Move to block foreign takeovers is welcome, but late

Changes in the way capitalism operates are being driven by the success of China’s state-directed economy. This means Britain’s new foreign takeover law is long overdue.

This content is more than 6 months old now, please visit the news area of this site for more recent content

  1. Garry White

Britain is finally doing something to protect our intellectual property from ‘malicious investment’ from abroad.

Donald Trump’s technology war has brought the ownership of cutting-edge intellectual property to near the top of the international agenda and now, finally, Britain is to get an updated framework to block foreign takeovers if they are not in the national interest. But, economically, is this a wise thing to do?

Last week, the government introduced The National Security and Investment Bill (NSIB), which will allow it to block the takeover of companies in 17 key sectors, including data infrastructure, communications, quantum technology, advanced materials and computer hardware. The restrictions came into effect as soon as the Bill was published on Wednesday – in order to prevent a wave of deals being rushed through while the bill goes through the parliamentary process.

There has been controversy about the sale of a number of Britain’s ‘crown jewel’ technology companies – that were nurtured here but then sold on to foreign companies. These include chip groups Imagination Technologies and ARM Holdings – but there has been controversy over the sales of other businesses too. These include defence engineers GKN and Cobham, as well as satellite group Inmarsat.

Foreign investment important

The new law has raised concerns in the City because it may prevent some essential foreign investment as Britain recovers from the Covid-19 pandemic. It also put limits on free markets – the core of the capitalist system that has generated our wealth. However, free markets do not exist in a vacuum and need a legal framework that includes strong property rights and freedom from corruption – so restrictions such as those introduced by the NSIB fit into this framework.

Capitalism in the 21st century will be very different than in the Twentieth. A significant amount of this is due to the rise of China and the success of the state-directed model it has developed.

In China, the government functions as the leading economic actor, directing its businesses to invest in areas it considers strategically important. This has allowed it to leapfrog the US in some areas of 5G technology amid accusations of the theft of intellectual property by taking over business and transferring ideas. Washington believes the success of China’s technology sectors is built on stolen ideas. This accusation is probably correct. China has been exploiting globalisation for its own gains while keeping tight restrictions on its own economy.

Under the new law, investors and businesses will have to notify a dedicated government unit through a single digital portal about certain types of transactions in designated sensitive sectors, such as our defence, energy and transport sectors, to ensure it can investigate and take action to address any national security risks. It also extends screening powers so we can interrogate the acquisition of sensitive assets and intellectual property, as well as the acquisition of companies. It aims to assess any potential transactions rapidly – giving an answer within 30 days.

Data is a commodity that will outshine gold

It’s not just the sale of intellectual property to foreign actors that is a concern. Data security is moving up the agenda and digital sovereignty – allowing foreign governments to access sensitive data about its citizens is becoming more of a significant issue. The US government, in particular, is becoming increasingly conscious of this issue – and has taken action on several fronts

One recent example of this was when a Chinese gaming bought gay dating app Grindr. After being developed in Los Angeles, it was bought by Beijing Kunlun in 2016 for $93m. The deal was eventually examined by the Committee on Foreign Investment in the United States (CFIUS), which eventually told the Beijing-based parent company that its ownership of Grindr constituted a national security threat. The fear was that Chinese actors could personal data collated by the app to unduly compromise or influence individuals in western countries. Following US pressure, Grindr was sold in March this year to US-based San Vicente Acquisitions.

The digital revolution is creating layers of complexity in the way data is organised globally – and this is just as much of a national security threat as the theft of cutting-edge intellectual property.

The EU is looking at introducing data localisation laws – which restricts data movements outside of the bloc onto servers elsewhere. The EU has adopted a stringent framework for privacy and data protection, with the General Data Protection Regulation (GDPR) at its centre. There is also a ‘right to be forgotten’ and a data portability right to enhance individuals' control of their own data.

Digital rights and sovereignty

So, assessing foreign takeovers by companies based in states where the government can control their actions is not only about ‘stealing’ ideas to gain a competitive advantage. It is about protecting the privacy and rights of individuals that may be compromised in the new era where data is the most valuable commodity on Earth.

We are only just at the start of the digital revolution – and the rapid changes it has brought about have created problems that were not envisaged as these new, exciting technologies were deployed. Even if this new bill limits investment in the UK, it is still the correct thing to do.

It is questionable whether the new rules will have a significant impact on inward investment anyway. As the government itself pointed out in the statement: “We are in a unique position in terms of language, legal system, time zone, and regulatory approach, which cannot be replicated anywhere else.” The changes in the law are arguably overdue – and, as digital sovereignty issues become more of a priority for individuals over the next few years, its scope will need to be reviewed regularly too.

A version of this article first appeared in the Daily Telegraph.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

More from author

  1. Garry White

    Last Week in the City: Best month for equities – ever!

    Date: 20th Nov 2020 08:48am

    Garry White, Chief Investment Commentator, provides a round-up of the market movement...

  2. Garry White

    Trump administration moves to secure its legacy

    Date: 20th Nov 2020 08:48am

    As the transition to the Biden presidency gets underway, members of the current admin...

  3. Garry White

    Last Week in the City: Trump’s election mischief continues

    Date: 20th Nov 2020 08:48am

    Garry White, Chief Investment Commentator, provides a round-up of the market movement...

Most read articles

  1. Move to block foreign takeovers is welcome, but late

    Is the money to deal with Covid-19 running out?

    Date: 20th Nov 2020 08:48am

    Since March 2020, markets have got used to running on an explosive mixture of central...

  2. Move to block foreign takeovers is welcome, but late

    Trump administration moves to secure its legacy

    Date: 20th Nov 2020 08:48am

    As the transition to the Biden presidency gets underway, members of the current admin...

  3. Move to block foreign takeovers is welcome, but late

    Is the ‘great rotation’ to value stocks underway?

    Date: 20th Nov 2020 08:48am

    Value investing involves aiming to buy shares that are cheap in relation to their ear...

Investment involves risk. You may get back less than invested.