In mid-January, France’s economy minister Bruno Le Maire took to the airwaves to abruptly shut down a €16bn bid for its leading retailer Carrefour. Just 48 hours after the firm announced it was in friendly talks with Canada’s Couche-Tard, Mr Le Maire declared on the radio that the government would use its foreign direct investment (FDI) screening regime to block the deal. Labelling the deal as a threat to food security, he said “it’s a polite, but clear and definitive no”. The companies ended discussions the following day. 

For dealmakers, the incident sets the high-water mark in a rising tide of protectionism fuelled by Covid-19. Over the past year, everywhere from Australia and Japan to Canada and the EU have expanded FDI screening to cover sectors deemed essential to the pandemic response. This has accelerated the mechanism’s evolution from a creature of national defence to a tool to scrutinise foreign involvement in so-called ‘strategic sectors’. The EU’s new screening mechanism, for instance, is focused on strengthening what it refers to as ‘open strategic autonomy’. Its member states now assess investments into everything from insurance and water to food and raw materials.

“When I sat on the Committee on Foreign Investment in the United States in the 1990s, national security was very well-defined and discrete,” says Harry Broadman, a managing director at Berkeley Research Group. It was things “that put at risk the population, their health and the military might of the country”. The conflation between national security and other elements, he says, has significantly expanded over the past five years.

Beyond China

The Organisation for Economic Co-operation and Development (OECD) estimates that 59 per cent of global FDI last year was eligible for national security review — just shy of the all-time high of 60% in 2013. Some public skirmishes suggest that enhanced scrutiny is starting to bite. Moreover, they are tripping up buyers from all nations, not just Chinese state-owned enterprises, which are widely regarded as the prime target of today’s tighter rules.

Since January, Australian investment fund IFM’s acquisition of a 22 per cent stake in Madrid-based utility Naturgy has been the subject of a protracted review by Spain. Although the country lacked a screening mechanism until 2019, it now investigates deals worth as little as €1m under a framework that goes beyond EU requirements. US chipmaker Nvidia’s $40bn takeover of the UK’s Arm Holdings is, the Financial Times reported in February, being probed on national security grounds. And in December, France blocked a US firm’s takeover of night-vision tech company Photonis. Although this last deal falls within the traditional remit of national security, law firm Paul Hastings says it was expected to be cleared because the buyer was from a close French ally.

From security to sovereignty

The blurring of boundaries between national security and strategic sectors is causing concern among economists and advisors. Matthew Slaughter, dean of the Tuck School of Business, notes that attempts to bolster post-crisis economies through policies that limit cross-border investment are misguided. “The vast amount of empirical evidence shows that FDI generates a lot of net economic benefits,” he says. “You are just costing your country when you have the uncertainty and whimsicality of how these FDI decisions get made.”

Mr Broadman stresses that investors are, by and large, trying to unlock businesses’ unrealised potential. “Not just for the benefit of the asset holders,” he says. “But also in the jobs it creates and other ways it engenders growth.” Reflecting on Couche-Tard’s offer for Carrefour, he says that, all things being equal, “it’s hard to say why a particular bid in a sector that is not truly national security is not in the French writ-large interest”.

Drawn-out review processes can deter both buyers and sellers. “We have been there,” says David López Velázquez, a counsel at law firm Uría Menéndez in Madrid. “Some parties have threatened to abort as they were very worried that the delays would render the economics of the deal invalid. If you don’t receive the funds on a given date, it can be critical for your financial position.”

Soft power, soft approach

Another feature of today’s FDI regimes causing alarm is the unfettered discretion given to politicians to block deals. In France, the economy minister has the final say, and is not bound by the outcome of the official review. “The decision on FDI is now entirely political,” observes Nicolas Bouvier, a partner at advisory firm Brunswick. The rejection of Carrefour’s takeover on food security grounds reveals the danger of this. “I don’t think many lawyers would follow the minister’s legal reasoning — I don’t think there was legal reasoning. It was a political statement,” says Nicola Bonucci, a Paul Hastings partner and former OECD legal chief. 

The US, Australia and Italy also empower politicians to veto deals, along with the UK’s incoming FDI regime, which is expected to commence this year. This two-tier approach “adds another layer of perception and potentially emotion” to FDI approval, warns Mr Bouvier. “You need to go through the regulatory process, but you must also consider the political component.” He recommends investors try to win government support early on: “Decision-makers hate being taken by surprise. It’s all about paying respect and somehow being polite.”

FDI’s new normal

To the extent that FDI policies have been tightened in response to the pandemic, rollbacks are not expected once the crisis recedes. Mr Broadman says they “have created some new vested interests”. Mr Slaughter highlights the political implications, saying: “It is very easy for the person trying to relax those restrictions to be portrayed by political opponents as being soft on national security.” 

Nonetheless, some are sanguine that today’s stricter rules do not have to spur protectionism. “The fine balance that all countries have to find is how we can develop a better screening mechanism, without giving policy signals that are counterproductive and deter FDI,” says Mr Bonucci.

It promises to be a learning curve for everyone. As Mr Bouvier notes, the ‘new normal’ permeates our daily life. “FDI is no exception.”

This article first appeared in the April/May print edition of fDi Intelligence.