Designing a Reasonable Regulation on Foreign Investments from State-owned Enterprises and Sovereign Wealth Funds

During the last decade or so, the international investment activities of state-owned enterprises (SOEs) and sovereign wealth funds (SWFs) have attracted the attention of policymakers. There is a fear that these investments may be influenced by the geostrategic interests of their home countries rather than based on traditional profit-maximizing considerations. Since this could be a serious harm to the national security of host states, several governments have introduced a specific review procedure against the investments from SOEs and SWFs that is much stricter than usual. As a matter of fact, however, such a review system tends to be excessively restrictive, sometimes even arbitrary or protectionist, and invokes a serious chilling effect on foreign investors. This means a loss of opportunities for economic growth and job creation. Therefore, a policy challenge lies in how to ensure the freedom of investment while maintaining a policy space for screening foreign investments in the light of national security. In this respect, it would be required that due process principles such as transparency, non-discrimination, and accountability be applied even when the investors are SOEs and SWFs. This paper explores a reasonable design of review procedures on foreign investment made by SOEs and SWFs with an emphasis on how to balance the conflicting policy objectives, i.e., attracting foreign investment as much as possible while defending strategic sectors sufficiently.