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What CausedThe ResurgenceIn FDI Screening1By SimonJ.Evenett234University of St.Gallen andCEPR JELcodes:F21,F23,F
52.Keywords:Foreign direct investment,FDI screening,COVID-19pandemic,digital technology,China,United States.Since2019at least30governments haveintroduced or strengthened policiesthat screenforeign investmentsostensibly on national security grounds.That28such policy changes occurredafter31December2019led someto posita linkto the COVID-19pandemic.While the pandemic was an importantaggravating factor,the spread of digitalgeneral-purpose technologies and growinggeopolitical rivalryare enduringfactors that account for the greaterresort to FDI screening.Consequently,few of the recentlyrestrictive policy changes are likely to be reversed;a permanentshift in the treatment of foreigninvestors isunderway.their clients:...it nowseems that some countriesare usingforeign investment screening to protect widereconomic andsocial concernstriggered byCOVID-19going beyond,they contend,national security considerations.5DLA Piper2020was not as directin itsadvice toclients,but itdid linkmention ofenhanced FDI review processeswith thestatement proposedincreasingly protectionistmeasures//Why doesthis matterPolicy uncertaintyin itsdifferent formsis knownto depressforeign direct investment.Unless managedin avery transparentmanner backedup bya communicationstrategy thatretains theconfidence of the private1I thankFabien Ruffor excellentresearch supporton thispaper.My debtto many officials at the Organisationfor EconomicCo-operation and Development OECDwill become apparent.Comments arewelcome andcan besent tome atsimon.evenett@unisg.ch.2Professor of International Trade and EconomicDevelopment,Department ofEconomics,University ofSt.Gallen,and Founder,The St.Gallen Endowmentfor ProsperityThrough Trade,the newinstitutional homeof the Global Trade Alert.5See alsoKowalski2020,notably theobservation Thefindings suggestthat thepandemic islikely to accelerate protectionisttrends thatwere alreadyreshaping the foreign investmentpolicy landscapen page
131.sector,the introduction and tightening of FDI screening regimeswill be seen as another burdenthat businessmust bear.Figure2:Any uncertaintycreated by FDI screeningmeasures compoundsrising levels of policy uncertainty山2000200120022003200420052006200720082009201020112012201320142015201620172018201920202021—GEPU Index6Months movinaaveraae Lestany readeris indoubt about the currentlevels of policy uncertainty,Figure2above demonstratesthat themost widely-used gaugeof economicpolicyuncertainty6has surgedover the past decade,accelerating from2014onandwell beforeeither PresidentTrumps accession to powerorthe COVID-19pandemic.The timingcould not be worse.
4.What role for shiftsDigital technologies and growing rivalry between China and the United States Reflectionon the arguments made in the previous section,and notingthe fourfactors identifiedin OECD2020b forgrowing policymakersupport for more stringent FDI screening,calls intoquestion the argument that the“shocks offirst the Global Financial Crisis and then the COVID-19pandemic are the primarydrivers.Two othercandidate explanationsworth consideringaretheimplications ofever morepervasive digital technologies and the reorganisationof industriesthat thishas inducedas well as the growingrivalry between China and the United States.Each areaddressed in turn.With respectto the spread of general-purpose digital technologies,there are at leastthree potentiallyrelevant facetsto consider.The firstis thatsignificantly improvedinformation andcommunication technologiesmeant thatcompanies couldcoordinate commercialactivity overgreat distances,allowing forfine-grained matchingof tasksto locationswith availableresources.Such hyper-specialisation wouldhave madeAdam Smithproud.Such task-location pairingwas executedthrough ever-more complexcross-border supply chains whichbecame profitableas containerisationslashed internationaltransportation costsand thesigning oftrade agreementscut tradebarriers andeased othertrade costs.The smoothoperation ofcross-border supply chains requiresthat everyassociated firmdelivers andcooperates asplanned.Some havesought toconnect thisdevelopment with the case for strengthenedFDI screening.Fabry andBertolini[2020argue in the context of the European Unionthat“The aggressiveacquisition of a companyin onemember statecan createdependencies in an entiresupplychain and thereforeaffect severalmember statesH page1].If true,this argumentmight supportEU-wide screening of FDIto properlytake account of the EU-wide potentialconsequences of a foreign takeover.6For moredetails aboutthe constructionof this index seehttps:〃www.policyimcertaiety.com/mithodology.htmL Thisindex isnow used by leadingcentral banksand has been foundto benegatively correlatedwith private sector investment in general.X3P U-A Ura uD3un=od OEO UOO-e qo eFabry andBertolini2020]made anotherargument,which may have greaterresonance duringcrises whennational policymakersfear lossof control over keycommercial capabilities.They argued“As thestrengthening of economic interdependencethrough productionchains becameincreasingly disconnectedfrom nationalstrategic interests,governments have become increasinglysuspicious page
7.The lengthsthat the United Kingdomand the United Stateswent tobuild localvaccine production capacity in2020may wellbe areflection of such suspicions.On thislogic,such asit is,stringentFDI screening may beseenas a necessary stepto sustainnational controlover suchproductioncapacity.A secondfacet of the spread of digital technology relatesto thebusiness modelsof technology-based firms.Three of the fivecharacteristics ofsuccessful businessmodels identifiedby Medhora2018are relevantfor ourpurposes.They are:high upfrontcosts,low tozero marginalcosts//high riskof failure,but largerents accruingto success/and rewardsto strategicbehaviour71Medhora2018emphasised thatunder thesecircumstances predatoryacquisition ofpotential rivalsby incumbentswith deep-pockets cana commerciallysuccessful strategythat alsocreates adverseknock-on effectsin termsof thwartedinnovation andcompetition.To theextent that these transactionshave across-border dimension they mayimplicate FDI screening policy,especially ifthe competition agency where the acquired company isoperating does not takeproper account of therelevant innovation-related aspectsof thetransaction.The thirdfacet relatesto thecompanies thatmanufacture theequipment for,assemble,maintain,and operatenational informationand telecommunicationsinfrastructures.Some of the sameconsiderations apply to digitalservice providersthat havelegitimately obtainedsensitive informationconcerning theirusers,information that could be used bya