Ever More Scrutiny? The Berlin Bubble’s View on FDI Screening
What do political stakeholders think of foreign investments? Which aspects matter to them when judging a particular investment? To obtain unique insights, we conducted a first-ever survey among political and administrative decision makers to shed light on the political landscape that often determines the fate of foreign investment reviews in Germany. The results point in a clear direction: dealmakers should be prepared for ever-more scrutiny.
Dealmakers should pay special attention to outflow of technology and retention of jobs when presenting a transaction.
While China is at the center of public FDI debates, decision makers want more stringent controls for Gulf states as well – investors from these states must remain vigilant.
Media interest for FDI screening procedures has risen but remains deal driven. Investors should consider that media and political attention are mutually reinforcing when designing their communications strategies.
Economic security is currently on everyone’s lips. Germany aims to align economic policies even more strongly with security considerations, expanding the scope for future regulation and interventions. Screening foreign investments is a central element in this economic security toolbox, and a new foreign investment screening law is on the horizon in Germany. Over the past years, the political and public environment surrounding FDI has become more challenging: media scrutiny has increased, and political decision makers are ready to get involved in FDI screening procedures that were previously thought a purely administrative matter. To succeed in this politicized environment, understanding stakeholder motivations, political agendas and public sentiment is key.
Decision makers favor more stringent FDI reviews, with concerns over technology transfers and job retention in the spotlight
As the government takes on the task of writing a law focused just on FDI screening for the first time ever, political and administrative decision makers agree that the level of controls should be increased. Of the 1,000 decision makers surveyed, the vast majority expressed support for much more (55.7%) or fairly stringent (28.9%) review measures, whereas only about 10% indicated preferences for less stringent procedures. This appetite for increasing controls extends to outbound investments as well: a decisive majority of 65.2% spoke out in favor of introducing outbound investment screening mechanisms. While the German government seems keen to keep this question out of the German FDI law and at the EU level – a recently tabled key issues paper on a possible FDI screening law in Germany decidedly does not include a reference to outbound screening – it’s clear that discussions on outbound screening will continue. Considering the U.S. Executive Order to introduce outbound procedures to prohibit certain advanced technology transactions with ‘countries of concern’ as well as the review of the EU FDI regulation before the end of this year, ongoing vigilance is required to monitor and assess in how far these developments may impact legislative developments in Germany.
What, then, matters most to decision-makers when forming their opinion about a particular investment? What aspects should the German government pay attention in its reviews? Our survey points to outflow of technology and expertise as the prime concern for political and administrative decision-makers. Deal makers should therefore pay particular attention to risks of technology outflow, and how they could be mitigated. Effects on the retention of jobs is another important factor for decision makers – deal makers can underline positive effects on job retention to increase support for their transaction. Investment commitments seem less promising to gather support – a mere 11.1% of respondents mention investment commitments by the buyer as an important aspect to consider in investment screening.
FDI into defense and ICT sectors as well as China and Gulf States viewed most critically
Naturally, countries of origin are a prime concern in foreign investment reviews, and when discussing economic security overall. Here, the public debate focuses primarily on China, with FDI screening being mentioned as a tool in Germany’s new China strategy as well. Perhaps not surprisingly, screening investments from China is considered top priority by 82.% of respondents. With twelve active cases, Chinese investments also form the majority of the 40 foreign investments the German government is currently examining. This does not, however, mean that Chinese investors have no chance of clearing the screening hurdle: while the German government screened 54 transactions involving a Chinese investor last year, only three were prohibited and six cleared under conditions.
A bigger surprise is that decision-makers also argue for more stringent reviews for other markets that are less subject to public debate: Inbound investments originating from Gulf states are much less in the public spotlight but almost as critically eyed by political and administrative decision makers: Saudi Arabia as well as the United Arab Emirates and Qatar follow closely behind China on the current regulatory radar, with 76.1% and 75.3% of respondents arguing for stricter controls. The German government is currently screening five investments from the UAE. To successfully navigate regulatory landscapes, dealmakers need to be aware of shifting geopolitical priorities and sentiment concerning countries of origin.
Which sectors are most in focus for FDI screening? Defense and information and communications technology, revealing a focus on traditional security sectors that is less visible in the public and political debate. In contrast, while energy and raw materials as well as semiconductors have faced intense global competition and have even been subject to public prohibitions, a relatively smaller number of respondents (about 30% each) deemed these sectors critical.
FDI media coverage driven by deal-making activities
Despite the overall heightened political and media attention surrounding FDI in Germany, our analysis of coverage across key news outlets showcases a lack of continuous and structured debate about what kinds of foreign investments Germany should attract. Instead, media coverage is deal-driven and highly volatile with peaks of interest triggered by specific, and often controversial, transactions. Over the past twelve months, the sale of a stake in the German transportation and logistics company Hamburger Hafen und Logistik AG (HHLA) to the China Ocean Shipping Company Limited (COSCO) gained rapid and extensive media attention, followed by coverage on the Hesse state government intervention in the Frankfurt Hahn airport sale, the Viessmann energy solutions unit acquisition by Carrier Global, and subsidies granted by the German government in the semiconductor sector earlier this year.
Given that the tonality of coverage then often mirrors growing skepticism and geopolitical concerns regarding risks emerging from deals with investors from countries considered ‘strategic rivals’, dealmakers must equally understand the dynamics of public and political interest. And as political and media scrutiny often comes in a mutually reinforcing relationship, they should be holistically addressed.
A record number of investment screening procedures, and further regulation on the horizon
Since the new German government coalition took office, the German Ministry of Economic Affairs has conducted a record number of screenings (including EU notifications) in 2022: 306 cases under national procedures represent a threefold increase from 2019. And as the reevaluation of economic ties in times of heightened geopolitical competition continues to manifest itself in FDI screening reviews, further regulation and intervention is likely. The Federal Government’s China Strategy published in July 2023 suggests that “Chinese direct investments pose particular challenges for us owing to the political and economic circumstances in the country of origin. The Military-Civil Fusion policy pursued […] is particularly critical in this context as civilian corporate interests and the development of military capabilities can no longer be clearly distinguished from one another”.
The key issues paper summarizing how the Ministry of Economic Affairs views a future FDI screening law picks up the China Strategy’s thread and outlines tangible actions and specifics pointing towards regulatory tightening. Among others, sectors and thresholds could be adjusted, and the government is set to discuss whether greenfield investments should be covered by FDI screening as well. The Ministry even considers creating a possibility to intervene in a limited set of scientific cooperation programmes that are deemed highly sensitive. A draft for the revised investment screening law is expected to be presented in the spring of 2024, with the legislative process planned for the second half of the year. The EU is likely to continue its legislative activity in the field as well, with not just outbound screening being discussed, but a revision of framework for screening of foreign direct investment expected as well.
FDI screening will remain a dynamic policy field, and media and political scrutiny are here to stay. Understanding your stakeholders’ priorities remains key to crafting communications strategies that increase support for a transaction and mitigate risk.