The digital economy offers a wide range of new opportunities for foreign direct investment (FDI), but also creates new regulatory challenges.

The key point is that attracting digital FDI may necessitate different laws and regulations than traditional FDI, since enterprises offering digital services use different business models. Digital enterprises, like traditional firms, invest abroad to be closer to clients and enter new markets. Although they often establish a physical footprint in the markets they operate, their business model differs significantly from traditional businesses as they rely heavily on intangible assets rather than ‘brick and mortar’ assets. As a result, specific rules, laws and measures top the list of issues that digital enterprises are most concerned with.

According to a paper by the World Economic Forum on digital FDI, while contemplating investment in the digital economy, the investing business takes into account the digital skills in the economy as well as the stability of the state’s regulatory framework. It should also seek to strike a balance between national and political concerns (such as data sovereignty) and international investor interests.

The Covid-19 pandemic acted as a driving force for the digitalisation of various enterprises, since a nation-wide lockdown across most of the globe drove firms to migrate to digital platforms. With most economies seeing considerable growth as a result of this digitalisation, investors recognised an opportunity to invest and profit. The usage of communication services that rely on the internet and significant quantities of cross-border data flows (CBDFs) has thus surged throughout the pandemic.

However, there is one disadvantage to this, which is the possible breach of privacy rights. As a result, numerous countries have moved to regulate data transfers in order to preserve privacy. In certain circumstances, like in Australia, countries have also introduced regulatory measures for FDI screenings to respond to certain perceived data-related risks, like national security or economic vulnerability from foreign takeover.

In the past five years, the number of data-localisation measures in use throughout the world has more than doubled, according to figures from the US non-profit organisation the Information Technology and Innovation Foundation. China, India, Russia and Turkey are the most stringent jurisdictions when it comes to requiring forced data localisation. The justifications given to CBDF limitations range from the basic (restricting content that is contrary to public policy/public order) to the complex (national security, cyber crime prevention and terrorist-funding prohibition). However, one potential disadvantage is the direct protectionist effect. This is illustrated by the restriction of internet access and use, which will  negatively affect foreign enterprises, and their online sales of products and services, while benefiting local businesses.  

There are three regulatory goals that will need to be achieved in order to align the national and international framework of FDI and CBDF. Firstly, digitalisation has created many businesses and therefore, states must boost infrastructure development investment, as this will attract significant levels of FDI. Secondly, in order to cohere and simplify the regulations concerning CBDF there should be more transparency and like-minded countries can attempt to create an open, rules-based and innovative digital economy. Thirdly, states should also revisit laws that restrict the ability of their national or domestic entities to co-operate with foreign entities.  

Julien Chaisse is professor of law at City University of Hong Kong and president of the Asia Pacific FDI Network. You can follow him on Twitter at @jchaisse. 

This article first appeared in the June/July 2022 edition of fDi Intelligence.