The German government is introducing a cap on non-EU investment in German companies, fuelling accusations of protectionism and prompting fears for future foreign investment.

The German cabinet has adopted a bill that it says will protect strategic German industries from unwanted foreign investors and is a reaction against rising investment into Europe by state-controlled sovereign wealth funds from emerging economies in Asia, Russia and the Middle East.

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The bill, which has been compared to the Committee on Foreign Investment in the US, will allow the government to reverse any acquisition of more than 25% of a German company by a non-European investor.

Carsten Rumberg, a partner at international law firm Eversheds, says the move is driven by current share prices and the fear that flagship German companies may be owned by foreign investors.

“This sends the wrong signals to foreign investors who directly employ more than two million people in Germany,” he said.

German economics minister Michael Glos denied the move will deter foreign investors from Germany, saying that the legislation reform will equip Germany with an instrument the US, the UK and France have had for a long time. “Germany is and remains open to investors and we will continue to attract investments from around the world,” he said.

The German government has pledged that investment reviews would only apply on rare occasions and is unlikely to affect any existing investments. European trade commissioner Peter Mandelson has publicly acknowledged concern that legislation which appears protectionist could prove disastrous for foreign investment into the continent as well as adversely affecting Europe’s own investments abroad.

“FDI capitalises huge chunks of our stock markets and underwrites literally tens of million of European jobs. We need to encourage it, not counter it,” he said.

But compared with Germany’s review of investments at 25%, many countries, including the UK and France, reserve the right to review all foreign investment; the US has recently lowered the threshold at which investments can be reviewed from 10% to 0%.

“Even if a governmental review is set off, the reviewing ministry can only apply national security-related criteria – and not economic ones, as is the case in the US, France and most other industrialised economies,” said Deutsche Bank director for financial markets and regulation Steffen Kern.

The German government has been working on the wording of the bill, which could become law early next year, to address fears that it may contravene EU free trade legislation.

But the Federation of German Industries warned that as well as sending out the wrong political signals for Germany as an investment location, the bill risks being overturned by the European Court of Justice, as EU legislation on the free movement of capital applies equally to EU and non-European investors.