Explain the differences among the three main theories of compensation for government takings of foreign-owned properties. Provide an example.
- International Theories Relating to Takings of Foreign Property
- Traditional Theory: The Prohibition of All Takings-
- Prohibition of all takings. the taking of foreign property was forbidden altogether
- Modern Traditional Theory: is generally considered to be the international standard
- Recognizes right to nationalize foreignowned property but:
- must be for a public purpose,
- prompt, adequate compensation
- Non-Western Theories:
- State has sovereign right to take, based on the Calvo Doctrine: sovereign placed head of foreign investor.
- Calvo rejected the modern-traditional theory’s prerequisites: Public Purpose and Non-Discrimination. (lucypa3006, 2012)
There are different ways a government can compensate for its takings of foreign property, but they are all about paying a fair price for the property they take.
The difference is mainly in valuating this property. So there are three main ways of valuation.
The first one is book value. This method is done by valuating all the assets of the company that is also called net asset value. It represents the net worth of the company’s assets as shown on balance sheet. This is usually considered an improper valuation because it does not take into consideration many aspects of the company like goodwill, trademark or how much this company makes profits.
The second way is going concern. This basically means that it is valued according to similar companies of that nature. It takes into consideration the assets and the other parts like how profitable the company is and what is its potential in the future.
The third main way is called discounted cash flow. This is considered the best way of valuation because the company taken is expected to grow with time either at a constant rate or continuous. It takes the asset value and calculates the cash flow with the growth rate, and sees how much the company is worth today.
The last one is basically considered the fair price. This way the owner of the company would not feel like it was taken for a lower price with which he can’t do anything as good later.