Abstract
In international investment law, local equity requirements are often provided in domestic investment laws and compel foreign investors to enter the market of the host state by joining forces with a local partner. Further, local equity requirements generally guarantee that control over the domestic entity rests with the local partner by prohibiting foreign investors from acquiring a majority stake in the local entity. In past eras with priority given to state planning, such requirements were explained by the dominance of the state in all aspects of the domestic economy. In the current era of privatization, they have been justified on different grounds. However, one key element that is often absent from the debate surrounding local equity requirements is their far-reaching, and possibly negative, impacts on the competitive state of markets.
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Notes
- 1.
See e.g. the Turkish Foreign Direct Investment Law, Law no. 4875, 5 June 2003, published in the official Gazette of 17 June 2003. Domestic investment laws are also sometimes known as investment promotion statutes (see e.g. the Ghana Investment Promotion Centre Act 2013 (Act 865)) or foreign investment codes (see e.g. the Senegalese Loi n°2004-06 du 6 février 2004 portant Code des investissements, modifiée par la loi n°2012-32 du 31 décembre 2012).
- 2.
- 3.
General Agreement on Trade in Services, 15 April 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1B, 1869 UNTS 183, 33 ILM 1167 (1994). See also De Meester and Coppens (2013), p. 105 and WTO DSB, China-Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products, Report of the Panel, 12 August 2009, WT/DS363/R, paras 7.1376 and 7.1388.
- 4.
Agreement on Trade-Related Investment Measures, 15 April 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1A, 1868 UNTS 186.
- 5.
Multilateral Agreement on Investment, Draft Consolidated Text, 22 April 1998, DAFFE/MAI(98)/REV1, Article III(1)(k)–(l).
- 6.
For instance, the scope of investment protections provided in international investment agreements sometimes extends to the pre-establishment phase in order to facilitate the entry of FDI on host state markets. However, the extension of investment protections to the pre-establishment phase does not grant unfettered market access as host states remain free to restrict access by foreign investors to specific sectors of the economy. If an international investment agreement provides for pre-establishment national treatment and most-favoured-nation, for example, host states can only do so without discriminating on the basis of nationality.
- 7.
Canada-European Union Comprehensive Economic and Trade Agreement (CETA), signed 30 October 2016, entered into force 21 September 2017 (Investment chapter not yet entered into force).
- 8.
See e.g. article XIV of the General Agreement on Trade in Services, 15 April 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1B, 1869 UNTS 183, 33 ILM 1167 (1994) and Section E of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), signed 30 October 2016, entered into force 21 September 2017 (Investment chapter not yet entered into force).
- 9.
General Assembly Resolution 1803 (XVII) of 14 December 1962, “Permanent sovereignty over natural resources”, para. 5:
The free and beneficial exercise of the sovereignty of peoples and nations over their natural resources must be furthered by the mutual respect of States based on their sovereign equality.
See also Article 8.4 (2) of the Canada-European Union Comprehensive Economic and Trade Agreement (CETA), signed 30 October 2016, entered into force 21 September 2017 (Investment chapter not yet entered into force);
For greater certainty, the following are consistent with paragraph 1:
[…]
d. a measure seeking to ensure the conservation and protection of natural resources and the environment, including a limitation on the availability, number and scope of concessions granted, and the imposition of a moratorium or ban;
[…]
- 10.
See e.g. Mexican Foreign Investment Law, Published in the Official Gazette of the Federation on 27 December 1993, last amended on 11 August 2014, Article 7; République de Guinée, Assemblée Nationale, Loi L/2015/N°008/AN Portant Code des Investissements de la République de Guinée, Article 6; No. 4 Decree of the National Development and Reform Commission and the Ministry of Commerce of the People’s Republic of China, http://www.fdi.gov.cn/1800000121_39_4851_0_7.html.
- 11.
Wallace (2002), p. 314.
- 12.
See United Nations (1973), pp. 12–13.
- 13.
Mexican Foreign Investment Law, Published in the Official Gazette of the Federation on 27 December 1993, last amended on 11 August 2014, Article 7 [official translation].
- 14.
République de Guinée, Assemblée Nationale, Loi L/2015/N°008/AN Portant Code des Investissements de la République de Guinée, Article 6 [unofficial translation].
- 15.
Sornarajah (2010), p. 106.
- 16.
