Government Favoritism: Local vs. Foreign Companies and Legal Obligations
When governments favor local companies over foreign ones, the question arises: Is such favoritism legal? This article explores the legal and practical implications of government policies that may give local companies an advantage over foreign ones, and the obligations (if any) of governments to treat foreign companies fairly.
Legal Framework and Government Influence
Whatever a government does, it operates within the legal framework of the country. Despite the separation of powers with a legislative branch expected to be independent, government policies often reflect national interests.
Many countries provide special treatment to local companies, from direct state investment to preferential tax policies. For example, in France, the state often has a significant stake in national companies, substantially supporting them. While foreign companies can and do compete, competing on a level playing field isn’t always guaranteed.
Fairness and Legislation
There is a general obligation for governments to act fairly. However, this obligation does not necessarily mean that foreign companies must be treated identically to local ones.
When a foreign company establishes a presence in a country, it can be subject to local laws and treated similarly to local companies. For example, foreign branches of companies are treated as local entities and subject to the same regulations. This is evident in Romania, where recent reforms have aimed to make the business environment more equitable.
Benefits for Foreign Investors
Some governments actively encourage foreign investment. They provide various incentives, which can range from tax breaks to specialized support programs. These measures are designed to attract international businesses and foster economic development.
For instance, Romania has made significant strides in recent years, offering a flat corporate tax rate to attract foreign investment. Such policies can significantly impact the competitiveness of local and foreign companies alike.
Examples of Government Incentives
One specific example is Romania's award system for foreign investors. In 2014, I was awarded the Citizen of Honour in my home city of Bucharest. This recognition, while honorary, carries tangible benefits. As a Citizen of Honour, I am entitled to certain tax incentives if I decide to start a business in the city. However, the current economic climate in my home city is challenging, making this incentive less appealing to me.
Conclusion
While governments have the legal and practical ability to favor local companies, there are no strict legal requirements to do so. Fairness is a guiding principle, but it doesn’t have to mean identical treatment of foreign and local companies. Governments can use various means, including legislation and direct support, to encourage investment and development.
Understanding the legal and practical implications of government actions can help businesses navigate the sometimes complex landscape of international trade and local regulations.