foreignintelligence serviceas leverage.In bothcases,there are now precedentswhere governments have bannedor heavilyconditioned the acquisitions,the commercialpractices,and therange of activities of foreign firmsseeking tooperate in their jurisdiction.As digitaltechnologies continue to developand5G and the“internet ofthings isrolled out,the privatesectors responsibilityfor thedata itacquires,stores,shares,and deployswill come under greater scrutiny.This will be thecase fordomestic as well asforeign firms-but foreign firms perceivedas havingconnections to foreign governmentsarelikely to facethe toughestquestioning.7It isinconceivable thatFDI screening on national security groundswould sidestepsuch considerationsin reviewingan acquisitionwhere suchmatters werepertinent.This thirdfacet,of course,provides aconnexion to the growinggeopolitical rivalrybetweenChinaand the United States.Seen from the perspective of manyWestern observers,it is not Chinese firms persethat areproblematic.Rather,it is the allegedinfluence of the Chinesestate overthose firms,legal requirementsof Chinese firms toshare informationwith Chinesestate bodies,as well as theambitious plansof theChinese technologicalsupremacy and,to some,hegemony,that callformoreintense screening of FDIproposals byChinese firmsInkster
2020.Although disagreementexists as to whenthis geopoliticalrivalry tookoft it is uncontroversialto writethat itpredates the COVID-19pandemic.Several Westernnations[examples beingGermany,theUnitedKingdom,and theUnited States]began andin onecase completeda legaloverhaul of their FDI screening regimebefore COVID-19became aglobal pandemic.That thepandemic originatedin Chinaand that,evidence notwithstanding8,enough policymakersin Chinas trading partnersare nowconvinced that their nations were toodependent onmedical kitand medicineingredients producedthere,were almostcertainly aggravatingfactors.Another aspect of pre-pandemic geopoliticaltension-namely,the pervasivesubsidies said to be a keyfeature of Chinas variantof StateCapitalism-took ongreater saliencein thecontext ofdeliberations overFDI screening regimes oncethe7These argumentsmight apply,for example,with asmuch forceto Russianfirms as they doto Chinese firms.8Evenett2020and Guineaand Forsthuber
2020.pandemic hit.9Dominguez-Jime nezand Poitiers
[2020]put the matter starkly:“As theChinese share of globalGDP grows,so haveconcerns aboutits use of subsidiesto facilitateacquisitions.These concernsrelate to the useof investmentas apolitical tool,through theacquisition ofstrategically relevantcompanies andtechnologies,and theuseof state aidto gaincompetitive advantagesin Europeanmarkets..//Fabry andBertolini2020articulate similarconcerns butdo notname Chinadirectly.This may be justas wellgiven thetendency of some Westerngovernments togive theirfirms moreand morestate aidin respectof foreign acquisitions andgreenfield investments.While thespread ofdigitaltechnologiesand geopoliticalrivalry appear to belonger termshifts in the world economy,one aspectof the latter relevantto FDI screening mayin factturn out to be less importantthan expected.Specifically,even at the beginningof the COVID-19pandemic,some expertsquestioned whetherChinese firmswould undertakean overseasmergers and acquisitions spree.Hanemann andRosen2020argue that a clampdownby theChinese authoritieson thefinancing ofoutbound FDI and tightenedcapital controlshad alreadyresulted inobserved transaction totals fallingshort of their2016peak.Citing datafrom ChinasMinistry ofForeign Commercethey note“The globalMA component[of totaloutbound FDI]shows asteep drop,with newlyannounced2019deals at$50billion,versus$80billion in2018,amounting to the lowestlevel ineight years//Dominguez-Jime nezand Poitiers
[2020]make similarpoints andconclude that“the currentoverall levelof Chineseinvestment givesno reasonfor concern/1More generally,the latterargue thatfears of an acquisitionspree byfirms fromnnon-market economiesor state-owned enterprisesare,on thebasis ofdata available,“overblown.”Another way to groundthis discussionin evidenceto examinethe findingsthose whotrack thelargest acquisitions of capitalstakes orentire companiesattempted byChinesefirms.The AmericanEnterprise InstituteAEI hasmaintained aChina GlobalInvestment Tracker10since
2005.AEI claimsthis trackerof corporate activity“isthe only comprehensivepublic dataset coveringChinas globalinvestment andconstruction[projects],which aredocumented bothseparately and together.Inaugurated in2005,the CGITincludes3,500large transactionsacross energy,transportation,real estate,technology,and othersectors,as well as300troubled transactions/1Data oncompleted Chineseinvestments as wellasthose troubled”taken to be thosecontested orblocked by foreign governmentswas combined.Annual total values ofsuch transactionswere calculatedfor the years2005to
2020.Since thecost of acquiring companieshas changedover timeas stock-market valuationshave risensignificantly fromover the past15years,the annualtotals weredeflated by an indexbased on the Financial Times All-World Index.Taking2020as thebase year,the annualtotals of the realvalue of Chinese overseas investments arereported inFigure3below.In realterms the total value of Chinese acquisitions in2016was more than six times thatwitnessed during2020,theyearwhen thepandemic hit.To theextent that there aredata collectionand reportinglags forrecent overseastransactions,then the totalvaluereported for2020should behigher.However,it is almost inconceivablethat itwillbesixtimeshigher.The lowertransactiontotalswitnessed in2020cannot solelybe attributedto moreintense FDI screening thatyear byChinastrading partners as the totalvalue of acquisitions attemptedin Chinastradingpartners*For anoverview of the consequencesof risinggeopolitical forglobal trade and investmentregime seeRoberts,Choer-Moraes,and Ferguson201910That trackercan beaccess at https://www.aci.org/chins・global・investment・track/c/in the East Asian,South Asia,Latin American,and Sub-Saharan Africanregions fellalso.11Figure3:In realterms,thetotalvalueofoverseasinvestmenttransactions byChinesefirmshas fallen85%since itspeak in
2016.Total valueofChineseactual andblocked investments2005-2020Deflated by the FTAll WorldIndex,2020Prices
273.17It would seem,then,that in2020at leastChinesefirmsdid notseek to acquire foreign firms atbargain prices//To scepticsofChina,this maycut noice.They mightargue thatChinese overseas acquisitions couldpick upagain and that morerigorous FDI screening willbe neededat thattime.Still,it isinteresting thatonce again-just likethe scareover Chineseexcess capacityin thesteel sector-the availableevidence doesnot supportthe broadbrushgeneralisations usedto frightenpolicymakers andfed tojournalists thatdont haveenough timeto checkfacts.
