Archived — Occasional Paper Number 1: Formal and Informal Investment Barriers in the G-7 Countries

prepared by Industry Canada Micro-Economic Policy Analysis staff, May 1994


Summary

To address the presence and significance of impediments to foreign direct investment in the G-7 countries and to draw out the public policy implications of the evaluation of barriers to FDI.

Method

Descriptive analysis of formal and informal investment barriers in each G-7 country and resulting public policy implications.

Main Findings

  • Two forms of impediments to FDI have been identified: formal, legal, regulatory restrictions, like foreign investment review requirements and informal, less tangible and somewhat less visible barriers. Informal investment barriers include administrative procedures, financial and commercial linkages, market models, and firm ownership patterns.
  • Recent years have been characterized by significant liberalization in formal investment regimes in all G-7 countries. Those countries with foreign investment review mechanisms have raised review thresholds. Some sectoral investment restrictions have been relaxed. The US is an exception, having introduced the Exon-Florio Amendment in the 1980s which permits the US to block FDI for national security reasons.
  • Investment asymmetries between countries appear to be more the result of differences in economic structures, corporate ownership patterns and linkages between various economic actors than it does from the presence of foreign investment review provisions and sectoral investment restrictions.
  • FDI accessibility has changed little in recent years among the G-7 countries. One reason is that the liberalization of formal investment regimes has not resulted in more transparency because all G-7 countries have retained, albeit little used, mechanisms for blocking FDI, formally (either for national security, sectoral, antitrust rationales).
  • Further, as a result of globalization and the heightened integration of world economies, domestic policies, institutions, and characteristics impinge on FDI to a considerable degree.
  • Examples of informal investment barriers and their potential roles as impediments to FDI include the roles of the Keiretsu cross-ownership structures in Japan and the roles of banks and supervisory management structures in Germany. These features of the Japanese and German domestic economies help preclude foreign takeovers and therefore impede FDI.
  • Policy issues raised by the analysis include the need for multilateral rules governing investment and the need to focus on the structure of economic institutions and their inter-relationships as investment liberalization proceeds.
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