Foreign Equity Restriction are constrains on the degree of ownership and control, referred to as equity in company law and finance, which foreigners of a country are permitted to control (Emery et al, 2007).
Such restrictions are strictly adhered to and are imposed in two different ways. The first way is through legislation. Restrictions through legislation are initiated by the government and enacted by the law making arm of the government. Such restrictions are usually aimed at or founded on the principles and provisions of public interest.
Therefore, where the country’s government has enough reason to suspect that the unrestricted investment by foreigners is against national interest, it will institute the restrictions. The second way in which the restrictions can be put in place is by the decisions of the individual companies. This paper seeks to explain the concept of foreign equity restrictions and the reasons as to why countries and companies adopt such restrictions.
The rationale behind the existence of a firm is to maximize the wealth of its shareholders. This objective, which has since replaced the traditional goal of profit maximization, calls for a number of strategies with regard to the manner in which shares are sold. Domestic companies and organizations maximize net worth of the business through price discrimination when it comes to selling their shares to both foreigners and locals.
An increase in the net value of the business translates to an improvement in the wealth status of the owners. The discriminatory pricing practices are applicable where and when the demand variable for local shares varies between local and non-citizen investors (Emery et al, 2007). The company may opt to sell the shares at different prices so as to achieve stability in control.
One of the major reasons why this kind of discrimination may be practiced is the need to protect the autonomy of the local industries. Since the decisions in the limited companies are made by a majority of the shareholders, it is important that the local shareholders outnumber the foreign shareholders so that the organization can achieve the status of a self-determining entity (Eun & Resnick, 2007).
Self-determination is vital when it comes to making strategic decisions. A company that has excessive foreign control will be controlled by the non-citizens who will make decisions that suit their interest. There is a possibility that the interests of the foreigners may not be the same interests of the locals following differentials in the rates of taxation.
A country’s government may also opt to come up with these restrictions for political reasons. The most potent illustration to this point is a recent case where a Dubai company intended to buy an American organization dealing in shipping and port services. The American leaders protested the move bitterly citing threats of terrorism as the major reason.
While American laws do not restrict such transactions, the political factor ended the transaction pre-maturely. Political factors are used in the name of national defense. The politicians may cite such concerns as national security to bar a competing economic force from investing in their territory (Emery et al, 2007).
This concept of foreign equity restrictions is most prominent in Switzerland, Japan and Brazil. In Switzerland, the restrictions are enacted and enforced by the individual companies with an aim of preventing dilution of power and control of the locals. This is done to encourage domestic governance of the companies (Eun & Resnick, 2007).
In Japan, the restrictions are put in place by the law. This is done for various reasons; among them national security and defense. In Brazil, the most prominent sugar businesses that are mostly run by families influence the government to institute such restrictions. The United States of America practices selective restriction such as restrictions on foreign acquisition of media services controlled by the government.
Emery, D.R, Finnerty, J.D., & Stowe, J.D. (2007). Corporate Financial Management (3rd Ed.). New Jersey: Pearson-Prentice Hall.
Eun, C.S., & Resnick, B.G. (2007). International Financial Management (4th Ed.).New York: McGraw-Hill.