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Legal Lingo: What is ‘Foreign Direct Investment (FDI)’ regulation?

Being an aspiring commercial lawyer often means being confronted with complex, often abstract, concepts that lead to an often impenetrable wall of jargon for students and trainees. Next in our LegalLingo series, which we launched to help break down this jargon, is a ‘101’ on foreign direct investment regulation.

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Foreign Direct Investment (FDI) is defined by the Organization for Economic Co-operation and Development (OECD) as: ‘a category of cross-border investment in which an investor resident in one economy establishes a lasting interest in and a significant degree of influence over an enterprise resident in another economy.’

Over the last few years – and following the global COVID-19 pandemic – governments around the world have implemented FDI regimes to protect what they consider to be strategically important enterprises from foreign acquisition or influence. An FDI regime provides a national government with the ability to investigate and possibly block or impose conditions on a proposed investment by (typically) foreign investors in companies operating in key sectors of the economy.

Historically, these sectors have focused on key areas of national security, such as military and defense-related companies. But, driven in part by heightened geopolitical threats elsewhere and developments in powerful technologies, the concept of national security now includes critical infrastructure—including energy grids and ports—communications assets, and advanced technology and data, such as artificial intelligence, quantum computing, and advanced encryption technologies and materials. .

The COVID-19 pandemic has also highlighted the relevance of a much wider range of businesses directly related to matters of national security and public health, such as companies working on vaccines and personal protective equipment.

Against the background of increasing global protectionism, FDI regulation has become a critical part of the regulatory puzzle in recent years, so careful consideration should be given to the application of FDI rules to cross-border M&A from the outset, along with merger control and other regulatory clearances. This may even be the case for acquisitions of minority stakes of as little as 1%.

Although unlikely to be considered ‘problematic’ by most investors, these regimes have significant implications for investors, particularly in terms of transaction grids. Investors should consider both their own position, but also that of any investment partners, and factor these approval requirements into their acquisition strategies.

Want to find out more about FDI? If so, here are links to three excellent articles on the subject:

Reuters: Germany blocks Chinese takeover of satellite firm over security concerns

The Economist: The pandemic has reduced annual FDI flows by one-third

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“Legal Lingo aims to break down legal buzzwords, concepts and jargon into bite-sized explanations to make the industry more accessible to aspiring apprentices.”

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