There’s a noticeable shift happening in foreign investment. Countries around the globe, even those that traditionally have been staunch supporters of the free flow of capital, are tightening their investment rules in the name of national security. This new wave of vigilance is reshaping how investments move across borders, presenting challenges and perhaps opportunities for investment promotion agencies (IPAs).
A Growing Phenomenon
Let's take a closer look at what's happening around the world, starting with Singapore, often celebrated as a champion of open-market policies. Proposed in late 2023 and passed this week, the Significant Investments Review Bill (SIRA) is designed to screen so-called ‘significant investments’, both local and foreign, into entities critical to national security. Under SIRA, certain entities will now be required to notify or seek approval from authorities for changes in ownership or control, reflecting Singapore's response to an increasingly complex and uncertain global economic environment. Critics - yes, they exist in Singapore! - have pointed to a lack of a clear set of definitions on how entities are designated. They fear that the new regime may risk “being seen as opaque (and) lacking in transparency, and fuel investors’ fear of the application being arbitrary”.
This move is part of a wider narrative of countries prioritizing domestic and national security considerations in foreign investments.
Canada has enhanced its national security protocols regarding foreign investments, particularly those involving State-Owned Enterprises (SOEs). The framework for these measures is outlined in the Investment Canada Act (ICA), which includes a comprehensive review system for foreign investments. This system encompasses a "net benefit" review for major acquisitions by foreign investors, where the investment's impact on Canada’s economic activity, employment, and industrial efficiency is assessed. Investments in sensitive sectors, such as critical minerals, are subject to even stricter scrutiny, with foreign SOE acquisitions in these areas generally approved only under exceptional circumstances. These powers were used in November 2022 when the Canadian government ordered the divestiture of investments by three Chinese companies in Canadian critical minerals operations after a national security review under the ICA.
In the US, the Committee on Foreign Investment (CFIUS) has been setting the pace for this trend, intensively vetting foreign investments like never before. Across the Atlantic, the EU and UK are not far behind, each developing their unique approaches to scrutinize inbound investments. This global movement reflects a growing caution in international trade and finance, marking a significant shift from the open-door policies of the past.
Navigating Rocky Waters
This cautious approach is reshaping the FDI landscape. It’s no longer just about financials, the talent pool, and new markets; navigating a complex web of regulations and security concerns has become a critical part of the game. This shift is significantly impacting major deals and altering corporate investment strategies. For instance, the U.S. DOJ's intervention in Penguin Random House's planned acquisition of Simon & Schuster highlights increased scrutiny and the use of unconventional legal theories in regulatory decisions. Such instances underscore the profound impact these evolving regulatory landscapes have on major business transactions. Similarly, the European Commission's decision to prevent Illumina's acquisition of Grail, despite the deal initially being greenlit by the U.S. FTC, reflects the increasing vigilance of European regulators over transactions involving sensitive health data and biotechnology. The concern was that such an acquisition could potentially give a foreign company access to sensitive health data of European citizens, posing a risk to both privacy and national security.
A Role for IPAs?
So, how can we navigate these choppy waters? First up, clarity and transparency from governments would be a game-changer, making it easier for businesses to align with new regulations. Global cooperation is also vital – aligning investment screening processes can help smooth out these bumps.
IPAs could play a pivotal role in this context. They can act as advocates and intermediaries, bridging the gap between government regulations and investor needs. By providing tailored information, facilitating connections, and advocating for investor-friendly policies, IPAs can significantly enhance the attractiveness and accessibility of a region for FDI. They can also assist in demystifying regulatory processes and offer support in navigating the complexities of new investment screening regimes. Ultimately, the active engagement of IPAs in policy dialogues and investment facilitation can foster a more conducive environment for FDI flows, balancing the need for security with the imperatives of economic growth.
Conclusion
Balancing national security with a thriving global investment environment is no small feat. It's about striking the right chord between control and openness. As this landscape continues to evolve, staying informed and adaptable will be crucial for investors and policymakers alike. By embracing this change with smart strategies and collaborative efforts, the global economy can continue to grow in a secure and sustainable way.