Britain’s prosperity relies on its open economy. Last year, 76,000 jobs were created as a result of foreign direct investment, as the UK remained Europe’s top FDI destination. But this reputation for openness cannot be taken for granted. Economic nationalism is rising across western democracies. The backlash against unfettered international capitalism continues, fuelling populism on the left and right. And there is Brexit, sometimes cast as a moment of liberation. In reality, it carries the risk of a nation turning inward.
This is the background to the UK government’s white paper on national security and investment. Theresa May has long signalled her desire for deeper scrutiny of foreign takeovers since she came to power two years ago. The prime minister notably questioned Chinese investment in the Hinkley Point nuclear power station on national security grounds. Yet after an unexpected delay, the deal went through. This government faces a delicate balancing act: keeping the UK open to businesses while addressing security concerns.
Greg Clark, business secretary, has proposed tougher new rules for future takeovers. He has announced that the 2002 Enterprise Act will be beefed up to counter what the government argues are heightened national security risks. Dealmakers will be expected to notify the government if they believe a deal would endanger security. Breaching the government’s recommendations would be a criminal offence.
Under the Clark plans, deals of all sizes will be reviewed by the government. The new rules will apply not only to company acquisitions but assets and intellectual property too — the economic battleground of the 21st century.
By his own estimates, Mr Clark’s guidelines could result in a 50-fold increase in the number of “interventions” made by the government (last year there was just one intervention on security grounds). Investors may chafe at the long arm of the British state, but these changes do not necessarily mean more takeovers will be blocked. More likely, they will face tighter conditions attached to deals.
The government is aware that forcing compulsory registration of all foreign takeovers — whether or not they have security implications — would rightly be judged as a bureaucratic intervention too far. Therefore, a notification will not be mandatory. This shows commendable restraint, even if the Department for Business will have the powers to “call-in” transactions that have security risks.
It is important to remember that the UK has long protected vital national assets against a foreign takeover. Even Margaret Thatcher approved “golden shares” in privatized state assets such as British Telecom. The white paper is a legitimate response to a new economic reality, where foreign powers are actively seeking to acquire intellectual property and technology either through theft or corporate purchases.
Many will single out China as a principal offender. But China remains an important foreign investor in the UK and high-tech companies such as Huawei have enjoyed a warm welcome. Overseas investors should take note that the UK’s proposals are broadly consistent with those in Australia, Germany, Japan, and the US.
The test is whether the tighter policy allowed to strike a sensible balance between business and security interests free of party political influence. Takeovers will always attract political attention, but the government should rely on experts, not MPs to make the final call. The UK needs a fair and consistent approach to foreign investors. Its economic future depends on it.