The Catalogue of Industries for Guiding Foreign Investment (No. 4 Decree of the National Development and Reform Commission and the Ministry of Commerce of the People’s Republic of China, http://www.fdi.gov.cn/1800000121_39_4851_0_7.html) was revised in 2017 and provides for the industries in which FDI is encouraged and in which special management measures apply. It lists 35 industries in which FDI can either take place through: a corporation with a Chinese party as the controlling shareholder; a Sino-foreign equity or contractual joint venture; or a Sino-foreign contractual educational institution with a Chinese party as the leader (the Catalogue specifies the following: “‘With the Chinese party as the leader’ refers to the principal or person primarily in charge of administration shall have Chinese nationality, and the number of Chinese members of the board of governors, the board of director or joint administrative committee of a Sino-foreign contractual educational institution shall be not less than 50%”).
- 17.
See International Bank for Reconstruction and Development (1997), pp. 1–2; Salacuse (2013), p. 60; Mason (1958), p. x. See also e.g. Article 166(1) of the 1982 Constitution of Turkey (Constitution of the Republic of Turkey, 7 November 1982):
The planning of economic, social and cultural development, in particular the speedy, balanced, and harmonious development of industry and agriculture throughout the country, and the efficient use of national resources on the basis of detailed analysis and assessment and the establishment of the necessary organisation for this purpose are the duty of the State.
- 18.
Lewis (1969), pp. 12–14.
- 19.
Sornarajah (2010), p. 63.
- 20.
Mason (1958), p. 43.
- 21.
- 22.
Salacuse (2013), p. 62.
- 23.
- 24.
- 25.
See Salacuse (2013), pp. 63–66.
- 26.
Corbridge (1995), p. 4.
- 27.
International Bank for Reconstruction and Development (1997), p. 23.
- 28.
OECD (2003), p. 22.
- 29.
The 1989 Washington Consensus between the World Bank, the IMF and the US Treasury focused on policies for developing states’ economic development and stabilization as well as on fiscal austerity, privatization and market liberalization and the promotion of foreign direct investment together with the enforcement of property rights. On the Washington Consensus, see generally Williamson (1990) and Stiglitz (2003).
- 30.
Salacuse (2013), p. 66.
- 31.
- 32.
This process also guaranteed that private actors operating key functions of public services would continue to provide said services at a fair price while maintaining quality. For other types of regulatory changes entailed by the new model, see Salacuse (2013), pp. 71–73.
- 33.
See UNCTAD (2010), p. 16 (Table I.5).
- 34.
Weber and Alfen (2010), p. 60.
- 35.
Weber and Alfen (2010), p. 57.
- 36.
Weber and Alfen (2010), p. 59.
- 37.
Hemming and Mansoor (1987), p. 6.
- 38.
Salacuse (2013), p. 111.
- 39.
For other types of privatization transactions such as the public offering and private sale of shares, the sale of state assets, the reorganization of state enterprises into component parts, management and employee buyouts or leases and concessions and management contracts, see Salacuse (2013), pp. 118–120 and OECD (2010).
- 40.
In this regard, although some periods were characterized by an emphasis on the encouragement of FDI, other periods were defined by an increase in means of restriction and control of FDI. See generally Sauvant (2011).
- 41.
See UNCTAD (2003), pp. 6–9.
- 42.
In Malaysia, for instance, as part of the country’s 1970s “New Economic Policy”, preference was given to Bumiputra (indigenous people) which required specific shareholding arrangements to ensure the participation of local populations in the domestic economy (see e.g. Milne 1976; Thillainathan and Cheong 2016). The same process took place in African countries such as in Nigeria that adopted indigenisation measures to ensure the divestment of foreign companies’ shares into local hands (see e.g. Beveridge 1991, p. 302; Tobi 1991; Osunbor 1988) and South Africa (see Section 2 of the Broad-Based Black Economic Empowerment Amendment Act, 2013, Act No. 46 of 2013, Government Gazette Republic of South Africa, Vol. 583, 27 January 2014, No. 37271) and Zimbabwe (see Section 3(1) of the Indigenisation and Economic Empowerment Act, 2007, Act 14/2007).
- 43.
Another positive aspect of local equity requirements mandating the creation of joint ventures for the host state is that they ensure that a smaller portion of the profits generated by the economic operation will be repatriated to the investor’s home state.
- 44.
Blomström et al. (2000), p. 30.
- 45.
Sornarajah (2010), p. 64.
- 46.
Sornarajah (2010), p. 64. In addition, the local partner can act as an effective mediator with the local government.
- 47.
