Elizabeth Brow is a Senior Fellow at the American Enterprise Institute. She is also an advisor to Gallos Technologies.
Over the past three years, European countries including the United Kingdom, Italy, Poland, Sweden and the Czech Republic have concluded that they need to be more prudent with regard to foreign investment and have introduced stricter foreign direct investment (FDI) screening. Which is welcome and very necessary.
However, the real challenge will come with implementing such screening.
Motivated investors can hide behind layers of proprietary entities, so this type of investigation is exceptionally difficult to conduct. And to do this, governments will need to find ways to keep investment volumes up for screening, and – most importantly – decide how to replace blocked investors. Because without thoughtful implementation, our economy will be no safer than it already is.
In 2018, a Hong Kong-based company called Mars bought a 75 percent stake in Alpi Aviation – a dual-use Italian drone maker that supplies Italy’s armed forces – for a staggering payout. 90 times Bet value. And because Mars only looked like a commercial organization, the Italian government did not intervene. After the country’s financial police, the Guardia di Finanza, takes a closer look at the investment, however, it Established that Mars was ultimately controlled by a Chinese state-owned enterprise, and had Used No less than seven layers of ownership and 17 different entities to hide its identity.
The country’s then Prime Minister Mario Draghi swiftly Compelled Alpi will be spun off from Mars, as the government would block the acquisition under Italy’s Golden Power FDI rules if it knew who owned the company. But by the time of the intervention, Elpi’s Chinese owners had long had access to its technology.
Such cases have now finally prompted Italy and others in Europe to increase their FDI screening. In fact, many were such strong believers in globalization, they had little oversight. For example, just a few years ago, Chinese firms Bought Three cutting-edge Swedish semiconductor firms suffered without any investigation, simply because there was no law for it.
The Czech Republic launched its first FDI regime in May 2021. “We have learned a lesson from our experience of not taking any measures against toxic investors,” said Ota Simak, director of the trade policy department of the Czech Ministry of Industry and Trade. International economic organizations told me. “This led to the political decision to introduce screening of investments in companies operating in critical national infrastructure, defense equipment and dual-use goods.”
Companies in other sectors can now actively seek government assessment of investors above a certain percentage stake. “The law allows us to ask for any details about the investing company,” Simak said. “We go deep into ownership structures, and a few times when we started doing that the investor withdrew. It doesn’t mean it was a toxic investor – it could just be that they didn’t supply the necessary information. Can or don’t want to.
In several cases, the trail of a potential investor assessed by Simak’s team has led to an entity in an offshore jurisdiction such as the British Virgin Islands, where firms and individuals who wish to remain anonymous have been known to set up shell companies. goes. ,[Such] The accounts are certainly difficult,” Simak said. Indeed, even for governments — which have the power to request information — vetting potential investors is extremely time-consuming, and it’s even more time-consuming when When potential investors know they are likely to be blocked, they hide their identities behind layers of proprietary .
Faced with this contradiction, countries are now seeking to protect vulnerable companies through better FDI screening. Janine Hulsmann from the law firm Weil, Gottschall & Manges said, “A system that covers a wide range of companies under FDI screening can easily become ineffective and enable ‘bad actors’ to avoid detection as resources are diverted.” Low-risk filings are turned over to process.” ,
“In the UK, for example, less than 10 per cent of companies covered under the new law called for a review in the first three months of the regime, which suggests that the limits may have been set too low.” This shows that the UK government is using precious resources on investments that do no harm, while investments by companies skilled at hiding their identities are not getting enough attention.
The same dilemma is true for other countries as well. The Committee on Foreign Investment in the United States – the gold standard for FDI screening – has become a victim of its own success and is now struggling to keep up with demand. Italy, which Strong 2020 saw number of companies informing government of its golden power rules, new investors Jump Yet the number of civil servants conducting investigations has not increased accordingly, from just 83 in 2019 to 500 two years later.
In such cases, civil servants conducting regular reviews may require help from intelligence agencies to augment their manpower. Or, to keep up, governments may need to select a few key cases for thorough investigation – and then tout their investigators’ abilities to deter shady investors.
Meanwhile, the question governments have so far failed to answer is this: if they block an investor, who will replace them?
For example, in the late 1970s, the Iranian government wanted to buy a major stake in Germany’s Daimler-Benz. But, later as the then Chancellor Helmut Schmidt Explained, “I found it unfair that the pearl of German industry, which was Daimler-Benz, would end up in Iranian hands. I thought, this should be stopped. So, he asked Deutsche Bank to buy the stake: “I said, It is in the interest of patriotism that you buy this stake. You may have to hold the stake for several years. , , But you have to do it. And because they were good patriots, they did.
Today’s European political leaders would struggle to get similar arguments off the ground – but they should try. If a company is sensitive enough to block an investor, it is also sensitive enough to keep alive. Alone in 2021, drawn wisely vetoed Three Chinese takeovers of sensitive Italian firms, and in the 12 months since new UK screenings were implemented, the UK government blocked three acquisitions. Germany, for its part, pioneered its own solution in the form of Berlin directed State-owned KfW Bank bought a German power company in 2018 after a Chinese firm sought to acquire a stake.
In the long run, the FDI law is just the first step. Really keeping our economies safe involves sophisticated scrutiny by a cadre of civil servants – as well as the willingness of other companies, or governments themselves, to take the place of a suspicious investor.