What Does it Mean to be Nationalized?

Nationalization risk is one of the main risks faced by multinational corporations 'direct foreign investment. At present, it has become the most prominent problem faced by transnational corporations' direct foreign investment activities. Significant, which directly affects the flow of funds, development trends and the implementation of global strategies of transnational foreign direct investment.

Nationalization risk

Right!

The risk of nationalization is

To ensure the security of investment in foreign direct investment, transnational corporations must effectively prevent the risk of nationalization. The prevention of risks can be carried out in the following aspects: (1) the home country

The multinational corporations 'home countries provide risk prevention for multinational corporations' direct foreign investment:

First, establish a guarantee system for foreign direct investment of transnational corporations.

This is the domestic law system of the home country of a multinational corporation in order to protect and encourage domestic multinational corporations to make outward direct investment.The main motivation for establishing this system is to provide legal guarantees for political risks (including nationalization risks) of foreign direct investment of domestic multinational corporations In order to achieve the purpose of promoting the country's foreign direct investment and strengthening the country's international competitive position. This guarantee system mainly includes the following two aspects:

First, the overseas investment insurance system;

The second is protection through domestic legislation.

First, the overseas investment guarantee systems of various countries cover three types of political risks: exchange risk, levy risk, and war risk. Politically backed state-owned companies or government agencies act as insurers. Qualified investments that comply with the home country's foreign economic policy.

The overseas investment guarantee systems of different countries have basically the same provisions on the basic rights and obligations of the parties to the investment insurance contract and their operating procedures, mainly including:

(1) A multinational company applies to an overseas investment insurance institution for insurance. After review and approval, the two parties sign an insurance contract, and the insurer fulfills the obligation to pay insurance premiums on a regular basis.

(2) Once a risk accident occurs within the scope of coverage, the overseas investment insurance institution shall compensate the overseas investor for the loss according to the insurance contract.

(3) The overseas investment insurance institution obtains the ownership and claim of the foreign direct investor of the multinational company and seeks compensation from the host country that caused the investment loss.

Second, it is guaranteed through domestic legislation. Such as the United States' Foreign Aid Act, Japan's Export Insurance Act, and so on.

Secondly, bilateral treaties for investment protection signed between the home country and the host country.

In order to provide guarantees for the nationalization risks faced by overseas investors, the home country usually concludes bilateral investment treaties with the host country to provide treaties for the risks of nationalization, making it a joint guarantee of the governments of the two countries in order to coordinate with the guarantees of their domestic laws and strengthen their Guaranteed effect. In order to attract foreign investment and create a good investment environment, the host country also gives foreign investment a sense of security. The nationalization provisions in bilateral investment treaties signed by various countries mainly include two aspects:

The first is about the way of nationalization;

The second is about the conditions for nationalization.

Almost all bilateral investment treaties stipulate certain conditions that nationalization must comply with, such as public interest, non-discrimination, compensation and judicial review. For example, the 1977 agreement between Japan and Egypt stipulated that the investments and returns of nationals and companies of the contracting states must not be subject to expropriation, nationalization, restrictions or other measures equivalent to the effects of expropriation, nationalization, and restrictions in the territories of the contracting parties, Unless the following conditions are met:

1) The measure was taken for public purposes and in compliance with due law;

(2) the measure is not discriminatory;

(3) Give timely, adequate and effective compensation. The model treaties in the Netherlands, Germany, the United States, and the United Kingdom all have roughly the same rules. The bilateral investment treaties signed between China and foreign countries are also consistent with the basic content of the above provisions. For example, Article 3 of the investment agreement between China and Sweden in 1982 stipulates that: "Either contracting party's investment in the territory of the other contracting party's investors is only in the public interest, in accordance with appropriate legal procedures and compensation, before expropriation or Nationalization, or taking any other similar measures, the purpose of compensation should place the investor in the same financial position that has not been levied or nationalized. The levy or nationalization should not be discriminatory, compensation should not be delayed for no reason, and They shall be convertible and freely transferable between the territories of States parties. "

Third, the home country provides nationalization risk guarantees for foreign direct investment through participation in multilateral treaties and multilateral investment insurance institutions.

The Multilateral Investment Guarantee Agency Convention adopted at the World Bank's annual meeting in 1985 provides treaty guarantees for the risk of nationalization of foreign direct investment.The Convention stipulates in its insurance coverage that the institution covers the risks of levy and similar measures, namely "Any legislative or administrative measure, or neglect, taken as a result of the responsibility of the host government, has the effect of depriving the holder of the ownership or control of its investment, or of the substantial benefits arising from its investment, Economic activities in the country and generally adopt non-discriminatory measures that are generally applicable ".