Salacuse (2013), p. 94.
- 48.
Salacuse (2013), p. 92.
- 49.
Salacuse (2013), pp. 113–114.
- 50.
Sornarajah (2010), p. 115.
- 51.
Pitofsky (1986), p. 1608.
- 52.
The US Supreme Court, for instance, made it clear that the first concern raised by joint ventures is their potential anti-competitive effects: “[o]verall, the same considerations apply to joint ventures as to merger, for each instance we are but expounding a national policy enunciated by the Congress to preserve and promote a free competitive economy” (United States v. Penn Olin Chemical Co., 378 US 158, 1964, p. 171). The EU also regulates joint ventures through its competition laws. See Council Regulation (EC) 139/2004 of 20 January 2004 on the Control of Concentrations Between Undertakings, OJ 2004, L 24/1 and Commission Notice Guidelines on the Applicability of Article 101 of the Treaty on the Functioning of the European Union to Horizontal Co-operation Agreements, OJ 2011, C11/1.
- 53.
Naked agreements often refer to agreements between competitors aiming at fixing prices or to engage in other market policies that have direct effects on the market’s structure.
- 54.
In particular, in case of a high degree of integration, the operation can be seen as “a full merger between two or more companies” (Pitofsky 1986, p. 1605). These joint ventures will thus be analysed under the rules applied to mergers.
- 55.
This effect of setting-up a joint venture represents an advantage of equity-based collaborations compared to purely contractual projects in light of the dangers of uncertainty and appropriability hazards affecting most collaborations.
- 56.
Brodley (1982), p. 1531.
- 57.
For example, in the case of the joint venture between Brunswick and Yamaha the United States Court of Appeals, Eight Circuit, stated that “there was an agreement between Brunswick and Yamaha to limit competition between themselves in certain ‘non-exclusive markets,’ for the most part in Europe and South America. In essence the parties agreed not to seek out the other’s dealers in these markets, but rather to concentrate their competitive efforts against other manufacturers. This is merely an agreement between horizontal competitors to direct their efforts elsewhere”. (Yamaha Motors Co v. FTC, 657 F 2d 971, 981 (8th Cir. 1981), cert. denied, 50 USLW 3799 (US 4 April 1982)). In addition to non-compete provisions, joint venture agreements also often contain ancillary restrictions involving purchase and supply arrangements as well as intellectual property licences. Under competition laws, it is often required that such arrangements restricting competition must “truly contribute (that is, are ‘ancillary’) to the organization or further the purpose of the joint venture, and are not broader in scope than necessary” (Pitofsky 1986, p. 1611).
- 58.
It is noteworthy that foreign investors have attempted to avoid local equity requirements by engaging in illegal activities involving holding shares through a nominee to meet the requirements of local participation. See Fraport AG Frankfurt Airport Services Worldwide v. The Republic of the Philippines, ICSID Case No. ARB/03/25, Award, 16 August 2007.
- 59.
Beside representing an access to additional resources—often taking the form of extra capital that is invested in the project by the other partner(s)—joint ventures also provide an access to complementary resources which are sometimes critical to enable the entry on a given market. These complementary resources can vary in type: material (for example, specific machinery) or immaterial (for example, intellectual property rights which often play an important role in R&D joint ventures) and will often be indispensable for the development of new products. One example which illustrates this indispensable element of complementarity can be found in the childhood vaccine industry in which to produce a “multi-valent” vaccine multiple vaccines protected by patents owned by different companies had to be combined. In order to develop the “multi-valent” vaccine, the different patent holders created a joint venture (see Kattan 1993, p. 940). This complementarity provided by joint ventures is very important: while “it is increasingly necessary to specialize within certain areas, [m]ost firms do not have the resources to become experts in all of the technologies required of an effective competitor” (Piraino 1994, p. 887). In this context, joint ventures offer the possibility for competitors to benefit from their respective specialized assets and knowledge in order to be more efficient on the market. For example, General Motors (GM), through its joint venture with Toyota, became more efficient by learning manufacturing techniques, which ultimately led GM to produce a new compact car (see Piraino 1994, pp. 887–888).
- 60.
See Sherman and Willet (1967), pp. 400–403.
- 61.
See generally Goldberg and Moirao (1973).
- 62.
Brodley (1982), p. 1532.
- 63.
UNCTAD (2018), pp. 2 ff.
- 64.
