Mergers and acquisitions are increasingly becoming matters of national sovereignty and security as China, in particular, extends its power
In a series of moves that will reverse a decades-long trend towards increasingly open markets, Western nations are pushing through stronger measures to vet foreign direct investment (FDI) and foreign takeovers of strategic economic assets, citing security concerns.
A spate of recent cases have awoken suspicions that Chinese-led cyberattacks and corporate espionage have been supplanted by targeted takeovers as a means of gaining technological, economic and defensive advantage
Europe’s four largest economies, Germany, the UK, France and Italy, have each taken steps to introduce legislation, while Europe-wide, the European Union looks set to adopt an investment screening mechanism by the end of the year.
Canada, Japan and Australia are strengthening defences against foreign capital, and the United States has seen bipartisan support for expanding the reach of the influential Committee on Foreign Investment (CFIUS), a secretive inter-agency panel that reviews foreign investment in the US for national security threats.
Main fear around foreign takeovers is lack of reciprocity
What has happened over the past 12 months to precipitate this sea-change? “For the most part, in Germany and France and perhaps the UK the concern is over Chinese access to European technology, but no reciprocity in China for those investing there,” says Stephen Woolcock, professor of political economy at the London School of Economics.
“There were previously controls on military technology, which have taken a much lower profile since the end of the Cold War, but there is also a residual concern about Chinese ownership of strategic technologies.”
In recent years, Europe has received record levels of Chinese inward investment, with minimal barriers to Chinese-led mergers and acquisitions. China, by contrast, has maintained extensive restrictions on inward FDI.
There are also concerns, Professor Woolcock says, that China is pursuing an “economic statecraft” approach to foreign policy. A spate of recent cases have awoken suspicions that Chinese-led cyberattacks and corporate espionage have been supplanted by targeted foreign takeovers as a means of gaining technological, economic and defensive advantage.
China beginning to take more active role on global stage
Notable cases in Germany include the purchase of the robot maker Kuka AG by Midea Group in 2016; the halted takeover in July of German semiconductor-equipment maker Aixtron SE; and the Chinese state grid operator’s bid for a 20 per cent holding in one of Germany’s largest power grid operators 50Hertz Transmission GmbH.
Under President Xi Jinping, China is taking a much more active role on the global stage, dropping his predecessor Deng Xiaoping’s 1990 guiding maxim “Hide your strength, bide your time”.
President Xi’s monumentally ambitious One Belt One Road initiative expands Chinese investment worldwide, while at the same time the Made in China 2025 ten-year plan, a state-led industrial policy aimed at making China globally dominant in high-tech manufacturing, does so through government subsidies, mobilising powerful state-owned enterprises and targeted intellectual property acquisition.
Foreign takeovers of technology firms threaten security
This matters because critical advances in certain technologies have security implications. It is widely thought that countries possessing the technological edge in artificial intelligence, chip-making, quantum computing and aerospace will have an economic and defensive advantage. Indeed, the Pentagon warned in 2017 that state-led Chinese investment in US firms working on facial-recognition software, 3D printing, virtual reality systems and autonomous vehicles is a threat because such products have blurred the lines between civilian and military technologies.
Western nations are also beginning to question the independence of private Chinese firms operating overseas from the influence of the Communist Party of China (CPC). “Australia is the canary in the coal mine of Chinese communist party interference,” according to John Garnaut, journalist-turned-adviser to the Australian government. “Nobody knows what happens when a mid-sized, open, multicultural nation stands its ground against a rising authoritarian superpower that accounts for one in every three of its export dollars.”
Australia has been the world’s second-largest recipient of Chinese investment since 2007, with $90 billion of accumulated investment, according to a report by KPMG and the University of Sydney. The flow of A$6 million in donations to Australian political parties from donors with CPC links has also raised alarm. This year, a Labour MP resigned in a scandal linked to a Chinese donor. And the decision was made to ban telecoms equipment makers ZTE and Huawei from foreign takeovers of Australia’s 5G networks.
Is national security being used as an excuse?
Despite its reputation as home of the free market, the US has maintained oversight of strategic industries since the 1970s. Now the expanded CFIUS remit will cover critical technology, infrastructure and businesses that handle personal data. This year it blocked the proposed $1.2-billion takeover of MoneyGram by China’s Ant Financial, a Chinese-backed bid for Chicago Stock Exchange and most recently the Broadcom-Qualcomm takeover.
The UK, in stark contrast, has been very much open for business from foreign takeovers, with security concerns bowing to economic expedience. Prime minister Theresa May, receiving a Chinese delegation earlier this year, vowed to continue the so-called “golden age” of Chinese-UK relations, begun under David Cameron. At the same time, however, business secretary Greg Clark is seeking to bolster protections.
A UK government white paper, published in July, seeks to upgrade national security investment powers, but outlines no provisions for an independent review, raising concerns that decision-making, if left to politicians, could give way to popular opinion and protectionist tendencies, to the detriment of innovation and competition.
“We must draw a line, however difficult it may be, between national and economic security; one has a solid foundation, and the other can lead to war between jurisdictions in terms of investment and trade behaviour,” says Dr David Reader of the Centre for Competition Policy at the University of East Anglia.
Some Chinese analysts claim national security is being used as a pretext for protectionism. But there are rumblings in the CPC that a lower profile served global Chinese interests better. In a conciliatory fashion, China appears to be listening to Western complaints. In June, the number of industries in which foreign takeovers are limited or prohibited was reduced from 63 to 48.