As economies around the world begin to grapple with post COVID-19 recovery plans and investors eye up opportunities, one area is emerging as a heightened regulatory risk for cross-border deals: foreign investment controls.
Inward foreign direct investment (FDI) brings significant benefits to economies, and often represents a material proportion of GDP. Many jurisdictions pride themselves on being open economies, including the EU which is both the leading source and destination of FDI.
But the last ten years or so have also seen a change in FDI patterns, with the emergence of ‘new investors’ from a growing diversity of countries (including a surge from China), and an increase in investments by state-owned enterprises.
Governments, realising that many of these investments are in sectors that are critical to economies, have found that their powers to vet them are often limited. Meanwhile political agendas have become increasingly protectionist. This has led to governments around the world scrutinising their screening measures and, in many cases, enhancing them.
Screening of foreign investment is not a new phenomenon. Controls have been in place in jurisdictions for many years. Until recently, these controls have been limited, being largely focused on national security concerns. However, in recent years there has been a consistent pattern of foreign investment controls being expanded and tightened. And with COVID-19, the focus has heightened with governments reacting by imposing more stringent controls to protect broader national economic and social concerns.
The largest European economies such as France, Germany and the UK are amongst those jurisdictions, as well another 12 EU countries. With the advent of the new EU FDI Regulation other EU countries are expected to follow suit.
As a result, navigating complex foreign investment controls, together with other regulatory and merger control approvals, is becoming increasingly complex.
Foreign investment controls now need to be considered a key regulatory issue, as well as a potential deal risk, for investors when considering strategic investment plans and executing transactions.