By Fayçal Ibrahim, Louise Monteil, Paul Mougeot, Eliza Wéber, and Justine Peries.
In recent years, the United Kingdom (UK) has undergone major shifts in its international economic policy that challenge its longstanding commitment to enabling inward foreign direct investment (FDI).
FDI is a category of cross-border investment in which an investor, company, or government acquires a lasting interest and significant ownership of a foreign company or project [1]. FDI is a crucial driver of global economic integration, establishing strong and lasting ties between nations’ businesses and economies [2]. These investments can take various forms, such as acquiring existing businesses, establishing joint ventures, or initiating new enterprises within the host nation. In 2022, the United States, the Netherlands, the British offshore islands, Luxembourg, and France were the UK’s main investment partners in terms of FDI stocks [3].
What is the National Security and Investment Act?
The National Security Investment Act (NSIA) received royal assent on 29 April 2021 and came into force on 4 January 2022. The NSIA provides the UK government with a new system of screening acquisitions, ensuring transparency, predictability, and protection of sectors at national security risk [4].
The NSIA targets domestic and foreign entities through a hybrid notification regime that includes mandatory and voluntary elements. Mandatory notification applies for 17 high-national-risk sectors, such as communication, technology, energy, and transportation industries [5]. Mandatory regime applies when an entity wishes to acquire more than 25% of a business or obtain voting rights. The NSIA control rights occur when a transaction involves qualifying assets, including tangible land, property, or intellectual property. Moreover, the regime applies to qualifying entities encompassing partnerships, body corporates, companies, or unincorporated associations. Failure to comply with the NSIA mandatory regime can result in civil and criminal penalties. Voluntary notification applies to investments or acquisitions falling outside mandatory notification [6].
Why Strengthening FDI Control?Aligning with Worldwide Protectionism
In recent years, the concept of national security has evolved to encompass increasing areas of strategic interest. Governments’ capabilities to intervene in hostile foreign direct investment have shifted. The UK is no exception. Its foreign direct investments used to be regulated only by the Enterprise Act 2002 [7], which ensured a healthy competitive market and that the Competition and Markets Authority would make decisions based only on economic criteria. The UK moved away from this pure liberal prism towards more protectionism enhanced by Brexit under the NSIA. Because of mimetism, after waves of allies’ regulations, the UK Government has expressed the need to update and replace the Enterprise Act 2002 to bring the country “into closer alignment with the screening regimes of [its] closest allies” [8]. The UK government’s response to the 2018 propositions to protect national security from hostile actors’ acquisition of assets defended the NSIA reform by stressing that Australia already requires foreign investors to seek approval to acquire a direct interest in sensitive businesses [9]. It also noted that the US required mandatory notifications for transactions concerning specific types of businesses. Much like the Committee on Foreign Investment in the United States (CFIUS), the NSIA comes with the Investment Security Unit [10]. The latter satisfied the CFIUS, which approved the UK’s screening regime and desired increased collaboration in investment screening between the “Five Eyes” [11].
Increasing Political Awareness, Strategic Autonomy, and Economic Sovereignty
Under the NSIA, the Intelligence and Security Committee of the UK condemned the government in 2023 due to the fact it “has over-favoured Chinese investment to the detriment of potential security risks” [12]. The COVID-19 pandemic had already exposed England’s dependence on Beijing, particularly in the health sector. Although the UK domestically produced some vaccines, former Prime Minister Boris Johnson reiterated his desire to “protect the country’s technological base” to preserve British sovereignty as permitted by the NSIA [13]. Some see the act as a way to counter the growing influence of China in some important technological areas (Sale of the Newport Wafer Fab chip factory to Nexperia). However, protecting strategic sectors goes further than simply safeguarding certain companies. The aim is to have increased control of different actors in the supply chain in order to avoid complete dependency throughout the process. While China is the focus of attention, long-standing allies such as the US are also concerned, particularly in the defence sector, where Washington is predatory (Control of Cobham’s takeover of Ultra Electronics).
Efforts to Rejuvenate the UK’s Economic and Innovative Landscape
The NSIA was also initiated as an effort to reinvigorate the British economy, particularly safeguarding vital strategic sectors with a strong emphasis on technology and innovation. While this approach offers several advantages to the UK, it also presents a significant downside, as it limits the financing options available to these companies [14]. To address this challenge, the government has launched the Advanced Research and Innovation Agency (ARIA) with an allocated budget of £800 million. ARIA provides investments for risky research ventures that could lead to groundbreaking discoveries, thereby positioning the UK as a leading centre for research and development [15]. In 2022, following the NSIA objectives, there was a strategic shift in the agenda of the UK Infrastructure Bank, a state-owned development bank with a capacity of £22 billion [14]. Prime Minister Rishi Sunak has redirected the bank’s focus towards investments in strategic sectors, such as renewable energy, carbon capture, storage, and transportation, and offering low-interest loans to local governments.
Nvidia’s takeover of ARM Holdings
Under the NSIA, the UK government took action on Nvidia’s acquisition of ARM Holdings, a case that perfectly illustrates the above principles [16]. ARM Holdings, a major semiconductor designer, was of strategic importance to the UK because of the critical role semiconductors play in a variety of cutting-edge applications, including technology, artificial intelligence, and advanced weapons systems. ARM operated impartially, providing its advanced designs to all industry stakeholders and fostering their dependence on its services [17]. Consequently, selling the company could pose a risk to the country’s national security. In addition, Nvidia’s acquisition of ARM Holdings raised concerns about possible breaches of competition law under the Enterprise Act 2002. Nvidia’s ownership of ARM Holdings could give it undue influence over its competitors, further underlining the need for government intervention.