In order to promote the flow of foreign direct investment to developing countries, the World Bank established a multilateral investment insurance agency on April 12, 1988. One of the agency's businesses is when "parliamentary organizations or governments in receiving countries deprive investors of their ownership or due economic interests are at risk", and "there is nowhere to appeal to investors in canceling contracts of governments in receiving countries "When the complaint is delayed for no reason and legal protection is not available", "Any legal entity represented by a citizen of a country that joins this institution can apply for insurance, and this institution decides whether or not to cover it according to specific circumstances".

Because multilateral investment guarantee institutions and insurance institutions underwrite the risks of nationalization of foreign direct investment, after the multinational company becomes a member of the convention or institution, the nationalization risk of foreign direct investment can be controlled to a certain extent, and nationalization compensation issues It may become the object of international compensation, which provides international legal guarantees for the nationalization risk of transnational corporations 'direct foreign investment, and is conducive to promoting the development of transnational corporations' foreign investment. As a global international organization, the multilateral investment guarantee institution plays an important role in controlling the risk of nationalization of foreign direct investment and promoting foreign direct investment of multinational corporations.

(B) the host country

Preventing the risk of nationalization in the host country benefits both the multinational company and the host country. For multinational companies, they can get more opportunities to invest in lucrative developing countries, occupy larger markets, and implement global strategies.For host countries, they can benefit from a large number of direct foreign investment by multinational companies. Choosing to absorb high-quality investment that meets the development requirements of the country, make better use of and master advanced technology in foreign capital, and can eliminate the mistrust between multinational companies and host countries, which is conducive to friendly cooperation between the two sides and promotes the international economy. development of.

In order to protect the legitimate rights and interests of foreign direct investment of multinational corporations, many host countries have provided guarantees for the risk of nationalization through the constitution or foreign capital legislation, clearly stipulating that the expropriation or nationalization will only be implemented under the conditions restricted by the law, and compensation will be provided to maintain it. The security of transnational corporations' direct foreign investment attracts foreign investment and develops their own economies. Regarding domestic legislation on nationalization guarantees, the practice varies from country to country. Some countries only guarantee nationalization through the constitution. As stated in the Indian Constitution: "No property shall be compulsorily acquired or requisitioned unless compensation is obtained for the acquisition of assets in accordance with the provisions." The Ethiopian Constitution provides that unless based on an order issued by the government under conditions specific to the expropriation and negotiated through judicial procedures, Determine to pay fair compensation, and no one shall be deprived of their property. The Mexican Constitution stipulates that "except for public use and payment of compensation, private property may not be expropriated." The constitutions of Argentina, Malaysia, the Philippines, Yugoslavia and other countries also clearly stipulate that expropriation of property must be conducted in the public interest through legal means and legal procedures and shall be " "Fair", "fair" or "sufficient" compensation. Article 18 of the Chinese Constitution stipulates that China allows foreign enterprises or other economic organizations or individuals to invest in and engage in other activities in China in accordance with the provisions of Chinese law, and their legitimate interests and rights are protected by Chinese law.

In addition to constitutional guarantees, many countries also provide guarantees for transnational corporations' direct foreign investment in their foreign investment legislation, and the scope of the guarantee is usually relatively broad. Indonesia's foreign investment law states: "Unless the national interest really requires it and is in compliance with the law, the government must not completely cancel the ownership of a foreign-invested enterprise, and must not take measures to nationalize and restrict the management and management rights of the enterprise." Compensation is obliged. The amount, type and method of payment shall be negotiated between the parties in accordance with the principles of international law. "Egypt's law on foreign capital investment and free trade zones stipulates:" Except through legal procedures, projects must not be reinstated to the state Requisition, investment must not be confiscated, seized and seized. "Sudan's 1980 Investment Encouragement Law stipulates:" Unless it is in the public interest, in accordance with the law and fair compensation to investors, no nationalization can be implemented. The current value of the investor's property during nationalization. "Thailand's Investment Promotion Act of 1970 guarantees that the activities of enterprises encouraged to invest are not nationalized. China s foreign investment legislation also provides for nationalization. Article 5 of the Foreign Enterprise Law promulgated in 1986 stipulates that: The state does not nationalize and expropriate foreign-invested enterprises. Under special circumstances, foreign investment is Enterprises can collect in accordance with legal procedures and give corresponding compensation. "

China's current international investment insurance system is different from the overseas investment insurance system of the capital exporting country. It is to provide insurance for political risks faced by foreign or Hong Kong and Macao investors in China. The People's Insurance Company of China promulgated the "Foreign Investment Insurance (Political Risk) Regulations", which listed political risk of foreign investment as an important property insurance content, and provided important legal protection for the political risk of multinational companies' investment in China.

