E3. Competitive Neutrality

Competitive neutrality refers to the maintenance of a level playing field among companies, direct investors and their investments in the international investment landscape. Originally, the term has been applied only to the competition between state-owned and private companies, especially in domestic settings (Capobiancoi and Christianseni 2011, OECD 2012, 2010). When viewed in the context of OFDI and HCMs, the issue of competitive neutrality can relate to all kinds of OFDI and investing companies when they are supported, privileged or owned by the home-country government, and subsequently enjoy a competitive advantage among MNEs and international investors. It is thus possible, based on OECD (2010) and after adaptation to the context of OFDI and HCMs, to define competitive neutrality as an international competitive, legal and regulatory environment in which all enterprises face similar sets of conditions and none enjoy unjustified advantage endowed on them by their home country government.

HCMs can distort competition in various settings. MNEs and investors that enjoy particular support from their home government may be placed in an advantageous position compared to those that do not. HCMs targeted at specific investors in the home country – such as SOEs or large firms – could place other home country firms at a competitive disadvantage in outward investment. Moreover, HCMs can also put domestic firms in a home country that do not engage in international business at a disadvantage compared to those investing abroad. Finally, host country firms might also be disadvantaged when foreign companies invest while enjoying HCMs from their home government (Sauvant et al. 2014).

The provision of most HCMs can be justified as providing firms with necessary tools, guidance, advice and assistance in their efforts to venture abroad, which can otherwise be a challenging step for many firms. HCMs could be seen as helping firms overcome some of the disadvantages associated with overseas investment, such as the liability of foreignness or newness, lifting them up onto a level playing field with other internationally experienced MNEs and host country firms. In addition, HCMs might correct other market failures, such as the more limited ability of SMEs to access finance. Some HCMs focus on channelling OFDI to developing countries for development purposes. Moreover, HCMs introduced by governments of developing countries or emerging markets can promote home-country sustainable development.

Yet, in certain circumstances, HCMs might be viewed as problematic. This can happen when HCMs become excessive, in particular in terms of the amount of financial support provided. HCMs can also be viewed as problematic if they target potentially controversial activities, such as acquisitions of important companies in other countries. Targeted support of SOEs could also be viewed unfavourably.

Thus, some HCMs are more controversial than others. For example, those involving finance or strong government backing are likely viewed with more scepticism than early support measures.

More broadly, HCMs are policy tools to enhance the economic performance and development of home countries and increase the competitiveness of home-country firms. Their disproportionate use by some well-resourced countries could therefore place at a disadvantage those countries with fewer financial and other resources available for HCMs.

In response to these concerns, governments in host countries might implement measures to prevent investment activities that are suspected to undermine competitive neutrality. So far, such responses have been largely non-existent, though this could change in the future if the concerns over competitive neutrality among policymakers intensify. It appears that most HCMs currently in existence, including those outlined in this Toolkit, do not reach this controversy threshold yet, preventing host country governments from taking such action. This may be because many HCMs can still be considered proportionate – for example, financial measures usually only complement private sector financing that is generally made available to firms for outward investment, and SOEs appear to be rarely targeted explicitly with HCMs, even if they might enjoy some implicit preferential treatment. Nevertheless, the potential host country responses to concerns about competitive neutrality should induce governments to consider this issue when they decide to introduce or expand HCMs.

Key insights

• HCMs could undermine competitive neutrality in the international investment environment if they provide specific companies or investments a competitive advantage that distorts the level playing field among MNEs and international investors.
• Many HCMs, such as early support services, have limited effect on competitive neutrality and their purpose can be fully justified. Some HCMs, such as financial support, have the potential to distort the international competitive environment if they are excessive and disproportionate. Targeting HCMs at specific companies or types of investment, such as SOEs or acquisitions, could also raise concerns.
• Governments should consider the implications for competitive neutrality when they introduce or expand HCMs.