Growing National Investment Screenings – in Germany and Worldwide
In the past years, numerous companies in Germany were bought by foreign investors. Takeovers from China, in particular, attracted public attention. The acquisition of the German robot manufacturer KUKA, the Chinese purchase of shares from Daimler, and the investment in the German network operator 50Hertz were particularly controversial. China is not only investing more and more in Germany but is in the process of expanding its shareholdings worldwide. In the past decade (2009-2019), the volume of Chinese direct investments abroad has increased around tenfold (UNCTAD).
Advocates of tighter state investment screenings warn that security and public order could be endangered when foreign investors gain stakes, for example, in arms companies or in critical infrastructure such as power grids or even pharmaceutical companies. In addition, they see the competitiveness of the business location to be at risk if foreign investors acquire “future-oriented technologies” through their acquisitions. Furthermore, by strengthening their own rights of intervention, other states – especially China – should be encouraged to open their own markets (“reciprocity”).
Strengthening German and European Foreign Trade Law
In response to the debate, the German government has expanded its options to screen and ban foreign investment in 2017, 2018, and 2020. A reporting obligation has been introduced for company takeovers in the case of critical infrastructures. The list of economic sectors in which takeovers are subject to approval has also been expanded to include various "key technologies". Most recently, in spring 2020, in response to the corona pandemic, companies in the industrial healthcare sector were included. In addition, the responsible Ministry of Economic Affairs was given more leeway by extending examination periods. The participation threshold above which investments from third countries can be prohibited was also lowered from 25 percent to ten percent for critical infrastructures. Further extensions of the state's rights of intervention are planned for the remainder of the year.
The European Union is also working on tighter screenings on investment from third countries. In spring 2019, an EU regulation focused on how to deal with investment controls within Europe came into force. The EU has hereby created a European framework for investment screenings. The regulation lays the foundations for a systematic exchange of information between Member States and with the European Commission on takeovers from third countries. The regulation explicitly emphasises that the only possible justification behind restrictions on foreign investment is the threat to national security and that the final decision on restrictions on specific investments is always in the hands of the member states. In spring 2020, the European Commission explicitly called on the Member States to use their legal instruments for investment screenings to critically review strategically relevant takeovers of companies in the healthcare sector from third countries.
Importance of Foreign Investment and Trend Towards Investment Protectionism
However, these understandable security policy concerns are counterbalanced by considerable economic risks. Germany and Europe benefit substantially from open markets for goods, services, and investment. The foreign turnover generated by German companies through their sites abroad is more than twice as high as the value of German exports. In Germany alone, 3.2 million employees work for 16,817 companies in which foreign investors have a stake (2018). However, foreign investment is declining; in the previous year (2017), this figure stood at 17,167 companies. The number of Chinese-owned companies and the number of people they employ has also fallen recently.
In order to maintain the foundation of their competitiveness, the EU and Germany must remain open to foreign investors. This is particularly prevalent against the backdrop that direct investment is in any case increasingly attracted to the emerging markets in the Far East. Since the middle of the 2010s, the bulk of annual investment flows have been directed towards emerging and developing countries (Link: International Investment Agreements Indispensable to Protect Investment Abroad).
The era of major liberalization and market opening seems to be coming to an end; a global spiral of investment protectionism threatens to accelerate. The UNCTAD World Investment Report 2019 showed that one-third (34 percent) of global investment policy measures recently restricted investment. This is the highest level seen in several years. Both UNCTAD and the Organization for Economic Cooperation and Development (OECD) have indicated a trend in the G20 countries towards broadening the framework for government investment screenings.
In the wake of the corona pandemic, this trend has become even more pronounced as many states sought to ensure control over the production of health-related goods. The stricter laws are already reflected in states’ practice of dealing with foreign investment. According to UNCTAD, three times as many takeovers were prohibited worldwide to protect national security in 2018 as in the previous year. In 2020, UNCTAD expects global investment flows to fall by up to 40 percent.
Political Discussion Remains Necessary
Germany should not participate in accelerating a spiral of investment protectionism. At the same time, Berlin and Brussels must ensure security and public order in their dealings with foreign investors. State control of takeovers of security-related companies in the armaments or infrastructure sectors is both permissible under EU law and necessary for regulatory reasons. Legislation in this area must be constantly adapted to changing scenarios, such as in the course of the corona pandemic. This requires a continuous dialogue between industrial, security and foreign trade policy. BDI rejects industrially-motivated encroachments on private property and freedom of contract that go beyond the protection of public security. After all, the competitiveness and innovative strength of German industry is based on the protection of private property and freedom of contract – not on state protection of certain technologies.
It is additionally important to adapt the German and European economic order as a whole to the intensifying systemic competition with China. Such adjustments must be made with our entire economic order in mind and must not be limited to investment controls for foreign investors. We must prevent state-subsidized foreign investment in Germany and Europe from distorting markets or undermining the market economy. Possible fields of action could arise in competition law, public procurement law, or in financial market regulation. In a policy paper on dealing with China, BDI has presented comprehensive proposals. Moreover, BDI is currently working on an extensive concept to strengthen Europe’s strategic sovereignty.
BDI also calls for resolute political action in the further opening of foreign markets. Restricting one’s own openness, however, leads in the wrong direction. The conclusion of free trade and investment agreements, dialogue within the WTO and within fora of global governance, such as the G7 and G20, are more effective than establishing new hurdles for investors.