5.Assessment The purpose of this sectionis to assess therationales providedfor elevatedscreeningof FDI.This matteris particularlyimportant giventhe trenddecline in FDI flowssince theonset of the GlobalFinancial Crisis.Whether measuredas ashareofworld GDP,world investment,or world trade,thetotalnominal valueof FDI never recoveredto levelsseen before the GlobalFinancial Crisissee Figure
4.Even before the sharpreduction witnessedduring the COVID-19pandemic theseshares wereall less than
0.02,implying thatfor everydollar ofcross-border investmentthere weremorethan$48of domesticinvestment.As a means forfinancing investment and marketentry,FDI has been on the decline.This picturewould beeven worsehad acorrection for the priceof assetsbeen made.In short,FDI hadbecome rarer,well beforethe COVID-19pandemic.Plausible reasonsfor thelower observedlevels of FDI arefalling returnson overseasinvestments The Economist2017and elevatedlevelsofcorporate politicalrisk seeFigure
2.The morefrequent resortto stringentFDI screeningcomes ontop of the developments,which national policymakers and the officialsthat advisethem maynot beaware of.It isone thingto arguethat the objective of nationalpolicyis tomaximise thebenefits of FDI rather than tomaximise FDIitself[Boonitcha2020,but thatstatement doesnot automaticallyimply that the correcttrade-offs inpolicymaking have been made.According tosome international investment lawexperts theintroduction or strengthening of FDI screening may fallfoul of national obligationsunder extanttradeandbilateral orregional investmentaccords.For example,Boonitcha2020identifies threegrounds forconcern:violation of National Treatmentprovisions;imposition ofperformance requirements;and expropriationprovisions.Moreover,whether national security exceptionshave becomesmokescreens forprotectionism is another matterdoubts on this scoreby leadinglaw firms have alreadybeen referred11The AEItrack doesnot showa singleChineseacquisitionattempt orsuccess in the MiddleEast in
2020.to.]Overall,it appearsthere may be severallegal concerns that oughtto beaddressed.Figure4:Nominal globalFDI totalsnever recoveredto levelsseen beforethe GlobalFinancial Crisis.2560।■।।■■।I।।।।e।।・।•02001200220032004200520062007200820092010201120122013201420152016201720182019-FDI/world GDPRight hand axis FDI/worldtradeLeft hand axis-FDI/world investmentLeft handaxis SinceI amnot atrained lawyer,I willconfine myassessments to the apparentlogic ofrecent FDI screening decisions.Crisis rationale1:Bargain pricesMy firstobservation relatesto thedefence that such mechanisms are needed to stopnational commercialassets beingsold atbargain pricesduring economic crises.If sustained,concerns about“bargain pricesor firesale FDInimply theneed for a mechanismthat checkswhether asufficiently highprice waspaid for the acquiredfirm.What couldthat correctprice beHere acompanys stock-market valuationbeforetheeconomic crisiswouldseema naturalbenchmark.Indeed,to erron theside ofcaution onecould envisiona rulewhereby anyforeigntakeoveror acquisition ofalarge stakemust beon termsdictated by the higheststock-market valuationfor a local companyduring theyear orthree years]preceding acrisis.Taken atface valuethe bargain prices argument is,at most,a callfor aminimum pricerule-and notfor ablanket argumentagainst FDIduring economiccrises.Moreover,it isunclear whya new government bureaucracyneeds to be implementedto enforcesuch arule-surely theresponsibility could be given toa competition agencythat mustreview sufficientlylarge acquisitionsanyway Despiteits salienceduring theCOVID-19pandemic,the abargain prices argumentcannot justifythe institutional mechanisms thatmany governments have put in placeto screenFDI decisionsduring thepast five years.Another problemwith the bargain prices“argument is that itimplicitly assumesthat acquisition ofalocal firmby anotherlocal firmat firesaleprices isunobjectionable.12Yet,in anage whenmany foreign firmshaveoverseas subsidiaries,some ofwhich mayhave beenoperating commerciallyfar longerthan many“local firmsthen,taken seriously,some mechanismwould beneeded to identify whethera locally-based firm is“local“enough.The local/foreigner distinctionis fuzzierin realitythan advocatesof FDI screening may be preparedto acknowledge.It maynot beclear tothose deployingthebargainprices argument that they are making this assumption.Some politiciansand analystsappear to be opposedto hostiletakeovers of all types.1312It maynot beclear tothose deployingthe“bargainprices“argumentthatthey aremakingthisassumption.Some politiciansand analystsappearto be opposedto hostiletakeovers ofall types.13This isrendolent of the“Who isus”debate concerningforeign direct investment in the1990sin theUnited States seeReich
1990.Crisis rationale2:Local dislocationoverlooked by foreign acquirersAnother theprice・isnt・right argumentis thatthe commercialfallout froma foreignacquisition forlocal communitiesand alongsupply chainsis not taken into account in the stock-market valuation of the acquiredcompany.To theextent thatthe financialvaluationof an acquiredfirm reflectsthe presentdiscounted valueof expectedFree CashFlows orof dividendpayments then,onthissecond rationalefor FDI screening,the concernarises thatlocal dislocationcaused bya foreigntakeover is nottakeninto accountby acquiring firms.An extremeversion of this argumentis thatalocal firmisso importantfor a national economythat noprice ishigh enoughandthatthe local firm should be protectedfrom foreigntakeover.Advocates of the latterargument typicallylabel the localfirmas“strategic.Since theonset of theCOVID-19pandemic,such firmshave alsobeen deemed“critical orvital.The failureof advocatesof FDI screening toprovide operationaldefinitions of these threeterms shouldhave immediatelyraised ared flag.Note immediatelythat this isnotan argumentfor FDI screening onnational securitygrounds.Nor isit necessarilyan argumentfor FDI screeningoneconomic groundseither.An alternativeapproach-perhaps crude-would beto taxforeign mergers and acquisitionstransactions byan amountthat coversthe estimatedcost of thelocaldislocation.One couldenvisage atax that isamultiple of thepre-crisis stock-market valuation.The proceedsof thattax could be usedto financeadjustments causedby thetransaction inlocal communitiesand alongaffected supplychains.It isfar fromclear thatthe recentFDI-related institutionalinnovations made by governmentsare neededif compensationfor suchadjustments isthe over-riding policyconcern.A morefundamental objectionto thisargumentisthat itfails toappreciate thatmergersand acquisitions,both domestic and cross-border,are frequentlymotivated by the beliefthatthe acquiring firmcan betteruse the assets andcapabilities of theacquiredfirm than the lattersexisting management.Such beliefsare notcareless hunches-invariably they are backedup by theacquiringfirms resources,including thoseof shareholders.Purposeful changeis,therefore,anecessarycondition forsuch mergersand acquisitionsto beprofitable forthe acquirerand dislocationis to be expected,irrespective of the nationalityof theacquiringfirm.Crisis rationale3:Loss of critical assetsFollowing foreignacquisition orforeign controlofalocalfirm,there may beaconcern thatcritical assetsare transferredabroad.14These assetscouldbein physicalform[for example,a machineor insome otherform such as intellectual property].The implicitassumption made in muchcommentary isthe foreignacquisition impliesthese assetsare lostto thelocal economyor society.This assumptionneeds tobe challenged.In somecases-such asthe foreignacquisitionofa port-it maybe physicallyimpossible tomove the asset fromits currentlocation.In othercases-such asthe sharingofamedical technologywith customersin theacquiring countryshome market-theassetneed notbe lostbut,in fact,is disseminatedacross borderstoalarger number of users.In apandemic,such disseminationof medicalequipment,medicines,vaccines,and thelike oughttobeencouraged,so longastheasset in question remainsavailable in the nationwhere thefirm was acquired.In suchcases,the solutionisnotto preventforeignacquisitionsbut for policy tomake clearex antethat allsuch assets14A milderversion of this concernisthatthe foreignowners of theassetin questiondenies or conditions serviceto localusers,perhaps arbitrarily.must remain available oncommercially reasonableterms within the nationwherethefirm wasacquired andto anyof thatfirms customersabroad.Again,it isunclear