What lies ahead?
Looking ahead, the NSIA will likely decrease investment towards the UK in a post-Brexit context, as added barriers and processing delays deter potential investors. Indeed, the NSIA’s broad interpretation of “national security,” coupled with the power it grants the government to scrutinise investments (even outside of the mandatory sectors), increases uncertainty for investors. If subject to mandatory notification obligations or if “called in,” investors must be prepared for extended waiting periods. These bureaucratic delays may be further exacerbated as the framework does not distinguish overseas from domestic investors, thus creating a longer processing time.
Edited by Justine Peries.
References
[1] OECD. (n.d.). Foreign direct investment (FDI). OECD iLibrary. https://www.oecd-ilibrary.org/finance-and-investment/foreign-direct-investment-fdi/indicator-group/english_9a523b18-en
[2] OECD. (2009). Benchmark Definition of Foreign Direct Investment 2008. OECD eBooks. https://doi.org/10.1787/9789264045743-en
[3] Santander. (2023). Foreign investment in the United Kingdom. https://santandertrade.com/en/portal/establish-overseas/united-kingdom/foreign-investment#:~:text=The%20main%20investment%20partners%20of%20the%20United%20Kingdom,Islands%20and%20Isle%20of%20Man%29%2C%20Luxembourg%20and%20France.
[4] GOV.UK. (2023, November). Call for evidence – national security and investment act. GOV.UK. https://www.gov.uk/government/calls-for-evidence/call-for-evidence-national-security-and-investment-act/call-for-evidence-national-security-and-investment-act
[5] Ward, S., Bates, M., & Court, C. (2022). Could the UK’s National Security and Investment Act affect your business? http://www.farrer.co.uk. https://www.farrer.co.uk/news-and-insights/national-security-and-investment-act-a-summary-of-the-recent-developments-and-what-you-need-to-do-now/
[6] Lewis Silkin – National Security And Investment Act 2021. (2023, September 1). Lewis Silkin. Retrieved October 20, 2023, from https://www.lewissilkin.com/en/insights/national-security-and-investment-act-2021
[7] UNCTAD. (n.d.). Enterprise act 2002. United Kingdom – Enterprise Act 2002 | Investment Laws Navigator|UNCTAD Investment Policy Hub. https://investmentpolicy.unctad.org/investment-laws/laws/243/united-kingdom-enterprise-act-2002
[8] GOV.UK. (2021, March). National Security and investment: Sectors in scope of the mandatory … National Security and investment: Sectors in scope of the mandatory. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/965784/nsi-scope-of-mandatory-regime-gov-response.pdf
[9] Adebiyi, J., Hopkins, S. C., Leiter, M. E., & Luoma, A. (2020, November). UK government introduces new regime for screening foreign direct investment: Insights: Skadden, Arps, Slate, Meagher & Flom LLP. Insights | Skadden, Arps, Slate, Meagher & Flom LLP. https://www.skadden.com/insights/publications/2020/11/uk-government-introduces-new-regime
[10] Covington . (2022, January). UK FDI: National Security and Investment Law is now in force. Covington & Burling LLP. https://www.cov.com/en/news-and-insights/insights/2022/01/uk-fdi-national-security-and-investment-law-is-now-in-force
[11] Morrison Foerster. (2023, April). Q1 2023 update on the UK’s investment screening regime. https://www.mofo.com/resources/insights/230428-update-on-the-uks-investment-screening-regime
[12] Reuters. (2023, 13 juillet). L’approche britannique des risques posés par la Chine est trop court-termiste. Challenges. https://www.challenges.fr/finance-et-marche/l-approche-britannique-des-risques-poses-par-la-chine-est-trop-court-termiste_861753
[13] De La Grange, A. (2020). Londres veut réduire sa dépendance envers la Chine. Le Figaro. https://www.lefigaro.fr/international/londres-veut-reduire-sa-dependance-envers-la-chine-20200522
[14] Covington & Burling LLP.(2021, May 3). UK FDI: National Security & Investment Law is approved by Parliament.https://www.cov.com/en/news-and-insights/insights/2021/05/uk-fdi-national-security-and-investment-law-is-approved-by-parliament
[15] GOV.UK. (2021, March 19).Advanced research and invention agency (ARIA): Policy statement. https://www.gov.uk/government/publications/advanced-research-and-invention-agency-aria-statement-of-policy-intent/advanced-research-and-invention-agency-aria-policy-statement
[16] Sandle, P. (2021, April 19). UK invokes National Security to investigate Nvidia’s arm deal. Reuters. https://www.reuters.com/world/uk/uk-intervenes-nvidias-takeover-arm-national-security-grounds-2021-04-19/
[17] Albert, E. (2022, February 9). Puces électroniques : L’acquisition du britannique arm par l’américain nvidia bloquée par les régulateurs. Le Monde.fr. https://www.lemonde.fr/economie/article/2022/02/09/puces-electroniques-l-acquisition-du-britannique-arm-par-l-americain-nvidia-bloquee-par-les-regulateurs_6112938_3234.html
[Cover image] Photo of the city of London by ALMURTADHA Altae, licensed under CC BY-SA 4.0
ESCP International Politics Society 
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