Recent years have seen important global shifts in both the policy frameworks for screening inward foreign investment and the way in which they are applied. These shifts come against a backdrop of protectionist political rhetoric and anxieties about the impact of foreign direct investment (FDI) in traditionally open economies. The new landscape is exemplified by the position in the US, from the increase in the volume and intensity of CFIUS reviews (leading to the collapse of deals such as Ant/MoneyGram and Canyon Bridge/Lattice Semiconductor), to the current proposals for expansion of the CFIUS mandate. It also extends to Europe, with increased intervention in France and Germany, the European Commission planning EU legislation on inward investment screening for the first time, and the UK government proposing extensive changes to its powers of national security review. Against the backdrop of these larger changes are many smaller shifts in the political mood around FDI across the OECD.
Governments in these countries are balancing competing concerns, seeking to remain attractive to necessary foreign investment while increasingly scrutinising the terms on which it is made. This is not happening in a vacuum. It reflects some big shifts in the global economy as well as the political mood. Moreover, it is likely to be structural, rather than cyclical. It will continue and may even accelerate.
Above all, the FDI changes reflect the growing weight of China as an exporter of capital, and a shift in what Chinese firms are seeking to acquire. But they also reflect increasing political concerns about how FDI by multinational companies – regardless of where they are based – is changing global value chains, with high-value activities being up-rooted from one location to another, as company ownership changes.
This pressure is manifesting itself in two distinct ways, which are important for foreign investors to understand. Politicians are adopting new political strategies for injecting informal government locus into deals, often deliberately creating ambiguity about the state’s power of discretion to force acquirers to court their approval more assertively. This typically means using more fully the room for discretion that is invariably available within existing legislative frameworks. In some cases, however, they are going further and seeking new policy tools that allow for more thorough vetting of foreign investments. This often requires new legislation.
The result is a more fluid and uncertain environment for foreign investment, presenting additional hurdles for deal parties. This makes it essential for foreign investors to understand both the legal framework and the political and policy contexts they are operating in when pursuing acquisitions. FDI and public interest considerations now need to form a key part (together with antitrust review) of transaction parties' regulatory strategy.
In this report, Global Counsel and Herbert Smith Freehills' Foreign Investment Regulation Group (made up of experts from our global M&A and Competition, Regulation & Trade practices) consider the current landscape and how to navigate this through effective deal planning and execution. Alongside this report Herbert Smith Freehills is publishing an interactive map and country-by-country guide summarising the FDI/public interest control processes and trends in key jurisdictions, an essential tool when considering potential deal hotspots.