As the twin spectres of Brexit and Covid-19 continue to dominate the headlines, you could be forgiven for not having the government’s planned National Security and Investment Bill on your radar.
But the Bill is set to radically overhaul the UK’s approach to foreign investment at a time of significant economic uncertainty.
While its exact contents have yet to be revealed, according to the background notes to the December 2019 Queen’s Speech — the most recent official reference to the proposals — the Bill would increase the government’s powers to “scrutinise investments and consider the risks that can arise from hostile parties acquiring ownership of, or control over, businesses or other entities and assets that have national security implications”.
But the Bill’s origins lie further back in, the distant past of the Theresa May government, which launched the process with a consultation followed by a White Paper published in 2018. This proposed that all assets, including intellectual property, should be covered by the new regime and that all transactions regardless of size should be in scope.
This is in contrast to the current regime which only covers share investments and businesses acquisitions, and which limits intervention to transactions that exceed size and market share thresholds determined by the Competition and Markets Authority.
While much of this might sound reasonable, there are major concerns within the business and investor communities that the proposals will make the UK significantly unfriendlier to foreign investment at a time when its economy is already on life support, and months before it leaves the EU’s Single Market.
Moreover, as alluded to above it is not the case that the UK currently lacks the ability to screen foreign investment on national security grounds. Under the current rules, enshrined in the 2002 Enterprise Act, the government is able to intervene where mergers and acquisitions raise any one of a number of specified public interest concerns, including national security.
In addition, recent amendments to the Enterprise Act have expanded ministers’ powers to intervene in sectors considered particularly sensitive, including advanced technologies and public health.
Why then, in the midst of an unprecedented economic crisis, is the government risking business confidence in this way? Across developed economies, a growing focus on technological competition with China (heightened, of course, by the pandemic) and the potential impact of the downturn on asset prices have led numerous governments — including those of France, Germany and Australia — to beef up their investment screening regimes.
Without debating the merits of these developments, there are reasons to believe that the UK’s proposals could be particularly damaging. Ahead of the publication of the Bill, ministers are said to be considering expanding the grounds for intervention beyond national security to the much wider notion of “national interest”, as well as giving themselves the power to unwind deals retrospectively.
Either of these things, let alone both, would have a major impact on the UK’s attractiveness as a destination for foreign investment. The malleable nature of national interest as a concept would effectively give ministers carte blanche to block deals for any reason they saw fit and unleash a Pandora’s Box of interest group jockeying. Meanwhile the mere threat of investigating and potentially unpicking deals already approved would seriously undermine the UK economy’s reputation as a haven of predictability and transparency.
While increasing technological competition and growing geopolitical tensions may well mean the UK’s investment screening powers need further updates, it isn’t obvious that a completely new system is required. Since 2002, there have been just 11 interventions on national security grounds, suggesting that even the government’s current powers have room for more use.
One possible explanation for the new strategy is that these proposals are an attempt to use national security as a pretext to pursue industrial policy goals, such as technological leadership and greater domestic production. The fact that political anxieties surrounding recent high-profile deals, such as Melrose’s 2018 acquisition of GKN and Nvidia’s ongoing attempt to acquire UK-based chipmaker Arm, have focused more on jobs and investment than national security supports this thesis.
Nevertheless, the government should avoid blurring the lines between national security and economic policy. If it wishes to support the emergence of globally competitive British technology companies, it already has a range of tools at its disposal to do so — from tax and procurement policy to investment in skills and R&D.
There may well be cases where foreign investment in specific sensitive sectors poses too much of a risk. But creating a hostile environment for foreign investment is not the right approach.
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