whynewgovernmentbodies need tobe set uphere.When undertakingmerger reviews,competition agencieshave thepower toimpose behaviouralremedies verysimilar tothose necessaryto addressconcerns about“lost assets/so anatural startingpoint is to assignany reviewon thesegrounds toacompetitionagency.Inappropriate foreignaccess toa Hcritical infrastructure.In recent years,the claimhas beenincreasingly madethataforeign mergeror acquisitioncould resultin accessto certainnational infrastructurewhich,inturn,could materiallythreaten national security,public order,cherished values,or someother importantaspectof the nationalway oflife.Parallel claimsare madeabouttheaward ofpublic infrastructureprojects tocertain foreign firms.Such fearsmaybeheightened in the eyesof somewhen theforeignfirmor firmsinquestionare thoughttobestate-owned orstate-controlled.15Given governmentshave aduty to protect theirpopulations againstsuch harmand threatsof harm,claims of this naturemust be taken seriously.However,that should not givegovernments theright toact withoutreason,without respectingdue process,without beingaccountable,and withoutthe potentialfor beingchallenged.Nor shouldit precludecollective actionby governmentsin thesame region,for example.Here better practice enforcementof competition law offersuseful lessons.When acorporateactis thoughtto limitcompetition anddistort marketoutcomes to the detrimentof others,then goodpractice isto insistthatthecompetitionagencyarticulate andsupport withevidence acogent theory of harm.Typically,such theories of harm involve multiplesteps betweenthe corporateact and the allegedadverse impact on others.Laying outthese stepsis essentialasthe impact isoften conditionalon otherintervening factors.Checking whetherthose factors,in fact,facilitate orattenuate theeffect of the anti-competitive conductis centralto theempirical assessmentofatheoryof harmincompetition lawcases.On myreading of the statementsby policymakersand othersin favourof the recent tighteningof FDI screening regimes,little orno attentionhas beengiventoarticulating theoriesof harm.All toooften,fear ofgeopolitical rivalsis fanned,systematic evidenceis displacedby selectivelychosen andinterpreted anecdoteswar stories,and concernsover themanner in which suchscreening willbe implementedare brushedaside.The resultall toooften isthe establishmentof opaqueinstitutional mechanisms.This problemis compoundedby anotherdeparture frombetterpractice:namely,the failureto specifysectors ofcommercial andsocietal activitywhich fallwithin the scope of the newFDI screeningregime.As thenature of national security and otherthreats maychange over time-not leastas digitaltechnologies spreadand machinesbecome evermore linkeddigitally theinternet ofthings-then somereluctance tospecify all oftherelevant potentialthreats isunderstandable.Likewise,allofthe potentialtheoriesofharm.However,that shouldnot excusegovernments frommaking publicindicative listsof bothunacceptable threatsand ofcompelling theoriesofharm.Doing sowill buildconfidence as wellasshaping theexpectations of domesticand foreign executives.In anera ofgrowing uncertaintyabout economicand regulatorypolices[recall Figure2,the lastthing policymakersneed todo isto takesteps thatmake themarket for corporate controleven lesspredictable.To conclude,from theperspectiveofencouraging transparentpublic policy and discouragingunnecessary resortto15This sentencewas deliberatelydrafted soastohighlight thefact thatit isthe perceptionofstatecontrol ratherthan thereality thatmay mattermore.As ageneral rule,the lesstransparent areeither agovernment/s policiesor theirlinks tobusiness,the easierit isfor foreigncritics tomake theseclaims withouteffective challenge.The campaignby theUnited Statesgovernment-now joinedby others-against Huaweimaybea casein point.discrimination againstforeign firms,there isplenty toworry aboutas governmentsinstituted orelevated FDIscreening in recentyears.The pandemic-related reasonsproffered forheightened screeningare particularlyweak,manyofwhich aremerely oldwine innew bottles.
6.Concluding remarksThe purposeofthis chapter has been todocument therecent strengtheningofthe screeningof foreign direct investments,to putthese recent policy developmentsin perspective,to understand the statedrationales forsuch strengthening,andto critical evaluatethe latter.Given thattheCOVID-19pandemic isstill ongoing,and thespreadofdigitaltechnologiesand geopoliticalrivalry showno signof abating,then it is appropriate to warnthat anyconclusions drawnhere couldbe revised,perhaps sharply,as moreevidence becomesavailable andas governmentpolicy evolvesfurther.Still,a fewpractical conclusionscan bedrawn at this time.First,both recentmajor shocksand shifts in the world economyhave furnishedgovernments with arguments forstrengthening FDIscreening procedures.Second,therecentpast inmany respectsrepeats earlierepisodes oftighteningofscreening.Third,unless governmentsare suddenlypersuaded onother groundsto liberaliseFDI regimes,then therecent ratchetingup ofFDIscreeningprocedures isunlikely tobe reversed.The mostoptimistic outcomeisapartial reversalof sometightening measuressuch asthe imposition of lowerthresholds forreviewing foreigntransactions adoptedby somejurisdictions].On topofthis,the uncertaintyinherent inmany national security-related FDIscreeningregimeswill almostcertainly detersome cross-border mergersand acquisitions.Several oftheargumentsfor elevated FDIscreeningand themanner of its implementationwere challengedhere,even thosearticulated innarrow national security terms.Given thewidely heldview thattheU.S.Administration ofDonald J.Trump abusedthe national security exceptionscodified inGeneral Agreementon Tariffsand Trade,national securityarguments ofany typefrom anyquarter are now morelikelytocomeundergreaterscrutinythan before.Some policymakersand officialsmay bristleatthis,but theyshould bereminded thatthere isa longstandingtradition ininternational tradepolicy communityof tryingto reconcilelegitimate non-economic objectiveswith openborders andwith somesuccess.For example,while notperfect,considerable progresshasbeenmadeinreconciling theregulation offood andproduct safetywith non-discrimination objectivesoftheworld trading system.Often,the solutionlies notin challengingthe policyobjective,but in the designof proceduresusedbyofficials,transparency ofassociated proceduresand decisionstaken,accountability mechanisms,assurances ofdue process,associated communicationto domesticand foreigninterested parties,andawillingness todiscuss thesematters openly.That the current bout of policymaking in FDIscreeningmaybe unnecessarilyincreasing theuncertainty overpublic policyfaced by foreign firmsand thediscrimination againstsuch firms,there isa clearcaseforfurther informationcollection onpolicy initiativesandforsystematic comparisonsacross theregimes erectedand decisionstaken.Here the OECD shouldcontinue itsyeoman work.Such evidencecollection,plus theviews ofofficials involved[including thoseofficials responsible for national security and the firmsimplicated,should informthe identification,discussion and,ideally,adoption ofbetter practices.Given themembership ofthe OECDdoesnotextend to the leadingemerging markets,it wouldnotbesurprising if atsomepoint in the futureassociated deliberationmigrated toGeneva toeither theWTO orto UNCTAD.Should theWTO berevived in the comingyears,then awork programmecouldbeestablished on thescreeningof foreign direct investmentin generaland on the conductof national security-related investigationsinto firmsin particularsee Tuand Si2020for someideas in this regard.In theabsence ofinternational cooperationin this area,then thedomain ofcross-border commercialactivity subjectsolely to the traditionalrules ofnon-discrimination willshrink further,representing anotherretreat frompost-Cold Warapogee oftheworldtradingsystem.References Baker McKenzie
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1980.“National Treatment and Questions of Public Order and Essential SecurityInterests/Committee on International Investmentand MultinationalEnterprises.20November.continued
