D1. Company Characteristics

HCMs can be targeted at specified companies. Most company targeting focuses on four dimensions:

1. Company size: It is possible to target HCMs towards companies of a specified size, such as large or small firms. Large firms can be offered capital, insurance and other support from the government when they take on large and strategically important projects such as in infrastructure, construction or mining. The problem often faced by SMEs is that they tend to have fewer resources, including financial capacities, which places them at a disadvantage. Some SMEs experience difficulties in obtaining financing from capital markets due to information asymmetries between SMEs and financial institutions and often insufficient collateral (Schans 2012). Financial institutions often consider financing SMEs riskier or insufficiently promising in terms of investment return. SMEs also have less international experience and managerial capabilities, and their access to information resources is more limited. The result is that they face limitations in ability to undertake OFDI. This can be problematic especially as SMEs often play a fundamental role in national economies and societies, contributing significantly to economic growth, employment and innovation. Moreover, in most countries the majority of companies are SMEs. HCMs can play a meaningful role in helping SMEs overcome the disadvantages they face (UNESCAP 2020, 23, Sauvant et al. 2014). Thus, targeting SMEs can be a justifiable strategy. SMEs also often operate in important niche areas and, due to their small size and limited economic power, supporting them will unlikely raise any major concerns about issues such as competitive neutrality. Relatively modest HCMs, such as information provision, trainings and grants for feasibility studies can often make a considerable difference for SMEs and are not too great a burden on state finances. Governments may also remedy the difficulties SMEs face when accessing financial markets, by providing loans and financing schemes. They can, for example, offer SMEs preferential terms that are better than those offered to larger investors (Sauvant et al. 2014).
2. Ownership: HCMs can be targeted at companies with specific ownership characteristics. The most common differentiation is between state-owned and privately-owned firms, but other forms of targeting are possible, e.g. focusing on family-owned or women-owned companies. In many countries, state- and privately-owned firms already operate to some extent under different regulatory frameworks (UNESCAP 2020), with SOEs often enjoying favourable regulatory and financial treatment, monopoly or oligopoly status and better access to information resources. This can place them in privileged positions not only domestically, but potentially also in international business (Sauvant et al. 2014, 22), which is already considered problematic. Extending such privileged treatment to the application of HCMs can be especially controversial, as host countries may have concerns when foreign-backed state-owned actors operate in their territory. Financial, regulatory and other forms of state backing of SOE OFDI could distort international competition, and SOEs may be suspected of having political agendas that run counter to the national interest and security of host countries. Thus, offering supportive HCMs to SOEs should be considered very carefully, especially if equal benefits are not offered to private firms, or if SOEs are offered better terms and conditions than those enjoyed by private firms (Sauvant et al. 2014, 22). While privileging SOEs can be problematic, targeting private investment with appropriate HCMs may be an option to consider. It should be noted, however, that because SOEs are under greater state control, they might in some cases also experience greater restrictions to invest abroad compared to private firms, including stricter procedures for government approval of overseas investment and greater monitoring by the state of their overseas operations. SOEs also assume public responsibilities that private firms do not have, such as operating in business areas that can be costly and unprofitable (e.g., postal services, telecommunications, railways, utilities).
3. Company nationality: HCMs can either apply only to domestic parent companies or be expanded to include subsidiaries and affiliates of foreign companies located in the home country. A focus on firms incorporated in the home country might make sense when companies are targeted with financial support measures or political risk insurance and the aim is to promote the generation of home-country effects, while regulations, fiscal measures and treaties might apply to all firms within a home country’s jurisdiction. The definition of a domestic, ‘indigenous’ firm can be a challenge in this context, and might depend on the degree of equity ownership and identity of the ultimate beneficiary (Sauvant et al. 2014, 21). HCMs that offer financial benefits and insurance tend to specify that the beneficiary firm has to be from the home country.
4. Business experience: Some HCMs might target companies with greater business experience or more experience with overseas investments. This approach to targeting takes into account that greater experience increases the likelihood that outward investments yield a positive outcome, including in generating home-country effects (UNESCAP 2020). A company’s position in global or regional value chains is also an important indicator of a company’s international experience that could be used for targeting.

Key insights

• Targeting by company size is relatively common. Large loans tend to be borrowed by large companies, and governments can support SMEs to help them overcome competitive disadvantages and financial limitations in the early phases of an outward investment.
• It is neither common for countries to use HCMs to target SOEs, nor is it recommended, because the operations of state-backed SOEs in host countries might be viewed with scepticism. Nevertheless, SOEs and private firms are not necessarily treated equally, and in some countries, SOEs may enjoy privileges domestically in terms of access to finance, information and in other areas.
• Most schemes offering targeted support to individual companies tend to indicate that the supported company should be from the home country.
• On a few occasions, business and international experience can be a criterion of eligibility for an HCM.