Can foreign investment pose a threat? EU’s perception and investment screening scheme

Submitted by Maastricht University on Wed, 06/03/2020 - 15:29

By Dr Aki Tonami

Dr. Aki Tonami is an Associate Professor in International Relations and Economics at University of Tsukuba. She’s also a Senior Research Fellow at the Nordic Institute of Asian Studies, University of Copenhagen.

The EU’s resistance to the US’ request not to use Huawei 5G technology is causing a stir in trans-Atlantic relations. In Japan, the Government has introduced tougher restrictions across 12 strategic sectors on any Japanese enterprise receiving foreign investment. In this context, foreign investment is increasingly viewed as a threat to national or regional security. Until recently, however, investment coming from overseas was most welcome in Europe and other developed nations like the US and Japan. So, what has caused this sudden change of heart? More specifically, can foreign investment even pose a threat to begin with? And if so, what kind of threat?

These are pertinent questions, given that the world’s FDI was 1.39 trillion USD in 2019 and has become a crucial tool for countries and companies alike to revive or sustain their national economies. Moreover, as the recent spread of COVID-19 and its fallout has shown, investment has become a new tool of assertive diplomacy in international relations. Against this background, I analysed the EU’s perception towards foreign investment using its investment screening scheme as an example.

Existing research on investment in the fields of International Business, International Economics, International Political Economy and Development Studies has paid insufficient attention to the nexus of investment and security. Instead, investment has been deemed something that must always be encouraged in order to achieve economic growth; Limiting investment is a hinderance to economic growth. In 2017, the EU defined Foreign Direct Investment (FDI) as “investments made by companies or individuals from a third country by setting up or buying a business in the EU” (European Commission 2017). What was missing from this definition was that the control over the resources transferred remains with the investor (O’brien & Williams 2016).

Reviewing the existing research showed that firms invest abroad for various reasons, but mainly to pursue capital, market, efficiency and to obtain access to strategic assets. Of these, strategic assets are most important for a firm from a developing country, for example, China. Receiving FDI can have various effects on a host country and relations between Multinational Corporations and host governments are complex.

Chinese investments, on the other hand, are regarded as particularly ‘problematic’ because Chinese companies are broadly viewed as targeting strategic assets, and the state’s economic diplomacy in this regard is seen as coercive and exploitative - or worse, directly linked to its foreign policy. Investment in technology has a special significance. Industrial growth has always been translated as political power; scientific knowledge is equated with national prestige and seen as determining a country’s international positions. Therefore, any possibility of this ‘resource’ being controlled by a foreign company – say, via FDI - is understood as a potential control of a host nation’s political power and international prestige. In sum, foreign investment particularly in the technology sector is considered as a threat in a symbolic sense, related to the host nation’s perceived political power and prestige in the international arena.

For the EU as well, receiving foreign investment was regarded as a way to achieve economic growth, which is one of the three pillars of EU’s economic policy - strengthening economic governance, growth, and stable finance (European Commission, 2017). Foreign investment became an important tool in an attempt to recover from the damage done as a result of the European sovereign debt crisis. Indeed, the EU was keen to showcase itself as the biggest investor as well as recipient of FDI in the world. At the time, security concerns about China were widely shared among the security community in Europe, but the gap between them and European politicians and the businesses was stark, as the latter viewed it as crucial to increase trade with China to revive EU economy. Chinese companies viewed Europe as an entry point to expand to developed economies, based on their experience of FDI in developing countries.

In September 2017, however, the European Commission adopted a proposal for a regulation establishing a framework for screening foreign direct investment (FDI) inflows into the EU on the grounds of security or public order. This was a reaction to, among many other things, the US’ drastic reforms and some of the key German technologically advanced industrial assets being acquired by Chinese enterprises (KUKA by Midea; EEW energy by Beijing Holdings; GBP by CIC; Kraussmafei by ChemChina).

Analysing press releases, official documents and media coverage of this investment screening scheme, there are several notable characteristics of the EU’s perception of foreign investment, especially coming from China. First, the EU seems to regard the relationship between the investor and recipient as if the foreign entity has a one-sided influence over the EU. Second, investment becomes a problem to EU when it is to “the detriment of the EU’s technological edge but also its security and public order”; in other words, not to protect local businesses or to prevent exploitation.

This assumes that technology and the ability to conduct industrial production is the indicator of the political power or national prestige. The EU regards the control of this resource moving to a foreign entity to infringe upon these indicators; therefore, we can say that the security risk that a foreign investment poses to the EU is a rather symbolic and conceptual one. This also points to the fact that there is a lack of knowledge on the mechanism of technology inflows and outflows (including leaks) to/from a foreign country, as well as the impact of a third country’s government owning and controlling the investing company.

The EU’s weak investment screening scheme shows the EU’s wish to distance itself from the US on economic matters, which is viewed as being increasingly willing to adopt economic nationalist policies - “America First” – while keeping closer ties on security issues. The EU, however, wants to avoid any impact on trade with China, seen also from its ongoing talks on an investment agreement with China. Lastly, there is also a structural limit, because security matters are left to member states; therefore, the screening scheme is mostly to share information to help seemingly less-equipped EU member states in CEE avoid any possibility of debt traps.

Looking at the case of the EU from Japan, there are several implications. First, it is worth emphasizing the importance of cooperation and information-sharing between the EU and Japan, as both are under intense pressure from the US and China to ‘choose sides’. Second, we need a wider debate about what represents an acceptable level of technological inflows and outflows (including leaks) when Chinese capital enters the EU or Japan. We should also discuss the cost and benefit of having an economic relationship with China vis-à-vis protecting universal values such as human rights, democracy and so on.

Finally, the EU side should keep in mind that, as near neighbours, Japanese businesses have much more intelligence about dealing with Chinese businesses than many of their EU counterparts; there should be an initiative to share lessons learned between the EU and Japan on how to co-exist with China in the economic sphere.

Sources:

European Commission. (2017). Foreign Direct Investment - an EU Screening Framework. Brussels: European Commission.

O’Brien, R., & Williams, M. (2016). Global Political Economy: Evolution & Dynamics (5th ed.). London: Palgrave.

This paper is a follow-up to the presentation and discussion that the NORTIA dissemination workshop EU-Japan on 25-26 March 2019 at Waseda University Tokyo. This blog draws on a longer paper published in the Defense Studies, Number 30, 21-41, 2019 (in Japanese), available at https://www.akitonami.com/publications