“Chinese companies’ acquisitions of distressed foreign assets at much cheaper prices during the Covid-19 pandemic remains an area of concern, with governments across several countries tightening their FDI policies,” says GlobalData lead analyst Aurojyoti Bose.
The EU has been a popular target for Chinese money for several years. A report from Rhodium Group and the Mercator Institute for China Studies noted that, in 2019, northern Europe had joined the ‘Big Three’ traditional destinations for Chinese investors: the UK, Germany and France.
Brussels was looking into ways of curbing foreign investment from state-owned funds well before the coronavirus outbreak.
Margrethe Vestager, executive vice-president of the European Commission and European commissioner for competition, was examining ways to block unfair competition from non-EU state-owned enterprises in 2019. The commissioner praised a Dutch proposal that would allow the European Commission to intervene when foreign state-owned firms were deemed to be distorting competition.
Despite the G7 commitment to support global trade and investment during the coronavirus pandemic, the European Commission tightened guidelines on FDI in early March to “protect critical assets, notably in areas such as health, medical research, biotechnology and infrastructures”.
In a statement to the press, President of the European Commission Ursula von der Leyen said: “The EU is and will remain an open market for FDI – but this openness is not unconditional.”
It is not difficult to understand who the EU is afraid of when it wants its member states to protect their critical assets. Indeed, Vestager urged European countries to block Chinese takeovers, saying that “people are more than welcome to come do business in Europe but not to do that with unfair competitive means”.
Germany approved changes to its foreign investment protocols on 8 April, after ministers warned that German companies could become targets of hostile takeovers by foreign investors. The German Government now reserves the right to intervene earlier and at a lower threshold when it believes there is a risk of non-EU firms interfering with public order and security.
The move did not come as a surprise. CureVac, a German pharmaceutical company developing a coronavirus vaccine, was reported to be in talks with US President Donald Trump about relocating its operations to the US in exchange for financial incentives.
“Make no mistake, we are determined to protect our companies and jobs,” said German Economy Minister Peter Altmaier, as he announced a €100bn fund to bail out the country’s companies affected by coronavirus.
France has also tightened its FDI screening process. Any non-EU investors looking to own more than 25% of a French company in a strategic sector will also need to seek approval from the government, compared with the previous threshold of 33.3%.
On 8 April, Italy, one of the countries most affected by the pandemic, amended its ‘Golden Powers’, a set of rules that permit the government to protect strategic assets. The new rules now allow it to expand its vetting powers to the banking and insurance sector as well as the health and food industry.
The new powers mean Italian authorities can now veto any attempt by EU or non-EU firms to buy stakes in strategically important companies.
Australia, India, Japan, Spain, the US and a slew of other countries have also imposed FDI screening mechanisms, with more countries expected to join them.
The coronavirus pandemic has shown a lot of countries that, despite their accelerated economic growth, they weren’t ready to quickly come up with the resources needed to fight such a disease on their own.
Foreign investment, especially from China, has already been shrouded in a veil of uneasiness for the past few years. The coronavirus crisis might only heighten tensions.
The pandemic has proved to the West how reliant it is on China when it comes to drugs and medical equipment. Now, some experts are calling on companies to relocate their production facilities to the US and Europe.
“When companies look for new locations to invest, they would probably look primarily into those countries where there is already a strong health system and where there is a lot of research going on, good universities,” says Joachim Karl, a legal affairs officer with the UN Conference on Trade and Development (UNCTAD).
Germany is hoping it will be one of those countries. A DW article makes the case that countries that have handled their outbreaks better, such as South Korea, Taiwan or Germany, are the ones most likely to benefit from the biggest share of FDI flows once the dust settles.
On the other hand, this also means that developing countries that rely on primary and manufacturing FDI may become even more vulnerable.
The UN has put out a report in which it calls on countries to “resist the temptation to resort to protectionist measures” and embrace cooperation in order to better fight the virus.
Fighting the good fight
FDI has the potential to support economic recoveries following the pandemic. Multinational enterprises (MNE) tend to be larger and have more cash than purely domestic ones and thus are in a better position to help support economic growth.
However, while FDI can help revive economies, countries are being warned that they shouldn’t be over-reliant on it.
The Organisation for Economic Cooperation and Development (OECD) argues that MNEs were already under pressure from global trade tensions and Brexit, as well as having to rethink their supply channels to make them more inclusive and sustainable.
Some of the biggest MNEs may now choose to shorten their supply chains and bring them closer to home in order to protect from shocks in the future. This may bring less FDI in the long run, argues the OECD.
UNCTAD now expects global FDI to shrink by up to 40% over 2020 and 2021.
Does that signal an end to the form of globalisation that the world has become accustomed to over the past few decades? The American Institute for Contemporary German Studies argues that it doesn’t, but it does indicate a rethinking of how international trade will develop in the future.
The coming months will show whether FDI will bounce back as early investors rush to take advantage of opportunities as lockdowns are eased across the world, or if the temporary restrictions that countries have imposed to protect themselves are here to stay.
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