(III) Multinational companies

Looking at it from a micro perspective, transnational corporations themselves are the most critical factor in preventing nationalization risks. The prevention of multinational corporations against the risk of nationalization can be carried out in three stages, one is the early stage of investment, the second is the medium stage of investment, and the third is the late stage of investment. The emphasis of risk prevention at different stages is different.

1. Early stage of investment.

In the early stage of foreign direct investment, transnational corporations mainly conduct feasibility studies on foreign direct investment. Based on the research, they can assess the degree of investment risk and make correct investment decisions.

The feasibility study of a multinational company is a feasibility analysis of specific foreign investment projects. When conducting foreign direct investment, it is necessary to first analyze the investment environment of the host country. This is a feasibility study of the investment risks of the host country from a macro perspective. The research, based on the analysis, puts forward a "country evaluation report" to explain the objective situation of the host country in terms of nationalization risks.

In the "country evaluation report", when analyzing the risk of nationalization, pay attention to the following three aspects:

First, the host country's domestic law, that is, the state of guarantee of nationalization risk in foreign investment legislation.

Second, whether the host country and the home country of the multinational company have signed a bilateral investment protection agreement, and whether there is a guarantee clause for the risk of nationalization in the bilateral agreement, and what is the content and scope of the guarantee.

Third, whether the host country participates in the multilateral investment guarantee agency convention, is it a member of the convention, and whether it bears the obligations of international law required by the convention and its guarantee responsibility. The purpose of risk prevention in the early stage of investment is to control the risk to the minimum extent, avoid the risk as much as possible, and prevent the trouble before it happens.

2. The medium-term stage of investment.

The risk prevention in the medium term of investment mainly refers to the fact that transnational corporations take adjustment measures at any time to ensure the smooth realization of foreign direct investment objectives based on various events and factors that seriously affect the safety and profitability of investment during their operations.

In the process of foreign direct investment, due to changes in various factors, many unpredictable situations will occur.Therefore, multinational companies must establish a set of flexible adjustment methods.The specific methods are:

First, the adjustment of investment entities.

That is, a multinational company adopts joint investment with a host country's local government or enterprise to establish a joint venture.This is a positive adjustment method. The diversification of investment entities also diversifies investment risks, because co-investment requires investment entities to share profits and losses and share risk. By adopting this method, the foreign direct investment of transnational corporations can transfer part of the risk to the local joint venturers, which can prevent the local government from adopting unfavorable policies and spreading the risk.

Second, adjustment of investment objects.

That is, multinational companies decentralize or diversify their investments in regions, industries, and products.The practical application of this adjustment method is of great value.For example, a U.S. multinational company in Southeast Asia initially invested in the oil manufacturing industry. With the rising voice of nationalization, the company quickly transferred part of its investment to other industries, thereby avoiding the risk of nationalization.

Third, adjustment of investment methods.

It includes two aspects:

The first is to swap equity investment and debt investment. Equity investment and debt investment are two commonly used investment methods. The former invests in the form of buying shares and becoming a joint venture investor, and regularly distributes dividends according to the proportion of assets and property rights, and obtains dividends; the latter uses bank credit, corporate and commercial credit, etc. Investment, which can get stable profits. When the risk of nationalization increases, multinational companies sell or convert their equity into debt forms such as bank credit and buyer's credit of the parent company; and when the debt crisis increases, multinational companies convert their loans into share investments. Despite some difficulties, risks can be reduced.

The second is the conversion of investment currencies, that is, multinational companies convert their investment currencies to local currencies in order to prevent risks.

Fourth, adjustment of investment strategy.

That is to say, multinational companies implement localized investment strategies to increase the localization of multinational companies. Since the 1970s, many developing countries have demanded the localization of foreign investment, that is, "gradual nationalization," and the result is actually transferring some of the risk to "local" and greatly reducing the risk of nationalization.

Fifth, the adjustment of investment management strategies.

Whether a multinational company can adjust its investment management strategy in a timely manner according to changes in objective conditions in its direct foreign investment is directly related to the survival and development of the multinational company. When a multinational company conflicts with the local government, the multinational company should proceed from the long-term interests and try to maintain friendly relations with the host country. It is better to sacrifice the immediate interests and adopt a policy of active cooperation, which is beneficial to avoid the risk of nationalization.

3. Late stage of investment.

When the risk of nationalization seriously endangers the survival of multinational companies and it is difficult to take effective measures, they can only retreat from the host country. Withdrawing investment and adopting a withdrawal strategy will inevitably cause many economic losses. It should be carried out step by step and at the same time, multiple measures should be taken to reduce losses as much as possible.