To date, foreign investment regimes have focussed exclusively on
inbound investments by foreign companies into a country’s
respective domestic businesses. However, there is growing concern
at political level on both sides of the Atlantic as regards the
creation of geopolitical dependencies because of domestic
companies, investing abroad, which are active in high- and
future-tech areas. From a business perfective, these investments
are usually made to get closer to relevant customers, to adapt
products and offerings to local needs, and to tap relevant talent
pools. From a political perspective, however, there is a concern
around the leakage of technology (in areas not sufficiently
captured by export control rules), potential military use, as well
as the creation of new geopolitical dependencies.
US – Outbound Investment Regime Is Delayed Further
As has been widely reported, the anticipated outbound
investment regime focused primarily on U.S. investments in
China-often described as “reverse CFIUS”- has been
delayed, as the United States seeks to secure buy-in from U.S.
allies, addresses concerns raised by the U.S. business community,
and possibly wants to avoid further escalating tensions with
China.
The regime, which will initially be created via executive order,
is expected to have a narrow initial scope, focusing on investments
in artificial intelligence, quantum computing, and semiconductors.
There appears to be an appetite among members of Congress, however, for a more
expansive regime, meaning that any regime created by the Biden
Administration could ultimately be reshaped through congressional
legislation.
Most of the commentary on the new regime (including ours) has been pretty speculative, when this
is a clear case of the devil being in the details, but watch this
space. Once the executive order comes out, we’ll provide a
summary of how it addresses key questions concerning the new
regime, including:
- Which investors will be covered? Will the regime apply to
corporate, fund, and/or individual investments? - Which investments will be covered? Will the regime apply just
to direct investments in China, or will it also apply to indirect
investments? Will an investment in a non-Chinese company (including
U.S. businesses) be covered by the regime if the company has (or
plans to have) covered operations in China? - How will the process work? Will it be more akin to CFIUS,
export licenses, or sanctions regimes? - Which agency will lead the process? Current thinking is that it
will be the Departments of the Treasury or Commerce. The decision
will determine which Congressional committees have oversight
responsibility and the lead on future legislation. - How soon will it take effect? The executive order is likely to
establish an initial framework for the regime, but implementing
regulations could take a while, with the timeline possibly
depending on which agency is responsible (as we saw following the
enactment in 2018 of the Foreign Investment Risk Review
Modernization Act and the Export Control Reform Act).
Meanwhile, in the EU..
On 20 June, the European Commission published its Joint Communication on a European Economic
Strategy. The Communication sets out the strategy for
developing a framework for the assessment and management of
security risks raised by certain economic activities. Of particular
interest is the proposed holistic approach to investment screening
in the Communication, with commitments made by the EC to both
strengthen the existing FDI Screening Regulation and develop
an outbound investment review mechanism. The European Council will
consider the European Economic Strategy during its meeting of 29-30
June.
Background
We have been waiting to see what the EC would say on outbound
investment screening, and now the next steps in this area – as well
as others – have been set out. It is perhaps unsurprising that the
Communication laid the groundwork for the EC’s proposals by
highlighting the considerable threats to peace and stability that
the EU and Member States have faced in recent years. The COVID-19
pandemic, the war in Ukraine, the age of disinformation, and
geopolitical tensions have, they state, exposed weaknesses and
risks in economies, supply chains, and companies. As tensions mount
and with global economic integration deeper than ever before,
certain economic flows and activities can present risks to economic
security at the EU, national and business levels. This includes
foreign investment, especially into critical and sensitive sectors
such as semiconductors, military and dual-use
industries, and energy.
The inception of EU outbound investment screening
The Communication suggests that a holistic approach to
protecting the EU’s security interests raises the question of
also subjecting certain outbound investments to control – to
counter the risk of technology and knowhow leaking as part of that
investment.
As a result, the Commission, in liaison with the Member States,
will now examine what security risks can result from such outbound
investments. In particular:
- It will set up a dedicated group of Member States’ experts,
building a new structured, confidential cooperation mechanism; - With input from this new group, it will conduct outreach and
consultations with business and other stakeholders, and partner
countries, as appropriate; and - It will aim to propose an initiative by the end of 2023 -
likely alongside the recast FDI Screening Regulation which is
currently under review (see below).
Finally, the Communication emphasises the need for unity at EU
level to achieve a more assertive approach to enforcement and
protect security interests. We will have to wait until the end of
the year to see exactly what this new approach will look like in
practice. There are a number of interesting questions to be
answered by the Commission:
- Will the Commission claim competence over an outbound
investment screening tool, i.e. establishing its own genuine
enforcement (something the Commission currently lacks as regards
inbound investment control) or will Member States retain
jurisdiction on the back of national security interests. - Will there be a clear delineation between export control and
outbound foreign investment rules (noting that the former are less
aligned with foreign investment control rules than e.g. in the US
and often do not fully capture more modern technologies, resulting
in certain perceived enforcement gaps). - Will there be a focus on what the US calls “countries of
concern”, which could result in a more targeted approach
compared to many FDI regimes but may be in conflict with WTO and
other foreign trade principles. - To what extent will the US and EU align on sectors to be
covered by the regime. Despite the extraterritorial application of
many US laws, there is a certain concern about
“circumvention” if the scope of outbound foreign
investment regimes is not aligned.
Finally, it will be interesting to see whether there may be a
broader alliance among Western countries and whether others also
follow suit as regards the enactment of an outbound regime. The UK
is already reported to be considering its stance in this area.
Further developments expected to EU inbound foreign
investment screening
Although the Communication highlights the success of the EU FDI
Screening Regulation, with the Commission and Member States
reviewing more than 1,000 foreign investments since 2020, the EC is
not resting on its laurels. It announced recently that it is in the
process of evaluating the current regime and will propose revisions
before the end of 2023. To this end, it has opened a consultation on the FDI Screening
Regulation, with interested stakeholders able to submit their views
by 14 July 2023.
In parallel, the EC has (again) urged Member States who have not
yet implemented national screening mechanisms to do so
“without further delay”. 18 EU Member States now have new
or revised regimes in place (including most recently The Netherlands), and at least 5 new regimes
are expected in the coming year (Belgium, Luxembourg, Sweden, Ireland, and Estonia). Croatia,
Cyprus, and Greece are all reported to be in the process of
developing their own FDI regimes. This leaves Bulgaria as the only
Member State with neither an existing nor a proposed FI screening
regime.
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