On July 5th, without warning or explanation, Chinese officials arrested four Rio Tinto employees, one of them an executive and Australian citizen. Later, China's state run media reported the arrests were connected with allegations that Rio Tinto obtained confidential documents revealing China's bargaining strategy for negotiating iron ore prices with the multinational mining firm. Australian officials are particularly concerned since the detainees were given no access to outside communication and Chinese officials did not divulge any information about their whereabouts or the charges they face to Rio Tinto or the Australian government.
The ensuing diplomatic breakdown between China and Australia illustrates two points about the nature of foreign direct investment (FDI) today.
1) Power asymmetries are shifting.
Most academic work on FDI treats developed (read OECD) countries as price makers and developing countries as price takers. In other words, highly developed countries act on behalf of their multinationals by securing legal protection for multinationals' FDI in other countries. This is mainly done through the use of Bilateral Investment Treaties (BITs). The literature treats developing countries (China included) as grateful for whatever FDI they can get, and therefore willing to submit to OECD standards of legal protection for businesses.
The problem with this view is that FDI sourcing patterns are shifting. As the Chinese economy can support regional trade and FDI growth as well as export FDI to Africa and elsewhere, China doesn't need to cower to western demands for business protection. Indeed, China never really has.
Bottom line: predictions of convergence towards one standard of FDI legal protections depends upon the preferred regulatory level of key players. China's rise underscores the possibility of multiple and competing regulatory regimes.
2) The link between home country and multinational must be tested:
The focus on regulatory regimes like BITs assumes that home countries act as agents for their multinationals and that home countries discriminate against multinationals based on the multinational's home countries. Talk that the recent events in China will lead to a backlash against Chinese multinationals looking to directly invest abroad depends upon the idea that countries will retaliate against Chinese-owned firms as well as the Chinese government. And, the Chinese experience is an easy test of this link because many Chinese firms are in part owned by the Chinese government. It is not entirely clear that this link holds more generally or consistently.
