Rise in Screening, Geopolitical Tensions Contributing to Drop in FDI, Report Says

Companies are increasingly straying from foreign direct investment, partly due to challenges faced by the ongoing COVID-19 pandemic and a rise in global investment screening, researchers said in a June 3 report. FDI requirements and thresholds have specifically become more “far-reaching” over the past five years, the report said, and businesses continue to face mounting regulatory risks, which has chilled investment in a range of sectors. “Once a hallmark of globalisation” the report said, “FDI has been in trouble for some time.”

The U.S. is at the forefront of a global shift toward increased FDI scrutiny. It expanded the jurisdiction of the Committee on Foreign Investment in the U.S. last year to cover mandatory declarations for certain critical technologies (see 2009140041), and industry lawyers said they have noticed an uptick in CFIUS scrutiny on investment transactions involving China, some stemming from years-old deals (see 2101290021, 2005290027 and 2010270050). European countries are also bolstering their FDI screening tools (see 2103180052).

The increased restrictions are partly because more investments “are caught up in geopolitical rivalry,” specifically involving China, according to the report, published by the Hinrich Foundation and the St. Gallen Endowment for Prosperity Through Trade. “The combination of China’s growing economic heft, its determination to take its place as one of the leading powers in the world and American countermeasures, plus the rise of state capitalism have produced a heady brew that is reshaping policies towards inward FDI,” the report said.

Governments have recently “translated their concerns into action” by blocking FDI projects and “challenging ongoing FDI initiatives,” the report said. “In particular, FDI proposals and projects from China have come under growing scrutiny.” While 47 foreign governments “challenged” about 86 FDI projects between 2010 and 2014, that number more than doubled to 174 since 2015, the report said. Many of those countries, including the U.S., Australia, Canada and Germany, have taken action against at least six Chinese FDI projects.

“Dozens of governments have revised their FDI screening policies after 2015 and several legislatures or governments are considering similar reforms,” the report said. “There can be no better indicator of how FDI is becoming tangled in geopolitical considerations.”

The rise in screening policies may be creating a “broad-based obstacle” to FDI and causing uncertainty about the outcome of reviews of proposed investments, the foundation said. Although governments have a “duty” to protect their national security through investment screening, the report said “the range of commercial activities that fall under scrutiny should be tightly proscribed,” and screening activities “should be undertaken in a technocratic manner as divorced from political considerations as possible.”

While countries are “unlikely to give up the option to screen FDI on national security grounds,” they can take steps to reduce industry uncertainty. The foundation said countries should publicly identify all sectors that have potential national security implications, and all foreign companies operating outside those sectors should be “at little or no risk of investigation.”