Divestiture Research Paper

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Countries that employ economic sanctions have a number of economic instruments with which they may induce compliance by their targets. Among these is disinvestment or divestiture, in which they shed their capital holdings within the target state. When sanctioning states divest, they effectively seek to reverse the benefits of foreign direct investment (FDI) flows into the target state. Whereas FDI increases states’ productive capital stock by funding factories and infrastructure, disinvestment seeks a liquidation of this capital stock. Although divestiture has rarely been used (because, to be effective, the sanctioning state must have previously invested heavily in the target country), when the conditions favor this policy tool, it can be particularly effective.

Perhaps ironically, the short-term effects of divestiture may actually benefit the target country. Because factories and infrastructure are typically immobile, they must be sold in-place, generally to entrepreneurs within the target state and often at fire-sale prices. Thus, in the short term divestiture does little to reduce target states’ capital stock; it simply transfers ownership of immobile capital assets from foreign to target state stakeholders.

While the short-term effects of disinvestment may be negative, its long-term effects can prove especially damaging to the target country. This is not only because disinvestment chills future FDI inflows but also because foreign management and technology are mobile and these are generally withdrawn after divestiture. Without access to foreign technology, spare parts, and management skills, in the long run the divested capital stock will eventually run down and become far less productive, becoming a drain on target-state entrepreneurs and increasing their calls for an end to the policies deemed offensive by the divesting state(s).

A notable past case of divestment was undertaken against apartheid South Africa under the context of the Reverend Leon Sullivan’s voluntary code of conduct that pressured (mostly U.S.) businesses to liquidate their South African holdings during the 1980s. In the short term South African entrepreneurs were able to acquire a set of highly productive assets at low prices and the black employees of these enterprises often suffered under their new management (Barber 1982). In the long term, however, the lack of foreign capital, technology, and management expertise began to tell on the divested industries, increasing South African entrepreneurs’ calls for an end to apartheid. Their pressure was one of the keys to the eventual demise of apartheid (Major and McGann 2005).

More recently, a number of universities and religious organizations, such as the Presbyterian Church (USA), have called for a similar disinvestment campaign against Israel for its continued occupation of Gaza and the West Bank. If U.S. companies could be pressured into disinvesting, it could prove damaging to the Israeli economy: in 2003, the United States’ FDI position in Israel equaled 5.62 percent of Israeli gross domestic product. Although Israeli entrepreneurs could be expected to reap a bonanza in the short term, should disinvestment proceed, cutting this crucial link between Israel and U.S. technology, managerial skills, and best practices, it could seriously hobble the Israeli economy in the long run.

In cases in which a sanctioning state has substantial FDI holdings in the target state, and where it is patient enough to ride out the negative, short-term effects of disinvestment, divestiture can be an effective nonviolent policy tool to persuade another nation against engaging in unsavory activities.

Bibliography:

  1. Barber, James. 1982. Economic Interdependence, Sanctions, and Alternatives to Sanctions. In Chatham House Papers, ed. James Barber, Jesmond Blumfield, and Christopher H. Hill. London: Royal Institute of International Affairs.
  2. Major, Solomon, and Anthony McGann. 2005. Caught in the Crossfire: “Innocent Bystanders” as Optimal Targets of Economic Sanction. Journal of Conflict Resolution 49 (3): 337–359.

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