1.Introduction Since the embraceby many governments ofthe tenetsoftheWashington Consensus,openness toforeign directinvestment FDI hasbeena hallmarkof soundpolicy.Such investmentsnot onlyinject capitalinto hosteconomies,theyareassociated todiffering degreeswith thetransfer oftechnology andmanagerial know-how,wage premiafor employees,productivity spilloversto localfirms,and greatercompetition inlocal markets.Cross-border mergersandacquisitions,a prominentform of foreign directinvestment,also playa keyrole inshifting resourceswithin nationaleconomies towardshigher value-added sectorsand awayfrom under-performing ones.Moreover,international investmenthelped economiesrecover fromthe globalfinancial crisisof2008/2009/suggesting thatFDI hasshort-term macroeconomicas wellas long-term structuralpayoffs OECD2020a.Consequently,for decades,government perceptionsofthebenefits ofinternational investmenthas ledthem toprogressively opentheir economies toforeign capital1OECD2020a.While openness to FDIhas notbeen rejectedoutright,in recentyears alarge number of governmentshave establishedorstrengthenedmechanisms toreview foreign directinvestmentin theirjurisdictions.16The mostcommon justificationfor doingso hasbeen ongrounds ofnational security.17No longersatisfied withlimits onestablishment byforeign firmsor onscreening proposalsbyforeign firms to acquire localrivals oncompetition lawgrounds,numerous governmentshave setup institutional mechanisms toreview theongoing operationsand strategicchoices of foreignfirmsalready establishedin theirjurisdictions.Departures fromNational Treatmentprinciples onmarket accessaswellas regulationof conductafter establishmentor acquisitionarenowpossible.This change in thetreatmentofFDIhascoincided withtheCOVID-19pandemic,leading someto linkthe two.Given thatthe governments of certainlarge economies instituted tougherFDIscreeningin thewake ofthe GlobalFinancial Crisis,there arecertainly precedentsto pointto[Heinemann2012]
18.If theseevents areindeed linked,then itholds outthe hearteningprospect thatrecovery fromCOVID-19could resultin recentFDIscreeningmeasures beingscrapped orfalling intodisuse-going somewaytorestoring thefavourable climatefor FDI.But cananalysts,business decision-makers,and policymakersbe sosanguine Whatif longerterm,harder toreverse factorsareatwork Thosefactors couldinclude thecombined impactofthegrowing dependenceof businessmodels ondigitaltechnology,associated technologyraces andthe intellectualproperty andharder-to-value intangiblewealth created,aswellas greatergeopolitical orgeo-economic rivalry.Thepurposeofthis chapter istoidentify,characterise,and assessthe rootcauses ofthe resurgenceinFDIscreen witnessedin recentyears.One factorthat canbesetaside isthe roleof bindinginternational obligationspertaining to the resortto measuresaffecting foreign direct investmentsonnational securitygrounds.Yoo andAhn2016demonstrate OECD1985,National Treatment:Examination ofMember CountryMeasures Basedon Public Order andEssential SecurityInterests/Note by the Secretariat.17January.OECD
[2008].Proportionality ofSecurity-Related InvestmentInstruments:A Surveyof Practices/1May.OECD2020a].Acquisition-and ownership-related policies to safeguardessential securityinterests:Current andemerging trends,observed designs,and policypractice in62economies/1Research note.Paris.May.OECD2020b].Investment screeningin timesof COVID-19—and beyond.7July.16This istobedistinguished fromthe reviewof mergersandacquisitionsin general,a mattertypically fallingwithin thepurview ofcompetitionlaw.17Sometimes referredtoas“essential security.18Writing in2012Heinemann observed“In recentyears,government interventionsdirected againstthe takeoverofdomesticfirms byforeign companieshavebecomeincreasingly morefrequent”page844].He goesontodescribe recentlegislative andenforcement developmentsin theUnited States,Canada,France,and China,among othercountries.Reich,R.
1990.Who isus”Harvard BusinessReview,January-February edition.Roberts,A.,H.Choer-Moraes,and V.Ferguson
2016.Toward aGeoeconomic Orderin International Trade andInvestment./our〃Q/ofInternationalEconomic Law22:655-
676.UNCTAD2020].Investment PolicyResponses ToThe COVID-19Pandemic/Investment PolicyMonitor.4May.Tu,X.,andS.Li.Lessons fromthepandemicfor FDIscreening practicesin S.Evenett andR.Baldwin eds].Revitalising Multilateralism:Pragmatic IdeasFor TheNew WTODirector-General.CEPR Press.November.Wehrle,F.and J.Pohl
[2016].Investment PoliciesRelated toNational Security:A Surveyof CountryPractice.OECD WorkingPapers onInternational Investment2016/
02.14June.Yoo,J.andD.Ahn
2016.Security Exceptionsin theWTO System:Bridge orBottle-Neck forTradeandSecurity JournalofInternationalEconomicLaw.19:417-
444.About theauthor SimonEvenett isProfessor ofInternationalTradeand EconomicDevelopment andMBA Directoratthe University ofStGallen,Switzerland.Simon specialisesin howgovernments tiltthe commercialplaying fieldin favourof localfirms.At the start ofthe GlobalFinancial CrisisSimon createdtheGlobalTradeAlertinitiative,the leadingindependent monitorof protectionismand commercialpolicy choicebased atthe University ofStGallen.Simon regularlyengages withprivatesectorpractitioners,government officialsand otherthought leaders.He hastaught atthe SaidBusiness SchoolattheUniversity ofOxford,the RossSchool of Business,UniversityofMichigan[where he wasaVisiting Professorof CorporateStrategy threetimes,and RutgersUniversity.In addition,Prof.Evenett hasserved asa WorldBank officialtwice,hasbeena Non-Resident SeniorFellow inthe EconomicsStudies programmeoftheBrookings Institution,andamember ofthe UKCompetition Commission.Recently,hewasthe DLAPiper DistinguishedVisiting ProfessorattheCarey SchoolofBusiness,Johns HopkinsUniversity.He holdsa Ph.D.in Economics from YaleUniversity anda B.A.Hons inEconomicsfromtheUniversityof Cambridge.Simon haswritten over200articles,book chapters,and volumes.He isregularly quotedintheinternational media.convincingly thatthe extantWorld TradeOrganization rules19in this area arenot workablelegal disciplines,despite beingpart ofthe multilateraltrade architecturesince itscreation in
1947.20They alsoobserve thatNew provisionsadopted inrecent FTAs showslight modifications,but notyet inany significantmeaningful way”Yoo andAhn2016,page844].The meaningof essential security provisionsfound ininternationalinvestmentagreements,suchasbilateral investmentagreements,is contestedaswell[Moon2012].As afirst approximation,inthearea ofFDIscreeningthere appearstobelittle byway ofbinding lawto constraingovernments.When itcomes tosoft law,however,in principlemember governmentsofthe OECD adhereto thatorganisations RecommendationoftheCouncil onGuidelines forRecipient CountryInvestment Policiesrelating toNational Security/adopted on25May
2009.That Recommendationis organisedinto fourparts:non-discrimination,transparency/predictability,regulatory proportionality,and accountability.Having affirmedthat membergovernments“self judge“their national security concernseach countryhas aright todetermine whatis necessarytoprotectits nationalsecurity,two otherpertinent expectationsconcerning theimplementation ofFDIscreening mechanismsare:aTailored responses.If usedat all,restrictive investmentmeasures shouldbe tailoredto thespecific risksposed byspecific investmentproposals.This wouldinclude providingforpolicymeasures especiallyrisk mitigationagreements]that addresssecurity concerns,but fallshort ofblocking investments.“Last resort.Restrictive investmentmeasures shouldbe used,ifatall;asalast resortwhen otherpolicies e.g.sectoral licensing,competition policy,financial marketregulations cannotbeusedto eliminatesecurity-related concerns//OECD2009,italics inoriginal]Thus,compliance withthe OECDRecommendation doesnot standintheway ofsignatories adoptingorstrengtheningscreening mechanismsfor foreigndirectinvestments.Having establishedthat governmentsare largelyunconstrained,attention nowturns tohow theyhave usedthat discretioninthearea ofFDIscreeninginrecentyears.The nextsection ofthis chapteraddresses thismatter,drawing largelyon OECDsources.The thirdsection discussesthe howglobal economicshocks aresaid toinfluence resortto FDIscreening.That discussionof shocksis followedbyan accountofhow shiftsintheworldeconomymaybeinfluencing governmenttolerance of foreigndirectinvestment.To thatend,thespreadofgeneral-purpose digitaltechnologiesandassociated businessmodels aswellasthegrowingrivalrybetweenChinaandtheUnitedStates arerecounted inthe fourthsection ofthischapterand linksto FDIscreening drawn.An assessmentofthevarious rationalesproffered forelevated FDIscreening is provided insection five.The finalsection ofthischapterdraws togethertheargumentand describeshow discussionson FDIscreening couldbetakenforward.
