WASHINGTON—National security concerns are prompting tighter investment screening as numerous countries introduce new regulatory frameworks that focus on foreign buyers, particularly Chinese state-backed firms.
Almost 12 percent of global foreign direct investment was blocked in 2018 because of national security concerns, according to a study by the United Nations Conference on Trade and Development (UNCTAD).
“In recent years, there have been numerous cases where foreign investment has been rejected by targeted host countries for national security reasons and related public concerns,” a report by UNCTAD stated.
“There is a trend towards tightening investment screening by expanding the scope and depth of screening procedures and the corresponding disclosure obligations of foreign investors.”
UNCTAD identified at least 20 cases in which planned foreign takeovers were blocked or canceled in the period from 2016 to September 2019; sixteen involved Chinese investors. The total value of the blocked transactions amounted to more than $162.5 billion.
In addition, national security-related foreign investment screening is on the rise.
“In Italy, for example, the number of such proceedings in 2018 was 255 percent higher in comparison to 2015; in the United States, the number of cases screened in 2018 was 160 percent higher than in 2015,” the report stated.
While investment screening used to be more relevant to the military and defense industries, it has expanded to cover key technologies and know-how, such as artificial intelligence, robotics, semiconductors, 5G, biotechnologies, satellites, and aerospace. It’s also applied to control the access of foreigners to sensitive data of domestic citizens.
Both developed and emerging countries have introduced measures to boost investment-screening mechanisms, in response to the rise in national security concerns. In nearly eight years, at least 13 countries introduced new regulatory frameworks. There have also been significant amendments to existing foreign investment laws.
There are several reasons for the increased crackdown on foreign buyers, according to UNCTAD. Countries want to ensure that cutting-edge technologies and know-how remain in domestic hands, as they are key for a country’s competitiveness. In addition, they seek to block increasing investment activities by foreign state-owned enterprises or sovereign wealth funds.
Governments use state-owned companies to buy companies overseas as a means to acquire key technologies and know-how. Hence, tighter screening for national security reasons had a significant impact on such investors, particularly those from China.
For example, the Canadian government in May 2018 blocked a $1.5 billion acquisition of the Canadian construction company Aecon by a Chinese state-owned company. The Canadian government stated that it “is open to international investment that creates jobs and increases prosperity, but not at the expense of national security.”
U.S. President Donald Trump issued an order in September 2017 to prevent the acquisition of Lattice Semiconductor Corp. by a group of Chinese investors, including a state-controlled venture capital fund. Trump followed a recommendation of the Committee on Foreign Investment in the United States (CFIUS), which had opposed the transaction for national security reasons.
US Broadens Foreign Investment Screening
The United States has enhanced its investment screening process to tackle national security threats posed by Chinese investments in particular.
The Foreign Investment Risk Review Modernization Act (FIRRMA) was passed by the U.S. Congress with overwhelming bipartisan support and was signed into law by President Trump in 2018.
The bill strengthened the CFIUS by bringing new transactions under its review authority. It enables the committee to scrutinize and block deals involving the transfer of not just controlling shares, but also minority stakes in companies dealing in critical infrastructure or technology.
Germany also tightened the rules on foreign investments deemed threats to national security. The German government in December 2018 expanded its ability to block foreign deals by lowering the threshold for reviews from 25 percent to 10 percent of the voting rights for direct or indirect acquisitions of German companies.
Officials said that they had to lower the threshold to monitor acquisitions in sensitive sectors of the economy.
Protectionist sentiment started to rise in Germany after a Chinese appliance maker acquired Kuka AG, a German robot-maker in 2016. The deal served to heighten worries that China could be buying high-end technologies that are strategically important to the German economy, and led to the blocking of the acquisition of German chipmaker Aixtron by a Chinese fund. The administration of President Barack Obama also prohibited the takeover of the U.S. subsidiary of Aixtron by the same fund.
The United Kingdom unveiled a 120-page policy last year to enhance the government’s power to prevent foreign acquisitions of British assets that raise national security concerns. The UK has mainly targeted Chinese and Russian investors.
According to UNCTAD, other countries that have enhanced foreign investment screening in recent years include Australia, Canada, Italy, and New Zealand.
In its blueprint “Made in China 2025,” the Chinese regime revealed its ambitions to achieve dominance in 10 high-tech industries, including advanced information technology, robotics, aviation, and new energy vehicles.
To realize its objectives, China has been resorting to various tactics including industrial espionage, cyber theft, forced joint ventures in exchange for market access, and acquisition of foreign companies to attain sensitive technologies.
According to a report by the Council on Foreign Relations (CFR), China’s intention isn’t so much to join the ranks of high-tech economies like the United States, Germany, South Korea, and Japan, but rather to replace them altogether.
Made in China 2025 outlines targets for achieving 70 percent “self-sufficiency” in core components and basic materials in high-tech industries by 2025.