Investment Subsidies for Cross-Border M&A: Trends and Policy Implications

Headline takeover bids made by subsidized foreign firms, coupled with the rise of sovereign wealth funds (SWFs), have excited public sensitivity to cross-border M&A. In addition to raising fears over “stealth” acquisition of U.S. assets, these transactions can also have adverse consequences for non-subsidized home firms that are outbid by subsidized rivals abroad. When confronted with both pressures from domestic firms that have been outbid and constituents alerted by the increasing number of foreign takeovers, Congress is prone to enact legislation that unnecessarily restricts the free flow of investment into the United States. During the past few years, threats to the open U.S. regime for foreign investment surfaced in response to acquisitions proposed by the China National Overseas Oil Corporation (CNOOC) and Dubai Ports World. Invoking broad “national security” concerns some members of Congress made misguided attempts to expand the oversight mandate of the Committee on Foreign Investment in the United States (CFIUS) beyond the core realm of national security to include economic criteria. Currently, the open U.S. investment climate is under scrutiny due to the recent string of investments made by sovereign wealth funds (SWFs). Concerned that SWFs may deploy government capital for non-commercial means, Congress and the Treasury are now exploring whether the U.S. government should play a role in screening transactions. In this paper we consider what measures can be taken to avoid the temptation of broad-brush, protectionist legislation in response to subsidized M&A or SWF activity.We begin by analyzing recent trends in cross-border investments and present three case studies of contentious M&A bids. We then explore a range of possible public responses to subsidized M&A bids and SWF activity, and the merits of addressing these issues through existing mechanisms at the OECD, the IMF, the WTO, and the European Union. We conclude that a multilateral compact would best avert not only the possibility of widespread, indiscriminate investment protection legislation but also the danger that M&A subsidies offered by one country would spark a round of competitive subsidy emulation by other countries. We also recommend disclosure by sovereign wealth funds when they acquire equity shares outside their home countries. We realize that pressure for protectionist legislation will likely increase before a multilateral compact on investment subsidies can be agreed. Therefore we also suggest a set of interim measures to begin addressing investment subsidies in a manner that preserves an open investment climate, both in the United States and globally. To be clear: we do not contend that subsidized M&A or non-transparent SWF dealings pose a “clear and present danger.” We do suggest, however, that these issues merit thoughtful consideration well before a political confrontation occurs.