2.The uptickin resorttoFDIscreening Goingback toat least1980theOECDsecretariat hasproduced reportson themanner in which governmentsaddress nationalsecurity considerationsin theirpolicies towards FDIandmultinational corporations.Although theterminology19Specifically,Article XXIoftheGeneral Agreementof Tariffsand Trade[GATT].Delegates tothe GATTare onrecord noting“the spiritinwhichthese MembersoftheOrganisation wouldinterpret theseprovisions wasthe onlyguarantee againstabuse//20They observeIt isimportant tolook atthe originsofthesecurity exceptionclause inorder tounderstand howinadequate sucha provisionisto address currentchallenges”Yoo andAhn2016,page
418.and framingofthe matter hasevolved over time21,the coresubstantive policymatter discussed in thispaper islongstanding.A reportbythe Working GrouponInternationalInvestment Policieswas publishedin November1980titled National TreatmentandQuestionsofPublicOrderandEssentialSecurityInterests//Note thetying ofnationalsecuritymatters withthe potentiallybroader policyconsideration ofPublicOrder.That reportnotes:Concepts relating to public order andsecurity canbe found inthelegal systemsofallMember countries.In generalthere isno explicitdefinition of these concepts;their interpretationrather dependsonthespecific contextinwhichtheyareapplied andmay evolveovertimeaccording tochanging circumstances[OECD1980,page2].As anindication ofthe sensitivityofpolicy interventions tosecure public order andessential security,theWorkingGroups reportnoted explicitlythatsuchinterventions werenotaderogation fromNationalTreatment.As such,OECD memberswere underno formalnotification obligationin thisregard.Nevertheless,the valueof transparencyin suchpolicies wasrecognised andinformation exchangeencouraged.This reportidentifies fourtypes ofgovernment measuretaken againstforeignfirmsto ensure that publicorder and nationalsecurityobjectives aremet:public procurementmeasures;special restrictions on investmentby establishedforeign controlleddefence relatedindustries whichcould involve/essential securityinterests page7;sectoral restrictionson investments byforeignfirms;means toprevent orundo foreigntakeovers ofimportant manufacturingundertakings page
7.Furthermore,the examples provided werealmost entirelysector-specific,suggesting littleroleforcross-sectoral screening mechanisms.Many sectors-not justdefence-related-were mentionedintheexamplesprovidedin thisreport.The OECDsecretariat produceda follow-up reportin1985with aneye toimproving transparencyin thisarea ofpolicymaking and“to extendthe applicationofNationalTreatment,the latteraiming toreduce the scope ofmeasures restrictingthe activitiesof establishedforeign-controlled enterprisespage4].In thisregard,it isnoteworthy thatthe focuswas onforeignfirmsalready establishedinajurisdiction,ratherthanon newinvestors.A survey of OECD members wasconducted in1984,which formedthe evidencebase forOECD
[1985].Approximately40relevant policymeasures wereidentified.These measureswere implementedby12OECDmembergovernments,withtheUnitedStatesand Switzerlandprominently represented.The measureswere concentratedinarelatively fewnumberofsectors.The reportobserves“the majorityofsuchmeasures arefound insectors suchas defenceproducts,maritime transportation,communications broadcasting,and energyproduction page
4.Differential treatmentwas alsofoundinsectors deemedpublic monopolies.Most measuresrelated torestrictionson investments byestablished firms,fewer togovernment procurementpolicyanddiscriminatory stateaid OECD1985].Subsequently,further reportswere published.A2008report focusedon whethersecurity-related policyinstruments implicatingFDI wereproportionate,an importantfeature ofthe2009OECD CouncilRecommendation mentionedearlier,Proportionality meansthat restrictionsoninvestment,orconditionson transactions,shouldnotbe greaterthan neededtoprotectnationalsecurityand theyshouldbeavoided whenother existingmeasures areadequate andappropriatetoaddress nationalsecurity concerns[OECD2008,page
1.Of the11OECD membersthat participatedat thattime intheir Freedomof Investmentproject,six reportedhaving investmentreview proceduresor othermeasures thatenable themtoaddressessential security concerns.Those sixnationswereFrance,Germany,Japan,the Republicof Korea,Italy,andtheUnitedStates.21References to“publicorder“were droppedafter awhile.The focuswas increasinglyonthenational oressential securitydimension ofFDIreviewprocedures.Two OECDstaff membersprepared asurveyof17government practicesin respectofFDIpolicies andnationalsecurity concernsthat was publishedin
2016.Wehrle andPohl2016carefully parsedthe extantpolicy regimesand identifieddifferences in approach.Certain governmentsemployed general,transaction-,or firm-specific restrictionson FDI,often followingforeign investmentreviews andinvestment scrutinyprocedures addressingsecurityconcerns/1Furthermore,a cleardistinction wasmadeinWehrle andPohl[2016between rulesconcerning theownership ofspecific assets and rulesrelating totheacquisitionof those assets.A foreignacquisitionofa national corporate assetmayhaveoccurred beforethelatterbecame“sensitive fromanationalsecurity pointof view,hence theneed inprinciple forpolicies pertainingtotheownership ofassetsandthe conductofforeignowners ofthoseassets.It wasalso noted that policyregimes thatlimit orban foreignacquisitions maystill permitgreenfield investmentsbyforeignfirms,thereby differentiatingacross entrymode byforeignfirms.Last,tothebest ofmy knowledge,thisisthe firstpublicly availableOECD documentthat providesdetailed informationontheinstitutional andprocedural aspectsofFDIreview regimesof17governments.22In aJuly2020update,thatwasheavily influencedbytheCOVID-19pandemic[more onwhich inthe nextsection,OECD2020a notedthat“only since2018have morethan halfofthe37OECD countriesputinplace across-or multi-sectoral investmentscreeningmechanism,compared tolessthana thirda decadeearlier”[page
