After a year dominated by COVID-related disruption and uncertainty, global vaccination measures are finally raising the prospect for societies and businesses to look ahead and plan for what looks to be a strong recovery, driven by pent-up demand, continuing monetary and fiscal support, and an acceleration of technology-led transformation. But while the recovery is priced in, the prospects for cross-border investments and trade are much less clear given geopolitical tensions, a policy shift across the world towards strategic autonomy, and a major leadership transition that began with the election of Joe Biden last November and will continue with the succession of Chancellor Merkel this year and presidential elections in France in Spring 2022.
Even before the pandemic, foreign direct investment (FDI) had already been under increasing scrutiny across the globe, given growing concerns over the national security and strategic economic implications of cross-border acquisitions, as well as a renaissance of active industrial policies. COVID-19 has further heightened awareness about strategic vulnerabilities in critical areas and triggered concerns about a sell-off of economic silverware in times of financial distress. Governments reacted by further beefing up their FDI screening regimes, increasing their remit to prohibit the acquisition of assets in an ever-wider array of strategic industries. Even though the main cause for the drop in cross-border transactions in 2020 was COVID-related, growing political-regulatory restrictions and uncertainties have also played an important role.
While the general focus on strategic autonomy is certainly here to stay, policy makers must balance this against the priority to support the post-Covid recovery and the need to maintain an environment that allows businesses to benefit from international growth opportunities and strategic partnerships. This is of particular importance as businesses look to M&A opportunities as a key element of their growth and transformation agendas. This raises the stakes for governments and regulators to wield their powers carefully.
From Afterthought to Deal Breaker
The once niche role of FDI scrutiny has by now been elevated to being a key pillar of M&A strategy, on a level with antitrust and sectoral regulatory approval regimes.
Successfully navigating FDI-related cross-currents has become a key success factor and must be factored in deal planning processes from the outset. Due diligence is required, and a strategic approach should be adopted to articulating a compelling narrative that demonstrates how a transaction will create value and contribute to political and regulatory agendas. Fine-tuning this narrative must be one of the key priorities in a deal roadmap.
As this report brings together the key political and regulatory trends on the global FDI landscape, 5 points stand out:
The scope of industries and technologies under scrutiny continues to be widened, reflecting an expansive interpretation of what constitutes national security and strategic interests.
Given the growing trend towards active industrial policies and fiscal support, FDI reviews are increasingly politicised in nature and must be approached correspondingly.
While investors from China certainly remain a key focus behind Western concerns, strategic autonomy considerations also extend to non-Chinese acquirers, as two recent prohibition decisions in France involving US and Canadian buyers illustrate.
The political environment for businesses is increasingly complex. Deals that would not appear to cause national security implications can suddenly get subject to lengthy and complicated reviews. On the other hand, even deals involving truly critical technology can still get approval, if carefully navigated. Managing this complexity requires a full understanding of the local perceptions and decision drivers and a clear gameplan.
Public perception plays an increasing role in the decision processes of governments, given the more public debate around FDI and industrial policy. Deal teams that bring across narratives that not only address the substantive concerns of policy makers but are also designed to provide strong arguments in a potential public debate can help to bring deals across the line.