Saturday, February 20, 2010

Why do governments buy companies when they could just steal them?

. Saturday, February 20, 2010

The WSJ reports Venezuela is negotiating to purchase a majority stake in French company Casino Guichard-Perrachon SA's local subsidiary, Cativen. Casino offered to sell a few weeks after Venezuela seized Casino's local grocery chain. So, the obvious (but ignored by the WSJ) question is why would Venezuela pay for a company it can seize?

Of course, international institutions could pay a role. Several multinationals are currently pursuing international arbitration to dispute what they deem unfair payouts, and Venezuela needs new FDI. Negotiating a buyout may be a way for Venezuela to reestablish a pro-investment reputation (though, given Chavez's domestic agenda, investors probably need a bit more than news of a fair buyout to make them more willing to invest in the country). But, if Venezuela is trying to reestablish its reputation, it probably wouldn't have seized Casino's grocery chain in the first place.

Perhaps there's a domestic interest group story at work here. I wouldn't be surprised if influential constituents of Chavez's have some sort of stake in a negotiated buyout.

The recent Venezuelan example highlights a failure of IPE scholarship in explaining political determinants of FDI and investment expropriation. Most of this literature (my MA thesis-in-progress included) focuses on institutional solutions to incomplete contracting problems associated with foreign investing. But, this framework for analysis often forgets that domestic constituents often have real interests in protecting the investments of certain foreign firms. The Casino-Venezuela case is particularly interesting because Venezuela has consistently refused to be constrained by international investment treaties in recent years. Yet, at least some firms can get some sort of compensation for expropriation even in an environment devoid of institutional constraints.

Institutions often matter, but there's another layer to the story.


Kindred Winecoff said...

Good post.

It is curious, so in that spirit here's an off-the-wall thought: Venezuela seized the smaller grocery chain in order to force the sale of Cativen at an acceptable price. In other words, I wonder if this is more of an "eminent domain" situation where Casino gets a "fair" price but really had no choice but to sell.

I don't know enough about the local circumstances to have any idea if that makes sense, but it's just a thought I had.

Sarah Bauerle Danzman said...

maybe, but again, if you can actually seize a company, then why not just do that? Local governments (at least in the US) worry about backlash after eminent domain seizures because these types of moves are often unpopular. Chavez's popularity is based off of nationalism rhetoric. Either way, we're getting back to interest group politics rather than institutions.

Thomas Oatley said...

I wonder what the value of Venezuela's overseas fixed assets might be. I doubt it is zero. Thus,might be a simple case of bilateral hostages.

Kindred Winecoff said...

i'm still stuck on this. been thinking about it for days and can't explain it.

how about this: think of chavez as a mafia don who wants a piece of property that is currently occupied. he presents a below-market offer, but it's rejected. he could firebomb the place, but that would damage the value of the property. or he could throw a brick through the window (seize the grocery chain, in this metaphor), then walk in and say that he can't guarantee their protection but he would be willing to take the business off their hands at a "fair" price.

maybe what i'm saying is... is there any evidence that this business was up for auction, or did chavez just muscle in as a sole "bidder"? maybe there's some quid pro quo going on, as Thomas said.

it bothers me b/c i don't have a great model for interpreting this.

Sarah Bauerle Danzman said...

Yeah, it's hard to interpret in part because there's not good information about the process. The news reports that the French company approached the Venezuelan government, but their source was Uncle Hugo, so who knows the real story.

Perhaps the Venezuelan government is pursuing a mixed strategy - they want investment and they also want to steal that investment. But, if they always expropriate foreign firms, no investor will enter the market. So, Venezuela mixes to induce some level of investment. Of course, investors would really prefer to retain ownership over their property rather than being forced to sell.

I guess the reason why this case is interesting is because current PoliSci theory can't really explain much of this interaction.

Why do governments buy companies when they could just steal them?




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