2.In fact,Figure2of thatdocument showsa markedincrease inthe numberof OECDmembers adoptingsuch regimesintheyears duringand aftertheGlobalFinancialCrisis,raising thequestion ofwhether theseoutcomes arelinked.The percentageof OECDmembers withFDIscreeningregimes increasedfurther after2018,beforetheCOVID-19pandemic hit.OECD2020a]argues theexceptional economicsituation causedbytheCOVID-19pandemic hasfurther acceleratedpolicymakinginthisarea..//page
3.With respecttothequalitative developmentofFDIregimes,OECD2020a]observes:“Beyond thequantitative changeassociated withthe greaternumberofmechanisms inthisarea,qualitative changeshave significantlytransformed policypractice inmany advancedeconomiesinthepastfiveyears.Most mechanismsnow allowfor interventionina much broadersection ofthe economy.Combined withthe loweringof triggerthresholds,amuchlarger numberof transactionsarenowpotentially subject to scrutiny.Rules havebecome moredetailed andsophisticated and are gearedtowards routineapplications.Implementation practicehas alsochanged inmany countries,with moreconfident andfrequent useoftheinstruments.Greater depthof regulationand transparencyabout policypractice arefurther indicatorsofatransformational changethat hasemerged overthepastdecade inmany countries,deepening markedlyfrom2016onwards[page
3.Greater detailon recentpolicy changestowardsFDIscreening canbe foundinaresearch notepublished bytheOECDsecretariat inMay
2020.OECD2020b]assessed developmentsin62jurisdictions,deliberately differentiatingbetween policiesaffecting theacquisition and ownership ofnationalcorporateassets.Considerable diversityinapproachtaken wasfound,where aminority ofsurveyed governmentsdeveloped“detailed andoperational mechanisms“to take accountofnationalsecurityconsiderations.Many governmentscontinue torely onoften decades-old administrativeauthorisation requirementsor similarinstruments thatapplytoa fewnarrow sectorsOECD2020b.Among those governments withadvanced mechanisms to manageacquisition-andownership-related risks/1OECD2020b noted:“four trendsemerge:Review mechanismsare gearedtowards routineimplementation,with responsibilitiesand22As tothe selectionof countries-some ofwhom werenot OECDmembers-Wehlre andPohl2016note:The selectionofthese countries isprimarily basedontheexistence inthese economiesof policiesrelatingto nationalsecurityandthefact thatmost ofthesecountrieshave recentlychanged theirpolicies byeither expandingthescopeof theirmechanismstoaddress nationalsecurityconcernsor introducingnew ones”page9].procedures setout moreclearly;other indicatorsdocument thematuring ofthe policy area more generally;continuous risk-management complementsone-time reviewsatthetime ofan acquisition;and State-ownership asameansto managerisk attractsrenewed interestafter havingbroadly fallenoutoffashion inthe1990s”page
11.Consequently,it isno longeradequate todefine investmentscreening,as Bonnitcha[2020has,as follows:Investment screening...refers torequirements underthe lawofthehost statethat foreigninvestors attainapproval priorto orconcurrently withmaking anew investment,along withthe associatedinstitutionalmechanismsby whichsuch approvalis grantedor withheld//To thismust beadded thepolicy objectives,institutionalmechanisms,and powersof governmentsas theyrelate tothe investigationand regulationof post-establishment conductofforeigninvestors ongrounds ofnationalsecurity,essentialsecurity,publicorderandthelike.The OECD2020b reportalso includesanaccountofthespreadofnationalsecurity-related measuresovertime.Following theopening upofnationaleconomiestoforeigncapitalinthe1980sand1990s,bythemiddle ofthe lastdecade thegovernmentsofmany industrialisedcountries expressedmisgivings about foreign ownershipof certainassets,industries,or infrastructures.Moreover,investmentsbysovereign wealthfunds orgovernment-controlled investorsraised redflags asthey couldhave beenpolitically motivatedandthedecision-making vehiclesconcerned weresaidtobelesstransparent OECD2020b,page6].Later,and OECD2020b pointstotheyear2015,concerns aboutthe connectionbetween FDIandnationalsecurity rosefurther.Furthermore,the reportargues:“The reasonswhy thispolicyareahas regainedattention is-in part-reminiscent ofthe early2000s:•Concerns aboutinvestment originatingin lessthan transparenteconomies andthe involvementofforeignState-controlled entities.•Concern thatforeign ownershipcould threatena Statessecurity bylimiting thediversity ofsuppliers ofcertain productsor services,in additiontothemore traditionalrisks ofespionage andsabotage.•Technological changesandthegrowing sensitivityand quantityof sensitivedata.•The moreassertive stanceofsomecountries inglobal economicand strategiccompetition pages6and
7.The lastbullet pointbeing somethingofanunderstatement giventhe developmentsfrom2017on.Updating theinformation containedinthecountry annexesof OECD2020b withinformation speciallycollected forthe preparationofthischapter,it waspossible tobring thisassessment upto datethrough tomid-March
2021.Sincethestart ofJanuary2019,a totalof31governmentshaveintroduced orreformed theirFDIscreeningpolicies relatedtonationalsecurity.Twenty-six ofthosegovernmentsmade thelast changeto thesepolicies during2020and twodid sothis year,which wouldconstitute awidespread shiftinthepotential treatmentofFDIshould thesepolicyinterventionsremain inforce oncetheCOVID-19pandemic abates.Figure1shows thelast yeareach nationrevised itsFDIscreeningpoliciestotakeaccountofnationalsecurityconsiderations.The resultsare striking.All butfour G20members areimplicated inrecentpolicy changes implemented since
2015.Africa istheonlycontinent wherefew suchpolicychangeshave beendetected since
2017.Large swathesofthe globe areimplicated inFDIscreeningpolicychangesimplementedsincethe beginningof
2019.Attention nowturns tothe factorsresponsiblefor this shiftin treatmentofforeigninvestors.To organisethe discussion,I differentiatebetween factorsthat shockedthe globaleconomy andthose moreslow changingshiftsinunderlying economicclout,technology,and businessmodels.Figure1:Every continenthas seenat leastone majoreconomy implementFDIscreeningpolicychangessince
2015.Last yearnationalsecurity-related policychange observed20212020201920182017Source:OECD2020b]augmented byown searchesof pertinentgovernment intervention.