It is worth observing that besides showing strong pro-competitive aspects, joint ventures sometimes have no anti-competitive effects at all on the market. Such is the case, for example, of joint ventures “set up to reap important economies of scale through common production of inputs accounting for a minor portion of the parent’s total costs” (OECD 2000, p. 9).
- 65.
This is especially true when the commercial operation involves the development of a new technology. For an extensive study of the competitive effects and the antitrust treatment of R&D joint ventures, see generally Grossman and Shapiro (1986).
- 66.
Sometimes, however, the contributions of the partners will not be similar. In the joint venture that took place between Danone and the Wahaha Group in 1996 for example, Danone was the only one to invest money in the joint venture while its Chinese partner, Wahaha, only transferred its trademark (see generally Dickinson and Harris 2008).
- 67.
- 68.
This is especially true in the case of R&D collaborations where “it is by definition impossible to contractually specify all concrete results” in advance (Hagedoorn et al. 2005, p. 176).
- 69.
Kogut (1988), p. 321.
- 70.
Oxley (1997), p. 390. This equity-sharing model also has the advantages of having a dissuasive effect on the parties to over evaluate their own assets when entering the joint venture. Indeed, these assets often serve as a basis to evaluate the respective shares of the parties in the jointly owned structure and each partner is thus likely to be careful when valuating the shares of the other party(ies) as the degree of control over the joint venture is generally proportional to the amount of shares owned in the shared company. Setting-up a joint—equity-based—structure will also have the advantage, compared to purely contractual collaborations, to provide the parties with an efficient control over the joint venture’s activities through a hierarchical type of governance in order to face the uncertainty often associated with collaborations. Indeed, an equity-based structure allows the parties to, “[t]hrough the board of directors, […] monitor the use of contributed assets, the development of new assets, and the overall returns from the cooperative effort” (Pisano 1989, p. 112), which is particularly useful for resolving issues which were not anticipated at the formation stage of the joint venture or when facing a deadlock during the life of the joint venture.
- 71.
Jorde and Teece (1989), p. 538, fn. 28 (quoting William Norris, CEO of Central Data Corporation).
- 72.
Billiet (2009), p. 8.
- 73.
Piraino (1994), p. 885.
- 74.
Piraino (1994), p. 884.
- 75.
See Salacuse (2013), p. 97:
Strong arguments exist that these restrictions raise the cost of private capital to the host country and may prevent it from using the investment received to maximum advantage. For example, there is evidence that foreign investors in joint ventures tend to transfer less advanced technology to joint ventures than to wholly owned subsidiaries which give them a greater ability to protect their technology from appropriation by local partners and others. Also, in such imposed joint ventures, the investor’s commitment to the future development of the project may be less than optimal; consequently, it may focus on gaining revenues through its contractual arrangements with the project (for example as a supplier of technology) rather than as a project owner.
- 76.
Sornarajah (2010), p. 64.
- 77.
Sornarajah (2010), p. 64.
- 78.
Sornarajah (2010), p. 65.
- 79.
Piraino (1994), p. 873. This is especially true for smaller businesses: not only will these smaller market actors benefit from the above-mentioned advantages but in addition, through joint venturing, these smaller firms become able to “achieve the types of economies of scale usually available only to larger businesses” (Piraino 1994, p. 886). In this perspective, a small business becomes able to compete with larger companies by proposing lower prices to consumers and to achieve the same production efficiency as their larger competitors. See Northwest Wholesale Stationers, Inc. v. Pacific Stationary & Printing Co., 472 US 284, 1985. These efficiencies, which are beneficial both for the collaborators and the consumers have been recognised by the US Supreme Court in the Pacific Stationary case. Indeed, the Court stated that “[t]he arrangement [at issue] permits the participating retailers to achieve economies of scale in both the purchase and warehousing of wholesale supplies, and also ensures ready access to a stock of goods that might otherwise be unavailable on short notice. The cost of savings and order-filling guarantees enable smaller retailers to reduce prices and maintain their retail stock so as to compete more effectively with bigger retailers” (p. 295) or to engage in large advertising and promotion campaigns “by collectively amassing a sufficient share of the market to make name brand promotion economical” (Kattan 1993, p. 939).
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Vanhonnaeker, L. (2020). The Impacts of Local Equity Requirements on Competition. In: Fach Gómez, K., Gourgourinis, A., Titi, C. (eds) International Investment Law and Competition Law. European Yearbook of International Economic Law(). Springer, Cham. https://doi.org/10.1007/978-3-030-33916-6_3
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