. It is quite clear that this lack of clarity is a knock-on effect from domestic priorities, but it does beg the question of what could be done by the government to pave the way to a better relationship with the overseas investor.

It has become fashionable to present an ugly face to outsiders. Distrust towards overseas investors is a great vote winner at home, and political candidates are capitalizing the world over.

This has the obvious advantage of winning elections, reality sets in when foreign direct investment is scared away. Threats during campaigns, and even delivering on promises of canceling programmes, projects and closing down investment promotion agencies (such as Promexico in Mexico), are now common occurrences.
South Korea has historically been hostile towards foreign investment and protective of its domestic business cartel, the Chaebol. Arresting diplomats and students in Middle Eastern and Far Eastern countries is becoming more commonplace. Intellectuals promoting governmental discriminatory rhetoric in the United States is intimidating to ex-pats of all walks of life. Even allowing provocative political commentators to overstate the case of protective economics or showing disinterest in economics/finance/business can give a feeling of apathy towards overseas business, despite these normally being purely symbolic gestures.

Making policy U-turns is another frustrating governmental pattern which withdraws foreign investors. The new Mexican president made a case in point as soon as he came to power, sending mixed messages by successively promoting and then tearing down private business interests. Upon coming to power in 2018, he halted the construction of an international airport, only to chair a round table for private business to open up investment and facilitate finance schemes. He then went on to hint at price-fixing schemes for gasoline at the retail level to reduce competition, turning around and declaring a call to private firms for management and maintenance of a new oil refinery. The four submitted bids were promptly criticized and turned down for being uncompetitive, only to be replaced by the State-run oil company PEMEX.

There are enormous business opportunities in countries with extremist political regimes, and Multinational Corporations (MNCs) have not been adverse to invest there, however they look for consistency. Insecurity arises when governments start to change their minds.

Following established rules and norms also give a sign of stability. A nation with a written constitution and a government which adheres to the system helps companies to strategize without having to plan contingencies. Even though ambitious politicians act on good intentions, at times they centralize power and ignore legislative and judicial branches in order to make decisions which sidestep overbearing bureaucratic delays or the traps of corruption, while holding popular votes and taking immediate action. The problem is that this use of direct rather than representative democratic government can be unconstitutional, and it makes outsiders feel nervous, especially those with vested interests in the nation.

In many cases, a constitution and separation of governmental powers can be set up to give the appearance of stability in caricature form, nevertheless when a nation is striving for stability it is best to work on maintaining these structures and giving them credibility rather than breaking them up and bearing their weaknesses. Examples could be cancelling a public infrastructural project without holding a properly moderated referendum, cancelling contracts with private investors and contractors alike without seeking approval from Congress, or holding government calls to certain suppliers without following previously established guidelines for procurement.

Overseas companies look to heads of state to be good ambassadors and to show an effective representation of the host country around the globe. Setting up investment promotion agencies, attending internationally renowned diplomatic meetings, investing time & energy in supranational social and environmental programs to show a collaborative effort, are all ways of giving investors assurance and helping them commit themselves to take emerging economies more seriously.

Andrés Manuel López Obrador went against this advice by deciding not to assist the G20 summit held in Tokyo last June, preferring instead to send his Minister of Foreign Affairs, Marcelo Ebrard with a letter of apology, stating in written form that he would rather these events be centered around social rather than economic matters. Unfortunately, his absence did not go unnoticed, and his written comments were redundant, as the Japanese leaders of state mentioned after the previous summit at Buenos Aires that they wanted their chaired meeting to touch on matters of distribution of wealth. It is also worth mentioning that if Mr. López Obrador really wishes to put these matters on the world agenda, he should go and make the case in person; he has boundless charisma outside Mexico and should capitalize on that.

Ahead of state should be a responsible manager by showing accountability and allegiance to home policy. It is tall order to oblige foreign MNC´s to show social responsibility if the domestic government fails to do so. A case in point: republics are democracies, which expect governments to represent the people, not to act on their own instincts; the provision of education, health, unemployment benefits, pensions schemes, economic opportunities, and general infrastructure are all moral obligations of a government. If an overseas investor does not see the public administrator pulling his/her weight, there will be a feeling of apathy towards helping society in the target market.
A genuine concern for the competitiveness of the country on the part of the home government is more likely to draw in investment for R&D, technological transfer and entrepreneurial activity. Another important administrative indicator is the correct management of the economy: giving the central bank autonomy to regulate monetary policy, avoid such seductive measures as price fixing, using prudent fiscal policies, planning realistic budgets & adhering to them; all with the objective of steering the economy during the appropriate stages of the business cycle.

National governments need to be active in foreign policy, and should not wait for crises to happen. Neither should they shy away from global issues. In the wake of June’s tariff threat crisis from the United States against lax Mexican Central American migrant policy, business leaders from both sides of the border lobbied with State governors in the USA to convince them of the potential harm of such barriers to trade were they to be applied, in the hope that they would dissuade the President. Their ploy seemed to work, as President Trump was swayed from doing the unthinkable. Several inferences can be made here: 1) the Mexican diplomatic machine is unprepared and undermanned, as the Trump administration had already issued similar threats several months beforehand, 2) there is an absence of dynamic diplomatic activity; Mexican politicians ought to be lobbying continually in legislation, in the back rooms, on television and with the business community outside Mexico, and 3) it is up to the Mexican government, not business, to convince US State governors of the dangers of steep tariffs.

An over-dependency on foreign debt is proving to be an important factor which has recently been swaying the confidence of foreign investors. According to BIS quarterly, Mexico is one of the most reliant economies on external private bank debt. Although this has largely been to the private sector, state-run companies and governmental mega projects are now receiving large sums from private banks. Interestingly enough, June’s G20 Summit in Tokyo produced a watchdog created by the Institute of International Finance to monitor overspending on national projects with borrowed money. Coincidentally, Mr. López Obrador did not show up to this particular summit…could this more than mere speculation? Probably not, but it is true that at a time when the international community is starting to cool to his economic policies and his gut instinct has been more reactionary than conciliatory, the signals have nevertheless been ominous.

Business, has historically been very active in overseas economies, always playing its part through direct investment, trade, strategic alliances, participating in supply chains, tourism and the provision of services. This does not mean, however, that business is going to stay under any circumstance; any sign of insecurity will make pundits pull the cord and jump ship. Governments cannot be complacent and expect global business to stay put just because of favorable market conditions.
Brexit has become a political issue, and overseas business has lost interest in the UK; indeed business there is frustrated at the prospect of its own internationalization prospects. Beijing has reacted badly to the trade war issue by forcing Chinese investors to withdraw real estate and other direct investment from the USA. There may be other issues at hand besides politics, however, governments must be aware that they hold a crucial stake, and that their decisions cause a knock-on effect for the economic, legal and social environments of their nations and their diplomatic relations.

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Andrew Lee Davis Blake

Andrew Lee Davis Blake at Expertise en investigación de mercados
Profesor de negocios internacionales con historial en proyectos de investigación privados. Especializado en áreas de negociación internacional, comunicación intercultural y estrategias de internacionalización empresarial. Participa como consultor para PYMES, organiza actividades de promoción internacional.
Andrew Lee Davis Blake

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