HCMs can target companies and investments in specific industries and sectors of the economy. Targeting might focus on sectors that are considered important within the home economy or which are priority sectors within a country’s development strategy.
Sectors of focus might also be those in which OFDI is expected to generate home-country effects that are of relevance to the home country’s economic development. These may include:
- Sectors in which the home country has export potential and therefore intends to strengthen its export performance;
- Sectors where there are scarcities in the home country that it aims to remedy through OFDI (e.g., in natural resources);
- Sectors where the home country would like to catch up with the international technology frontier through OFDI; or
- Sectors that demonstrate future importance.
In some cases, targeting might involve prohibiting OFDI in specified sectors, or making OFDI in some sectors subject to approval. This can, for instance, occur when there are foreign exchange restrictions, when OFDI in specific sectors is sensitive or against the national interest, or when it might have unfavourable economic or security implications for the home country.
Targeting by sector can be complex, as it requires consideration of many industries and sub-industries in the primary, secondary and tertiary sectors. Sectoral compositions differ considerably among countries, requiring individual governments to make unique choices on which sectors to target. Moreover, the costs of HCMs might differ between sectors. For example, supporting large natural resources or infrastructure projects is more costly compared to supporting investments in the services sector.
Key insights
- Depending on country economic characteristics and development strategy, targeting HCMs towards specific sectors can increase the effectiveness of these measures in supporting investments that promise to generate favourable home-country effects.
- Targeting by sector often focuses on natural resources, technology-intensive or services sectors. Financially supporting natural resources projects tends to be more costly than supporting services sectors.
- It is possible to prohibit OFDI in specific sectors and industries, or make OFDI subject to approval, in order to prevent economic activities that are not in the home country’s economic, political or security interests.
Interactions
B2) Industrial sector: Home-country measures can be targeted at specific industrial sectors.
C2) Regulations: Regulations can prohibit OFDI or make it subject to approval in specified sectors. Monitoring of OFDI projects and corporate social responsibility abroad may also focus on specific industries where the potential for harmful corporate conduct is heightened (e.g., in natural resources or construction sectors).
C4) Financial support: Financial support can focus on companies in specific industrial sectors, such as natural resources, knowledge-intensive or services sectors. It is also possible to exclude certain sectors from financial support measures.
C5) Fiscal support: Fiscal HCMs can support OFDI undertaken in specific industries, such as natural resources, knowledge-intensive or services sectors.
C6) Political risk insurance: Specific political risk insurance can be offered in particular sectors of the economy that are prone to heightened risks, such as the natural resources or construction sectors.
C7) Treaties: MNEs are more inclined to take investment treaties into consideration when they operate in a sensitive sector where problems are more likely to arise in host countries (e.g., in energy, mining, construction).
C8) Operational support: Operational support can focus on specific industries, such as sensitive sectors or industries where projects are large and complex (e.g., natural resources, energy, infrastructure).
C9) Maximizing benefits: Efforts to maximize benefits from OFDI can focus on specific industrial sectors, such as technology-intensive sectors.
Available Research Findings
Many countries restrict OFDI or make it subject to approval in specific sectors, especially in the context of foreign exchange restrictions. Relevant information can be found in the IMF’s Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER).
(see sections XI.A.5.a. on outward direct investment)
Existing Country Practices
Targeting by sector in India: Direct investments abroad are prohibited in the real estate and banking industries, with some exceptions. In other sectors (e.g., energy and natural resources, manufacturing, education, hospitals), prior approval is required.
Targeting by sector in Japan: The INCJ creates and nurtures key industries via open innovation and by overcoming boundaries between companies and industries. It focuses on sectors that require revitalisation through open innovation. For investment in developed countries, JBIC specifies a list of sectors in which companies are eligible for overseas investment loans and equity participations. In addition to its general overseas investment insurance, NEXI offers specific investment and loan insurance for the natural resources sector.
Targeting by sector in the Republic of Korea: KORES provides financing and technological support to private companies for overseas resources development. K-Sure offers overseas investment and political risk insurance with a focus on the natural resources sector.
Targeting by sector in Malaysia: The Export-Import Bank of Malaysia runs the Malaysian Kitchen Financing Facility, which supports the overseas establishment and expansion of Malaysian restaurants, food-related warehouses and trading houses, and Malaysian food-related retail businesses and supermarkets. MATRADE’s Services Export Fund offers grants for the expansion of Malaysian services overseas.
Targeting by sector in Spain: COFIDES excludes the defence and real estate sectors from its financial support measures. It also has a list of sectors excluded due to environmental and social concerns.
Targeting by sector in the United States: In December 2020, the DFC announced an equity investments scheme covering all sectors, with special consideration given to technology sectors.
Resources
Many countries restrict OFDI or make it subject to approval in specific sectors, especially in
the context of foreign exchange restrictions. Relevant information can be found in the IMF’s
Annual Report on Exchange Arrangements and Exchange Restrictions (AREAER).
(see sections XI.A.5.a. on outward direct investment)