Foreign investment gets political

Across the Western world, politicians are getting nervous about the future place of their countries in the global economy. In 2014, the EU and the US economies combined accounted for 46% of global GDP, down from 60% in 2004[1]. Over the same period, China saw its share rise from 5% to 13%.

In this context, there is a strong focus on the implications and perceived threats of foreign direct investment (FDI) on national economies, turning it into a first order political issue. It is of equal importance to both corporates and governments. This spotlight has lately been shining particularly brightly on China and its foreign investment activity.

Beijing’s focus on investing in future industries such as artificial intelligence, big data, biotech, quantum computing and microprocessors, including through acquisitions of high-tech companies in Europe and North America, has raised red flags across Western capitals and has attracted the attention of regulators. In fact, China’s Ministry of Commerce recently declared[2] non-financial outbound direct investment to have increased 25.2% year-on-year to USD 16.82bn during the first two months of 2018.

A further concern is that China gains political influence by holding assets in western Countries. For example, by owning the Greek port in Piraeus, China could have influence over the Greek Government through which it could influence EU decision making. For a long time, the EU closed its eyes to this kind of implications of FDI by state owned enterprises.

What this means for companies is a more politicised business environment in which deals are under increased scrutiny. In both the US and the EU, companies face the prospect of additional regulatory burdens, and will therefore need to engage directly within these frameworks if they want to see their deals cleared.

Taken off guard by Chinese investments in Daimler, Europe continues to build its fences

In the EU, fears of China buying into key assets were reinforced when Geely chairman Li Shufu disclosed in late February that the firm had bought a USD 9 billion stake in German carmaker Daimler, making it the largest shareholder. While Li sought to appease fears in Germany, by telling the tabloid newspaper Bild that he hadn’t taken a “single cent” from the Chinese government, his statements in the Chinese media were of a different nature: his Daimler investment would “support the growth of the Chinese auto industry” and “serve our national strategies”.[3]

While the German government is looking whether it needs to close potential loopholes in disclosure requirements[4], the European Parliament has outlined its initial views on how the proposed EU foreign investments screening framework should look.

The framework was presented by the European Commission – with the political backing of Germany, France and Italy – in September 2017. The emphasis lies on coordination and information-sharing among EU countries, while keeping national governments in control of the ultimate power to block takeovers. The Commission, according to the proposal, would only be able to give a non-binding opinion for investments of “Union interests”.[5]

The man in charge of the legal proposal in the European Parliament – French conservative lawmaker Franck Proust – has proposed to grant a veto power on foreign takeovers of European companies to any coalition that includes a third of EU Member States. Proust would also like to give the European Parliament the possibility to issue an opinion on investments, and allow Parliament delegates a seat at the table when EU countries discuss the screening of foreign investments. His proposals were well received by most of his fellow European parliamentarians at a trade committee discussion on 22 March, during which a consensus on information-sharing, and to a certain degree coordination, seems to have appeared.  Discussions in the Council are likely to be more contentious given the reliance of some EU Member States on Chinese investments, and the fear of others that a new screening framework might discourage investment into the EU and add more red tape. The Bulgarian presidency of the European Council hopes to form a position on the FDI proposal by June.

US screening is increasingly political after Qualcomm/Broadcom and looks to add more weapons to its arsenal

Meanwhile in the US, defense officials sounded the alarm on foreign investment early last year by releasing a government report that detailed China’s strategy of gaining access to US technologies, particularly in artificial intelligence, autonomous vehicles, robotics, and blockchain technology.  The report was released just months after a historic 2016 where China invested $46.2 billion in the US, up from $356 million in 2007[6].  To curb this threat, the Department of Defense called for the United States to seriously ramp up its screening of foreign investment, a regulatory process led by the Committee on Foreign Investment in the United States (“CFIUS”).

This report and the subsequent news coverage resulted in quick action by both the Trump Administration and the Republican-led Congress.  For example, as per CFIUS’s recommendation, President Donald J. Trump has already blocked two Chinese acquisitions of US businesses on national security grounds, with several other foreign acquisitions unravelling as a result of heightened scrutiny. The most recent deal, Broadcom’s hostile takeover attempt of Qualcomm, demonstrates how businesses are taking advantage of the current anti-China environment for their own gain.  Qualcomm actively lobbied the Trump Administration and Congress to block the deal on national security grounds arguing that it would have strengthened Huawei’s position in the race to develop 5G.

The Trump Administration is not alone in its effort to increase the scrutiny of foreign investment. US lawmakers have introduced legislation that would significantly reform CFIUS. More specifically, the legislation known as the Foreign Investment Risk Review Modernization Act (FIRRMA) would broaden the scope of transactions that must undergo CFIUS review, as well as provide additional guidance in determining what constitutes a national security threat. FIRRMA has received broad support from Republican and Democratic lawmakers, as well as key officials from US agencies within the Trump Administration, including Treasury Secretary Steve Mnuchin.[7] As a result, the legislation could become law before the end of this year, giving the Trump Administration more authority to screen foreign investment, particularly in the technology sector.

For businesses operating and investing globally, what remains to be done?

Foreign investment has now become a political issue on both sides of the Atlantic as leaders worry about their countries’ capacity to maintain their technological edge. As a result, businesses around the world will soon have to navigate an additional layer of scrutiny around deals, on top of current merger controls. This translates into tangible risks to get transactions cleared as new screening mechanisms are increasingly likely to be leveraged by domestic political and commercial interests to block deals. In this angst-driven environment, businesses will need to revisit their foreign investment strategy by anticipating potential political roadblocks and by engaging much more proactively with regulators and the wider public to make their voices heard.

Jan Hueckmann, Gerardo Proaño and Martin Zech in Brussels; John Whitcomb in Washington, D.C.

 

[1] http://ec.europa.eu/eurostat/statistics-explained/index.php/File:Share_of_world_GDP,_2004_and_2014.png

[2] http://english.mofcom.gov.cn/article/newsrelease/policyreleasing/201803/20180302719674.shtml

[3] https://www.ft.com/content/391637d2-215a-11e8-a895-1ba1f72c2c11

[4] Ibid.

[5] https://ec.europa.eu/transparency/regdoc/rep/1/2017/EN/COM-2017-487-F1-EN-MAIN-PART-1.PDF

[6] https://rhg.com/impact/china-investment-monitor/

[7] https://home.treasury.gov/news/press-releases/sm0270

 

 

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