National Security Review of Foreign Investment

A Comparative Legal Analysis of China, the United States and the European Union

Cheng Bian

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000046311
• Edition: 1
• Topic: Business
• Subtopic: Finance
• Index: Business

In recent years, China, the US, and the EU and its Member States have either promulgated new national laws and regulations or drastically revised existing ones to exert more rigorous government control over inward foreign direct investment (FDI). Such government control pertains to the establishment of an ex-ante review regime of FDI in the host state in sectors that are considered as 'sensitive' or 'strategic', with an aim to mitigate the security-related implications. This book conducts a systematic and up-to-date comparative study of the national security review regimes of China, the US, and the EU, using Germany as an exampling Member State. It answers a central research question of how domestic law should be formulated to adequately protect national security of the host state whilst posing minimum negative impacts to the free flow of cross-border investment. In addition to analyzing the latest development of the national security review regimes in aforementioned jurisdictions and identifying their commonalities and disparities, this book establishes a normative framework regarding the design of a national security review regime in general and proposes specific legislative recommendations to further clarify the law.

This book will be of interest to scholars in the field of international and comparative investment law, investors who seek better compliance programs in the host state, and policymakers who aim for high-quality regulation on foreign investment.

1 Introduction

1.1 The changing landscape of national security review of foreign direct investment (FDI)

International investment is one of the pivotal momentum propelling global economic growth, next to international trade. Cross-border capital flows benefit the recipient country by contributing to the increase of capital liquidity, industrial productivity, social welfare and overall economic growth.¹ The existence of the spill-over effect and the positive externalities that FDI generates in the host country is well documented.² In order to fully reap the benefits of FDI, host countries actively pursue an open and liberalized domestic business environment, especially when the host countries are developing ones where the level of development in technology, infrastructure, human capital, and the financial market is considered less fledged. To that end, host states provide incentives and preferential treatments to encourage and attract foreign investment, so as to create an appealing and competitive investment climate.

In recent years, however, while continuously pursuing the maximization of economic benefits resulting from FDI, many host states have become more vigilant to the potential drawbacks and adverse effects induced by FDI, most significantly, concerning the increasingly perceived security-related implications. Such implications involve the idea that foreign ownership or foreign control of domestic companies in sectors that are considered by the host state as ‘sensitive’ or ‘strategic’ may result in particular perils to both the essential security of the recipient state, and the survival, livelihood and well-being of its citizens. As a result, many host states have opted to seek regulatory responses that specifically address such risks: an increasing number of countries have established national security review mechanisms that aim at identifying, calculating, and eventually preventing the security-related risks of inbound FDI.

This book conducts a comparative study of the national security review regimes of China, the United States (US), and the European Union (EU), adopting Germany as an exampling Member State. These jurisdictions are selected for comparison because of their practical and academic significance. From a practical standpoint, the EU, the US and China remain the world’s top three largest recipients of FDI for decades; altogether, these three regions account for approximately 57% of the global FDI inflow.³ Within the EU, Germany is a top recipient of FDI that has established a national security review regime in national law.⁴ The massive value of FDI inflows in these jurisdictions is an important indicator of the economic significance of these countries on a global scale. Even slight modification of their national FDI policies would possibly generate a considerable impact on the global investment landscape. Therefore, research on the national security review regimes of FDI in these jurisdictions as the world’s most important FDI destinations could provide important and practical reference to stakeholders, i.e., investors, policymakers, and legal practitioners, thus making a strong societal relevance.

From an academic perspective, research on the national security review regimes of FDI in these jurisdictions is a timely attempt at the reconciliation of a long-standing debate in investment law. Especially in recent years, China, the US, and Germany make a typical representation of countries that have either introduced new national security review regimes or drastically revised existing ones, aiming at exerting more rigorous government control over inward FDI. The introduction of new law or the revision of existing law regarding a national security review of FDI in these jurisdictions have raised a succession of political and regulatory concerns that can be both homogeneous and country-specific. The following section provides an inventory of the national security review regimes of FDI in these selected jurisdictions, and identifies some of the contentious aspects of these regimes in debate.

