Investment Screening in Germany and Europe

© Fotalia/Edward de Rule

© Fotalia/Edward de Rule

Chinese businesses are increasingly investing in German and European companies. Over the past two years, the German government has expanded its right to intervene in foreign investment. Industry remains adamant that Europe must stay open to investment. There must be no interventions in private property and freedom of contract for industrial policy reasons.

China is investing more and more abroad. According to UNCTAD, Chinese stocks of foreign direct investment have increased by the factor 53 since the turn of the millennium (as of 2018). In many European countries, there is growing concern about key technologies being “sold out”. The takeover of the German robot manufacturer KUKA, the Chinese stake in Daimler, and the involvement in the German network operator 50Hertz have led to controversial discussions in recent years.

Proponents of tighter state investment screenings warn about the threat to security and public order, in particular regarding investment in armaments companies and critical infrastructure.  Moreover, they see the competitiveness of the local economy as being endangered by foreign investors appropriating future-oriented technologies through acquisitions. Moreover, they argue that by strengthening our own right to intervene, other states – especially China – will be induced to open their own markets (“reciprocity”).

Germany’s Tightened Foreign Trade Law and the European Commission’s Draft Regulation

In response to this debate, the German government tightened the foreign trade ordinance in July 2017. This included introducing the obligation to notify authorities of company takeovers in certain sectors of the economy in the area of critical infrastructure.  At the same time, the list of sectors in which takeovers are subject to approval was expanded to include “key technologies”. Through the extension of the screening periods, the Ministry for Economic Affairs was given more room to manoeuvre. In December 2018, the German federal government lowered the threshold for screening and prohibiting investments from third countries in the area of critical infrastructure from 25 per cent to 10 per cent.

In Spring 2019, the European Council and the European Parliament adopted a regulation establishing a framework for the screening of foreign direct investments into the EU. The draft explicitly emphasizes that foreign investments can be limited only on the grounds of a threat to national security and that the Member States always have the final say on whether to restrict specific investments.

The Significance of Foreign Investment and the Safeguarding of Security and Order

Germany and Europe benefit considerably from open markets for goods, services, and investments. The total amount of revenue earned by German companies through their sites located abroad is approximately double the total value of German exports. Similarly, foreign companies are engaged here in Europe. Alone in Germany, some three million people work for around 16,000 companies in which foreign investors have stakes.

In order to maintain their competitiveness, the EU and Germany must remain open to foreign investors. This is particularly important at a time when foreign direct investors are being increasingly drawn to the growth markets of the Far East. European politicians should also not give other states any grounds to turn to protectionism.

At the same time, Berlin and Brussels must safeguard national security and public order. Under EU law, state control over acquisitions of security-relevant companies in the areas of defence and infrastructure is both admissible and acceptable from a regulatory point of view. In Germany, there are sufficient legal means to safeguard national security. Any economically motivated restrictions on investment freedom that go beyond this framework would constitute inadmissible interference in private property and freedom of contract – two integral elements of the market economy.

No Backdoor Protectionism!

While the German government and the European Commission should work resolutely towards the further opening of foreign markets, they should ensure that the appropriate political instruments are used to achieve this goal. It is far better to conclude free trade and investment treaties, take part in the dialogue within the WTO and participate in global governance forums such as the G7 and G20 than to erect ever more barriers for investors. Moreover, it is important to adapt the German and European economic system to tackle the increasing systemic competition with China. Such adaptation must take into account our economic order as a whole and should not be limited to investment controls on foreigners. This includes competition law, procurement law, and financial market regulation. In this vein, BDI has published a strategic position paper, laying out more than 50 recommendations on how to deal with China.