COVID-19’s next casualty: Foreign Direct Investment

Covid-19 has unmistakably blown new life into the push for a more protectionist stance worldwide. Market economies are erecting walls against foreign investments, spurred by coronavirus-triggered economic upheaval, as well as by China’s increasing assertiveness. Countries around the world are increasingly tightening the rules on foreign investments in prized businesses and key sectors.

Door Carlos Pita Cao

Earlier this year, the Trump administration expanded the powers of Cfius, allowing Cfius to block foreign purchases of minority stakes and widening its jurisdiction to cover more sectors, including real estate. In March, the European Commission issued guidance to EU members, requiring them to use existing laws to prevent capital flows from non-EU countries that could undermine “Europe’s security or public order.” 

Germany, France and Spain have tightened foreign investment rules in recent months. Italy has said it will bar any foreign entity from acquiring strategic businesses, including investors from other EU member states. Even the UK – traditionally one of the bastions of the free market and long one of the world’s most open countries for foreign investors — has implemented similar measures. So too have Australia and Japan. The EU FDI Screening Regulation will come into force in October. In the Netherlands the preparation of an act introducing an investment screening mechanism (Wet toetsing economie en nationale veiligheid) has been expedited and is currently in consultation. This, following the adoption of an investment screening mechanism specifically for the Dutch telecom sector in May. 

The trend towards a more protectionist stance predates the Covid-19 crisis. This trend has however decidedly been accelerated by it, as the global health crisis has laid bare the vulnerabilities of a globalized economy and the just-in-time supply chain. It has become quite evident that there is a finite amount of critical supplies – vaccines, medicines, personal protective equipment – and that it can be essential to be able to steer the way these resources are allocated. Covid-19 has also prompted governments to look beyond traditional key sectors, as fears mount that businesses in a wide array of sectors that have been hit hard may be easy prey for foreign buyers.

These fears must however be balanced by the need to have market forces work, and for inbound investments and financing to support and even revive the economy. The pandemic has already dealt a severe blow to the free movement of people. The free movement of goods and the free movement of services have not remained unscathed either. Now it looks poised to take a hatchet to another pillar on which free markets used to stand firmly: the free movement of capital. 

Whilst concerns may definitely be warranted, undesirable investments in critical sectors may need to be prevented, and appropriate scrutiny may very well be justified in today’s world, a desire to focus on the national interest may also partly be rooted in populism and a general backlash against globalization. The possible resurgence of economic nationalism lurks around the corner. 

An additional issue that needs to be noted is that the pandemic has given governments the ability to intervene and to dictate strategy. State programs to support businesses through the crisis – such as the provision of grants or subsidies – have been rolled out generously. However, governments often demand a price for such support. Bailed out businesses might – for instance – be asked to move faster in cutting down on its CO2-emissions. Governments now have a catalyst for making more intervention possible. This may add to an unpredictable investment climate.

The Netherlands has always had an open investment climate. It has a hard-earned reputation for being liberal as regards foreign investors and open to international trade and inbound investments. It can rightfully boast a favourable investment climate, partly made possible by excellent physical and digital infrastructure, a highly educated workforce, a high labour market efficiency and initiatives regarding innovation and cutting-edge technologies. Still, to quote Warren Buffett: “It takes twenty years to build a reputation and five minutes to ruin it.”

Foreign investments have always been essential and will continue to be critical in the coming years for the Dutch economy, and for its recovery. It is paramount that FDI screening does not hamper inbound investments. Scrutiny may be justified, but it will need to be applied with restraint and in exceptional instances only, it will need to be fair, consistent and well-implemented, and avoid being politically motivated. Political interference – whether actual or perceived – and legal uncertainty surrounding the review process will have a negative impact on the investment climate. 

The market will likely be more politicised and new regulatory challenges will need to be faced. All in all, recent developments are likely to have a lasting effect on foreign investments, and thus on cross-border transactions. These developments will however undoubtedly also lead to new opportunities. The investors that are most savvy to these new opportunities will be able to stay ahead of the curve.

Carlos Pita Cao is advocaat en partner bij AKD. Hij houdt zich vooral bezig met nationale en internationale fusies en overnames, managementbuy-outs, joint ventures, aandeelhoudersovereenkomsten, personenvennootschappen, commercial contracting, vennootschapsrechtelijke herstructureringen en algemene advisering.

Dit artikel is eerder gepubliceerd in M&A Magazine #3, 2020

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