The UK is slowly emerging from the murky COVID/Brexit period and is arriving on the World stage on its own terms, from a trade perspective, for the first time in decades. After years of talk, it’s now crunch time and the coming months and years will start to expose the real impact of Brexit.
A major part of post-Brexit success is attracting foreign direct investment (FDI) into the UK. However, right now, FDI protectionism is being ramped up globally and is having a serious impact on the world of mergers and acquisitions. Whether the UK can strike the right balance between national security and boosting trade remains to be seen.
Can the UK attract FDI without access to the single market?
Although Brexiteers would, of course, answer yes! to this question, some analysts remain fearful that our appeal will seriously wane now we’re out of the European Union (EU). A recent peer-reviewed study undertaken by economists at the London School of Economics and University College London at the end of 2020 was full of scepticism.
The study predicts a 37 per cent fall in foreign investment into the UK. The report points out the fact that the UK was the largest recipient of FDI in the entire EU over the past 20 years and that this is all about to change.
It states: “Access to the single market and customs union has been instrumental; with entry into a larger market and the opportunity to exploit scale economies without hefty tariffs and red tape. With Brexit we estimate a significant and substantial decrease in FDI.”
Prior to the UK leaving the EU, another study by LSE analysts predicted an FDI fall of some 25 per cent post-Brexit, so the prediction has actually worsened since Brexit has been completed. This is bound to alarm the government, particularly when viewed in light of figures showing the net value of FDI was £40.3bn in 2018, already down from £80.6bn a year earlier. It seems that overseas investors were already backing away from the UK even before Brexit was decided.
The government is, no doubt, very aware of gloomy predictions such as these and is obviously keen to do everything it can to boost the UK’s appeal as a target for FDI. Part of this is the establishment of the Office for Investment, reported in the Financial Times as central to Boris Johnson’s moves to stimulate FDI post-Brexit.
The Minister for Investment, Gerry Grimstone, who has a background in investment, having headed up Standard Life as its Chairman, is to oversee the new Office. He will be looking to maintain FDI levels as the UK goes it alone. And will be aware of the crucial statistic from the Office for National Statistics, that over 50 per cent of exported goods leaving the UK between 2018 and 2020 were exported from foreign-owned UK businesses.
But FDI protectionism is on the rise
G8 countries have been stepping up their FDI protectionism in recent years. This has had an enormous impact on M&A. Standards are set by the Committee on Foreign Investment in the United States (CFIUS), which has had a stronger position and greater power since the introduction of the Foreign Investment Risk Review Modernization Act, or FIRRMA, in the US, which came into force in October 2020.
This was swiftly followed, also in October 2020, by the introduction of new regulation in the EU to allow for greater screening of FDI. And the UK is following suit with new legislation expected to be passed this year, which will be applicable retrospectively to deals carried out from November 2020. The changes in the UK will revolve around the actions of the Office for Investment.
So, while the government is promoting the Office of Investment as a tool with which to stimulate FDI to the UK, the reality is that it will also bolster the screening of FDI to a significant degree.
What impact will the Office for Investment have on FDI screening?
The government says that the Office for Investment will review as many as 1,800 deals every year, with respect to FDI and national security. Previously, over the past 20 years, only 12 deals have been subject to intervention on these grounds, which means the new Office opens up the prospect of a much stricter intervention regime.
The Office of Investment is also to be given a much greater scope for interventions, including in scenarios like when a foreign business has just one UK customer, for example. In addition, the government is currently reviewing whether a number of sectors should be required to seek mandatory approval for FDI deals, including major growth sectors such as artificial intelligence, robotics and materials, space, defence, communications, data infrastructure, energy, quantum technologies and transport.
These changes are bound to lead to a growth in incidents of M&A screening and could damage the UK’s potential to attract FDI even further at a time when it needs to be doing all it can to court investment from abroad.
However, some caution is undoubtedly necessary. Pressure is growing from MPs concerned about the influence of China and Russia in the UK’s defence supply chain. Some are calling the government's forthcoming defence and foreign policy review to ban all FDI from China into this sector.
In February 2021 a report by Thomson Reuters exposed the fact that a number of London boroughs were using surveillance technology sold by Chinese firms, Hikvision and Dahua, both of which are linked to the abuse of minority Muslim Uighars in China.
This is the kind of alarming story that Boris Johnson and his cabinet will be keen to avoid by limiting China’s access to British businesses and, indeed, British customers.
Getting the balance right
The arrival of the Office for Investment and its new broader powers will be watched closely. It will be interesting to see how far the government is willing to flex on its tougher new screening powers in order to attract the precious FDI that seems so essential to our economy.
It won’t be easy to strike the right balance. Especially because the protectionist ideas that drove many to vote for Brexit have also given rise to increased calls for FDI screening to protect national security. For those who hold these ideals, it may be time to accept that increased screening will be necessary for a flourishing post-Brexit economy.
Read more about other recent trends that are shaping M&A:
Remote dealmaking – M&A in the time of COVID-19
IR35 in the private sector: Could the new rules impact M&A?
Tighter pre-pack regulations - What could the proposed changes mean for dealmaking?
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