C4. Financial Support

It is common for government institutions to offer financial support for OFDI projects. The institutions offering financial support vary from country to country. Some focus only on supporting home-country firms, while others have a broader mandate to support development-oriented investments, including those made by firms in the host country. Financial support comes in various forms, especially grants, loans, financial guarantees or equity participation.

Grants can be awarded by a government to companies to cover specific business-related expenses. They usually fund comparatively small expenses that facilitate the realisation of OFDI and therefore tend to be easier to administer. Companies have to apply for grants and usually share in some of the costs of the funded activity. The duration of grants tends to be relatively short. Grants are expenses for the state that are not repaid by the recipient. The purposes for which grants can be provided include the following activities:

1. Pre-investment feasibility studies and research to help prevent poor investment decisions and even identify the development implications of an investment.
2. Establishment of offices overseas to enable initial exploration before deciding on full implementation of an investment project. The associated expenses might be rent, salary and training for overseas employees, and travel costs.
3. Training and human capital development to prepare staff and managers for overseas posts.
4. Consultancy and other advisory support that companies draw on in relation to their OFDI projects. Such services normally incur a fee.
5. Work placements for staff, including for training purposes, that could, for example, be made in overseas subsidiaries.

Loans are offered to MNEs to provide direct funding for their investment projects. These tend to be financial commitments of significant size involving longer timeframes, and therefore require more onerous risk assessments and approval procedures than grants. To share the associated risks, governments might prefer to offer these loans in collaboration with private financial institutions and international organisations. An advantage of loans is that they are eventually repaid with interest. Different types of loans can be made available:

1. Concessional loans are offered at lower interest rates and better terms compared to those available on financial markets. Preferential terms, for example, include generous grace periods.
2. Non-concessional loans offer neither better rates nor preferential terms, but because the funds are provided by institutions associated with the government, accessibility can be widened to a broader pool of investors, in particular those facing challenges in accessing capital from financial markets. SMEs tend to have more limited access to capital markets and could specifically benefit from such government-supported financing schemes.
3. Structured financing options could form part of the agreements to provide a loan. One option is to link repayment of the loan to investment success, another is to allow loans to be convertible into shares
4. Risk-sharing arrangements can be put in place, allowing governments to share the risk of funding an investment project with private lenders or international organisations.

Financial guarantees on the repayment of loans could be offered by governments to private lenders to reduce the risk to the latter when they agree to fund specific OFDI projects. Such assurances enable private lenders to make more capital available to support OFDI projects. While the government must bear some risks, it has the option to charge a fee for the service from the investor.

Finally, governments could opt for direct equity participation in the foreign affiliate established through an investment. Equity participation usually involves the ownership of a minority stake in the foreign subsidiary and is therefore a capital-intensive undertaking for the government that would necessitate prior risk assessments and onerous negotiations or approval procedures. The advantage to the investor is that no interest payments are required and, by having the state as a shareholder, there could be implicit government backing in overseas operations, as well as benefits from drawing on the government’s international knowledge and networks. The disadvantage, however, is the requirement to relinquish some control over its foreign enterprise to a government entity, which will normally have some minority board membership, but unlikely exercises the associated rights proactively. Exit options may be included in the arrangement to allow the investing company to re-purchase the shares from the government. The government might eventually be able to sell its share at a profit, or it may incur losses if the venture turns out to be unsuccessful (Sauvant et al. 2014). Equity participation can be time-limited and can be arranged for both greenfield and M&A projects.

These various financing schemes usually specify eligibility conditions for receiving financial support, to ensure that appropriate and feasible investments are promoted and to target specific firms or types of investment (see Section D: Targeting). Eligibility can vary depending on the particular financing scheme or home country.

Financial support offered by home governments can provide a financial advantage to companies engaged in OFDI activities. This is especially the case for schemes with a higher level of financial support, i.e., loans, financial guarantees and equity participation. It may be for this reason that they have been found to be popular among outward investors (Spring Singapore 2011). Yet it will be important to assure that such support does not distort international competition in the area of cross-border investment (see E3) Competitive neutrality).

Financial HCMs offer governments an opportunity to increase awareness of home-country effects among investors seeking financial support and can even specifically fund those investment activities that promise to yield home-country effects (UNESCAP 2020). They are also an opportunity to make investors aware of the corporate and social responsibilities they have when investing abroad, including on environmental, labour and other standards. Companies could be required to uphold such standards as a condition for receiving financial support.

Key insights

• Home governments offer various forms of financial support to enable and assist home-country firms expand overseas through investment.
• Financial support is a particularly widely employed HCM and is especially popular among companies. Loans are a particularly common type of financial support (Sauvant et al. 2014).
• Financial support is arguably the most controversial HCM, as it effectively involves the provision of financial backing to firms investing abroad. Caution is needed to ensure that financial support does not distort international competition for investment opportunities, especially when financial HCMs are provided to support M&As. Financial HCMs should therefore focus on addressing market failures in financing OFDI, such as by supporting firms facing difficulties in accessing financing in the open market.
• Financial support can be targeted at specific firms and investments, in line with home-country preferences.
• Financial support is particularly useful for companies, especially SMEs, that would find it difficult to explore overseas investment opportunities without such support or have difficulties accessing funds from the private sector due to insufficient collateral proof.
• Governments should focus on financing projects for which private financial institutions are not providing sufficient funding. In such circumstances, governments can, in first instance, offer guarantees to encourage private institutions to provide financing.
• Companies should be asked to share in the costs of the funded activities.