3.What rolefor shocksThe COVID-19pandemic Toappreciate thelinks betweentheCOVID-19pandemic andelevatedFDIscreening itis necessaryto observethat thispandemic induceda systemiceconomic crisisin additionto posinga seriousthreat toglobal publichealth.On accountoftheeconomic crisis,a lotof oldwine well-known rationalesfor FDIscreening waspresented innew bottles,as willbecome clear.The publichealth dimensionbrought totheforewhat appeared,at first,tobenew policyconsiderations.Each isdiscussedinturn.Concerns thateconomiccrisesgenerate nfire-saleFDIare perennialsee,for example,Krugman2000and hisanalysis basedon FDIflows during the LatinAmerican andtheEastAsian financialcrises.More recently,Hanemann andRosen
[2020]observed that“After the2008-9crisis Chinesefirms venturedouttoacquire discountedassets aroundtheglobe,especially thosewith strategicutility:iron andnickel ore,oil,and myriadother commoditiesthat Chinabecame dependenton.”Ten yearslater,the connexionbetween foreignacquirers anddistressed localfirms wasmade veryquickly oncethe globaleconomic falloutofthepandemic becameapparent.Fabry andBertolini
[2020]sounded analarm aboutthe perilsofforeignacquisitions atthestartoftheCOVID-19pandemic,writing inApril2020:Whether therecession thatis triggeredbythehealth crisisis severebut temporaryor whetheritisa shockthat bringsabout structuralchangeintheglobaleconomy,the weakeningpositionof European companieswill createmany opportunitiesforcorporatetakeovers atbargainprices”page
1.In a31March2020briefing,Baker McKenzie2020]notedthattakeovers occurforavariety ofreasons:...this unprecedentedenvironment couldafford opportunisticbuyers thechance toacquire orinvest incompanies thathavebeenweakened bythe crisis.In addition,creditors mayunintentionally findthemselves ina positionwhere theyacquire controlover abusiness/1The latterpoint isworth bearingin mindas politicianslargely framedthematterin termsof hostiletakeovers.For instance,the Germanminister of economic affairs;Mr.Peter Altmaier,stated on20March2020that“We willnot allowa bargainsale ofGerman economicand industrialinterests/23In asimilar veinnine Europeanheads ofgovernment wrotetothePresident oftheEuropeanCouncil,Mr.Charles Michel,on25March2020and argued:“We alsoneedtomake surethat essentialvalue chainscan fullyfunction withintheEUborders andthat nostrategicassetsfall preyof hostiletakeovers duringthis phaseofeconomicdifficulties//24In theevent,manygovernmentsjustified theirtightened FDIscreen procedureson multiplegrounds,some linkedtothehealth-related aspectsofthepandemic.The statementmadebyCanada on18April2020is typicalinthisrespect,making threepoints germaneto thisdiscussion.“Many Canadianbusinesses haverecently seentheir valuationsdecline asa resultofthepandemic,consistent withpatterns inother majoreconomies.These suddendeclines invaluations couldleadtoopportunistic investmentbehaviour..//“While eachinvestment willcontinuetobe examinedon itsown merits,the Governmentwill scrutinizewith particularattention underthe Actforeigndirectinvestments ofany value,controlling ornoncontrolling,in Canadianbusinesses thatare relatedto publichealth orinvolved inthe supply ofcriticalgoods and services toCanadians ortothe Government..71“Some investments into Canadaby state-owned enterprisesmaybemotivated bynon-commercial imperativesthatcouldharm Canadaseconomic ornationalsecurityinterests,a riskthatisamplified inthecurrentcontext.For thisreason,theGovernmentwill alsosubject allforeign investmentsby state-owned investors,regardless oftheir value,or privateinvestors assessedas beingclosely tiedto orsubjecttodirection23The Germangovernment backedup thesewords withan economicstabilisation fund,financed tothe tuneof100billion euros,that offersfinancial supportto Germancompanies andincludes provisionforthestate totake equitystakes indistressed companiesKenner2020].The quoteby Mr.Altmaier waswidely reportedinthemedia see,for example,this articleintheFinancialTimeshttps://www,ft.com/content/dacd2ac6・6b5f・ll//・89df・41bea055720b,24This letteris availablehere:http:〃www.governo.it/sites/new.governo.it/files/lettir michel20200325eng.pdf.from foreigngovernments,to enhancedscrutiny underthe Act//25The EuropeanCommission framedthematterdifferently inadvice toits MemberStates onhow toimplement theirnational FDIscreening mechanismsduringthepandemic.On25March2020,the Commissionargued:”...the EUsopennesstoforeign investmentneeds tobe balancedby appropriatescreening tools.In thecontextoftheCOVID-19emergency,there couldbe anincreased riskof attemptstoacquirehealthcare capacitiesfor examplefortheproductions ofmedical orprotective equipmentor relatedindustries suchas researchestablishments[for instancedeveloping vaccines]via foreigndirectinvestment.Vigilance isrequired toensurethatany suchFDI doesnot havea harmfulimpactonthe EUscapacity to cover thehealth needsof itscitizens//EC2020,page l26The Commissionwas concernedaboutforeignacquisitionsofstrategic capacitiesmoregenerally,noting:“FDIscreeningshould takeinto accounttheimpactontheEuropean Unionasawhole,in particularwithaview toensuring thecontinued criticalcapacity ofEU industry,going wellbeyond thehealthcare sector.The riskstotheEUs broaderstrategic capacitiesmaybeexacerbated bythe volatilityor undervaluationofEuropeanstock markets.Strategic assetsare crucialto Europessecurity,andarepart ofthe backboneof itseconomy and,asaresult,ofitscapability fora fastrecovery//[EC2020,page1In itsrecommendation toMemberStatesthe Commissioncast thenet evenwider,arguing thatFDIscreeningshould“take fullyintoaccountthe riskstocriticalhealth infrastructures;supplyofcritical inputs,and othercritical sectorsas envisagedintheEU legalframework”EC2020,page
2.On theaccompanying websiteforthisannouncement mentionis alsomade oftheobjectiveto preserveEU companiesand criticalassets/27which appearseven broaderin scopethantheconsiderations mentionedabove.No definitionisprovidedfor thesestrategic capacitiesand criticalassets butthey couldinclude valuableintellectualpropertyand tacitknowledge,cutting-edge research,development,and prototypingcapabilities,controloverproduction and distribution facilities,and controlof infrastructures-both physicaland digital-neededtosupport innovation,supplychains,manufactured,anddistributionof pandemic-related orother highvalue-added goodsandservices.In sum,governmentshavecomealong wayfromthe1970s whenforeigndirectinvestmentsinspecifically selectedsectors wassingled outfor specialtreatment.It isimportant tostress thatmany alsogovernments emphasisedthat theireconomies remainedopen toforeigndirectinvestment.One canconclude,then,that governmentsfelt compelled,ataminimum,to expandthescopeofeconomicactivities coveredbyFDIscreening yetatthesame timeeschewed sweepingbans onFDL preferringa case-by-case approach.Much willdepend onwhether privatesector participantsperceive thesepolicy innovationsas constitutinga broad-based obstacletoforeigndirectinvestment.In thisregard,itistelling thatBakerMcKenzie2020warned25The fullstatement canbe foundathttps://www.ic.gc.ca/eic/site/ica-lic.nsf/eng/lk
81224.htmL26UNCTAD2020notes governmentsn...countries eitherexpand theirscreeningmechanismstocoverthese sectorsor broadenthe meaningofnationalsecurityandother publicinterest toinclude healthemergencies page7].27See https://ec.euroca.eu/commission/presscornes/detail/en/ip20528。