How coronavirus is changing the rules on foreign investment in essential areas

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How coronavirus is changing the rules on foreign investment in essential areas

In spite of the G20 commitment to keep (FDI) foreign direct investment and trade continuing during COVID-19, some countries placed few restrictions on investment coming in their own country. For them, strategic industries like health care are a key area of concern.

While investment screening measures are not new, the scope of their expansion is. Before the pandemic began, a study analysing FDI-screening measures adopted 3 justifications for these measures:

  1. Fear of becoming dependent on a foreign company for the delivery of critical goods and services
  2. A desire to ensure that domestic technology and expertise remain within national borders
  3. The prevention of surveillance or sabotage of essential services.

This pandemic has added new aspects to these insecurities that will have global consequences for FDI and trade flows.

In the late March in 2020, the European Union (EU) released updated guidance for Foreign Direct Insurance screening, insisting member states to support European public security by protecting “critical assets and companies” in health-care related industries, including medical goods, protective equipment, medical research and biotechnology, from foreign buyout.

Later, Margrethe Vestager, the European Union (EU) competition policy head suggested that if needed, countries must consider taking over the ownership stakes in companies threatened by takeover particularly by Chinese organizations. Several other countries also took action. Australia announced temporary measures to lower investment review threshold to zero for all economic sectors as of March 29, 2020.

Familiar measures were followed in France, which reduced investment screening threshold to 25 per cent and Spain imposed a 10 per cent threshold on non-European FDI flows and published guidelines to protect public security, order and health. India, concerned by the prospect of a Chinese takeover of critical organizations, also made its FDI regulations stronger.

Canada tightens FDI rules

Canadian policy-makers on April 18, 2020 released a familiar policy statement on FDI & covid-19. The federal government tightened FDI reviews for corporations in public health and also those involved in supply chains of critical products and services. Also the threshold for review of FDI made by foreign state-owned enterprises were lowered to zero.

This lines up with Canada’s commitment to the protection of critical infrastructure, including “service essential to the health, safety, security or economic well-being of Canadians”, under the Investment Canada Act.

Although FDI screening in the U.S. do not appear to have changed due to covid-19, prior to the pandemic, the country had already strengthened the protection of critical technologies from FDI, including items related to biotechnology and healthcare. But it is predicted by the legal experts that covid-19 may lead to more rigid reviews of health care related investment by the country’s Committee on Foreign Investment.

A trend towards rising strictness of FDI screening mechanisms is around, with rising severe restrictions on investment in strategic industries, health care is probably just one of them. At the same time, the economic significance of the pandemic may create the conditions for successful aggressive bids for underrated technology companies.

Concerns about state-owned Chinese firms

This concern has been mostly expressed with respect to the Chinese firms, in particular, those that are state-owned firms. While this is not new, the EU is thinking about accepting additional measures to screen investment by state-owned organizations. The rise in political attempts to interfere with free trade in essential goods is more daunting. One example is the ultimately unsuccessful attempt by U.S. President Donald Trump’s administration to block the flow of protective masks made by 3M to Canada.

The changes are likely in the locations of supply chains of strategic industries as more countries look to bring corporate activities back to domestic soil. This is stated by anxiety in the U.S. and EU about their dependence on drugs manufactured in China during COVID-19.

Governments may also offer incentive packages to firms to diversify supply chains away from China, as is the case in Japan. That means covid-19 crisis may accelerate the disengagement between the U.S. and China, especially in strategic industries.

Accelerating deglobalization

The deglobalization process appears to be speeding up due to the current crisis. The United Nations Conference on Trade and Development (UNCTAD), reports that the FDI flows may fall by 40 per cent in 2020-21, and cross-border mergers and acquisitions will continue to decline.

The extent of the decline will depend on the degree to which the selective FDI measures become binding and supply chains are relocated to home markets.

The multinational enterprises have one consequence that will almost certainly experience increasing levels of social and political uncertainty that will require experienced corporate diplomacy.

It’s true that even before covid-19, there was global recognition that large firms should support a more stakeholder-oriented model, one that pays attention to multiple stakeholders, including customers, employees and communities, that are affected by the activities of particular businesses.

Covid-19 will mostly accelerate this trend as the social responsibilities and political pressures on firms increase.

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