WASHINGTON—National security concerns are prompting tighter investment screening as numerous countries introduce new regulatory frameworks, targeting foreign buyers, particularly Chinese state-backed firms.
Nearly 12 percent of global foreign direct investment was blocked in 2018 for national security concerns, according to a study by The United Nations Conference on Trade and Development (UNCTAD).
“In recent years, there have been numerous cases where foreign investment has been rejected by targeted host countries for national security reasons and related public concerns,” a report by UNCTAD stated.
“There is a trend towards tightening investment screening by expanding the scope and depth of screening procedures and the corresponding disclosure obligations of foreign investors.”
UNCTAD identified at least 20 cases where planned foreign takeovers were blocked or canceled in the period from 2016 to September 2019. Sixteen out of 20 cases involved Chinese investors. And the total value of these blocked transactions amounted to more than $162.5 billion.
In addition, national security-related foreign investment screening is on the rise.
“In Italy, for example, the number of such proceedings in 2018 was 255 percent higher in comparison to 2015; in the United States, the number of cases screened in 2018 was 160 percent higher than in 2015,” the report said.
In the past, investment screening was more relevant to the military and defense sectors. Nowadays, it is expanded to cover key technologies and know-how, such as artificial intelligence, robotics, semiconductors, 5G, biotechnologies, satellites, and aerospace. It’s also applied to control the access of foreigners to sensitive data of domestic citizens.
Both developed and emerging countries have introduced new measures to boost investment-screening mechanisms in response to rising national security concerns. In nearly eight years, at least 13 countries introduced new regulatory frameworks. There have also been significant amendments to existing foreign investment laws.
There are several reasons for the increased crackdown on foreign buyers, according to UNCTAD. Countries want to ensure that cutting edge technologies and know-how remain in domestic hands, as they are key for a country’s competitiveness. In addition, they seek to block increasing investment activities by foreign state-owned enterprises or sovereign wealth funds.
Governments use state-owned companies to buy companies overseas as a means to acquire key technologies and know-how. Hence, tighter screening for national security reasons had a significant impact on such investors, particularly those from China.