The trend towards more regulatory or restrictive policy measures, which had been growing in recent years, became more pronounced during the pandemic, prompting concerns over the future of foreign direct investment (FDI) flows in restricted sectors. 

The number of new measures restricting FDI approved by countries across the world reached a historic high of 50 in 2020 — more than twice the 21 measures tracked in the previous year, according to Unctad’s World Investment Report 2021.

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Overall, Unctad tracked 152 regulatory changes affecting FDI approved by 67 countries in 2020. While 50 of them made FDI more challenging, another 72 went in the opposite direction of liberalising the domestic investment environment, and another 30 were ‘neutral’. 

Restrictive measures amounted to 41% of the new investment policy measures reported for 2020, excluding neutral or indeterminate policies, the report highlights. This compares with just 24% in 2019 and 28% in 2009. 

“This surge in regulatory or restrictive investment policy measures is not only a response to an extraordinary crisis but also a continuation of a policy trend in the era since the global financial crisis,” the report notes.

Surge in restrictive policies

Headline restrictions on FDI, from enhanced scrutiny to foreign ownership caps, were widespread in 2020.

The EU Commission issued guidance to protect member countries from the risk of foreign acquisitions in critical assets, such as healthcare. China put out an “unreliable entity list” framework through which the government can implement punitive measures on foreign entities on the grounds of threats to national sovereignty or security. 

And some countries, such as France, implemented temporary measures, only then to extend them. Others have already said that their thresholds and screening procedures are permanent, including the UK and Australia.

The geographic split between restrictive and promotional FDI policies appears to reflect individual countries’ economic development, according to Unctad’s findings, with 63% of the measures adopted in developing and transition economies intended to promote or facilitate investment. 

Meanwhile, an overwhelming 81% of the measures introduced in developed countries, such as Europe and North America, introduced new or reinforced existing regulations.

Chinese acquisitions 

Simon Evenett, professor of international trade and economic development at University of St. Gallen in Switzerland, says that there have been several waves of screening mechanisms. The one we are in now, he says, dates back to the mid-2010s where a fear of “firesale FDI” and Chinese companies acquiring foreign companies in sensitive sectors gave policymakers a new impetus to adopt restrictive measures.

Conventional wisdom suggests that screening mechanisms are intended to avoid this scenario, where foreign firms buy up local firms at a low cost.

Mr Evenett cites the acquisition of Kuka, a German robotics manufacturer, by the Midea Group, a Chinese-listed home appliances company, in 2016 as an instance that raised concerns over Chinese expansion. 

If concerns over China were the backdrop to the increase in such policies, he notes that they also “threw sand in the wheels” of non-Chinese FDI.

The pandemic then provided a “catalyst upon which the original geopolitical dynamics fed off, and you end up with a lot of countries saying they will change their FDI screening”, he adds.

Permanent change

Mr Evenett believes that these are permanent changes, saying that once in place, these policies “won’t go away” and “what you’re looking at then is a permanent change in the treatment of cross-border FDI — both greenfield and mergers and acquisitions”.

By contrast, James Zhan, Unctad’s director of investment and enterprise, predicts that this boost in restrictions will give way to a staggered reduction over time, as global FDI flows are projected to return to pre-pandemic levels by the end of 2022.

“I foresee a gradual lifting [of such policies] for some [countries], while others may take longer to phase out — and still others may stay there for quite a while,” he tells fDi

Screening does not necessarily translate into rejection of investments, however. Data identified by Unctad from 2018–2020 show that apart from in Russia, fewer than 1% of screened transactions have been rejected in countries for which data exist.

For many, the concern remains that businesses are already scared off by red tape. Mr Zhan calls this the “cooling effect” whereby foreign investors stop earmarking investments if barriers are already in place.

Even if the liberalisation measures are at their lowest ever recorded, Unctad notes that there are still moves towards liberalisation in certain sectors, such as agriculture, manufacturing and financial services.

There will not be either liberalisations or restrictions across the board, says Mr Evenett. “If we can take these FDI measures and tightly define them to the sensitive areas [like technology, critical infrastructure and essential goods], then maybe we can preserve the room for manoeuvre in other sectors,” he says.