1.2 An inventory of national security review regimes of FDI

1.2.1 China

The Chinese government has further implemented its opening-up policy to attract more foreign investment after joining the World Trade Organization (WTO) in 2001, and inbound FDI in China has been thriving and prosperous. While the ever-increasing cross-border mergers and acquisitions (M&As) conducted by multinational enterprises (MNEs) in China have become a salient stream of inbound FDI, some high-profile foreign takeovers of Chinese indigenous well-known brands and the foreign investors’ sole proprietorship of those national brands as a result have stirred up concerns about China’s industrial security amongst national policymakers. As an initial response to those concerns, the advent of China’s national security review appeared in the Chinese legal system in 2003, which was briefly mentioned as a part of the anti-monopoly measures.⁵ China enacted its Anti-Monopoly Law (AML) in 2007, which reaffirmed that China would establish a national security review regime for inbound M&As.⁶ In February 2011, the State Council promulgated the Notice of the General Office of the State Council on the Establishment of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors,⁷ followed by the Provisions of the Ministry of Commerce (MOFCOM) on Implementing a Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors in August 2011.⁸ The Notice and the Provisions establish China’s currently effective national security review regime for cross-border M&As.

Having solicited public opinion since December 2013, the MOFCOM published a draft version of the Foreign Investment Law of the People’s Republic of China (the draft FIL) on 19 January 2015.⁹ The draft FIL represented a revolutionary step in China’s efforts to liberalize its foreign investment regulatory regime. The draft FIL reiterated China’s position in establishing a national security review of FDI; whereby the scope of such a review appeared to be far broader than earlier references, as it proposed an elaborate chapter on establishing a review system to all incoming foreign investment that may imperil China’s national security. The draft FIL was adopted by the National People’s Congress (NPC) in March 2019 with significant modifications: only one article pertaining to national security review is retained, stipulating that ‘China establishes a review system for foreign investment that affects or may affect national security’.¹⁰

China’s establishment of its national security review regime of FDI since 2011 has evoked a heated debate among commentators regarding China’s motivation and timing of such a newly fledged regime. It is viewed by proponents more as a positive than as a negative turnout because, although far from being perfect, it has at least successfully set up a codified, viable, and systematic review mechanism for the first time in legislation with an intention to protect China’s national security.¹¹ Opponents nonetheless have questioned China’s retaliatory agenda; the hardly coincidental timing of announcing a review system of its own almost immediately after the occurrence of a succession of failed outbound M&A deals conducted by Chinese enterprises, both private and state-owned, which took place in the US and the EU;¹² the necessity of a separate national security review in addition to China’s multi-layered FDI review and approval system;¹³ and the lack of a level playing field in terms of the degree of openness of the domestic market between China and the Western countries.¹⁴

1.2.2 The US

The US was the first country in the world that set up a comprehensive regulatory framework vetting foreign investment based on national security grounds. Formally established in 1975 by President Ford through an Executive Order,¹⁵ the Committee on Foreign Investment in the United States (CFIUS), the review body of the US, is mandated as an inter-agency committee to review transactions that could result in foreign control of a US business, so as to determine the effect of such transactions on national security. The CFIUS was charged with the power to review foreign takeovers pursuant to Section 721 of Defence Production Act of 1950 as amended by the Exon Florio Amendment in 1988,¹⁶ which was subsequently modified by the Byrd Amendment in 1993,¹⁷ the Foreign Investment and National Security Act (FINSA) of 2007,¹⁸ and the Foreign Investment Risk Review Modernization Act (FIRRMA) of 2018.¹⁹ Substantially expanding the jurisdictional scope of the CFIUS, FIRRMA introduces significant reform to the CFIUS review process, motivated by the view of the legislators that additional CFIUS regulatory competence is in need to address the growing national security risks posed by foreign investment the US is facing nowadays.²⁰

The CFIUS is appraised by some commentators as a laudable example that reaches an equilibrium between national security protection and investment liberalization, which explains why the CFIUS might be regarded as an institutional paradigm, and in fact has been transplanted by many countries in the world, including China.²¹ Nevertheless, as sophisticatedly designed and meticulously structured as the CFIUS might be, the US national security review system has encountered its fair share of criticism, all of which indicate some room for further reform.²² The most frequent accusation towards the CFIUS process is the inclination of targeting foreign investors from certain countries which are non-allies to the US, and the propensity of over-politicization in the review process.²³ Often, the foreign investor finds himself in a pressured or even hostile situation created by prevalent public opposition and politicians who are not shy at expressing their personal aversion about a particular deal through official and unofficial channels, which leads to the withdrawal of the investor’s filing with the CFIUS amidst a CFIUS review still in progress, and eventually the abandonment of the whole deal.²⁴

1.2.3 The EU

In recent years, several Member States of the EU have either established new laws and regulations, or have amended existing ones to exert increased government control over inbound FDI. For instance, French law regarding inbound FDI has been fundamentally changed in the twenty-first century. In December 2005, following the effectuation of Decre...