Foreign direct investment changes in the UK safeguard defence technology development

Citing national security concerns, the UK has recently proposed a bill to tighten its foreign direct investment (FDI) rules. The National Security and Investment bill introduced in November gives the government significantly increased powers to scrutinise, impose conditions, and block transactions.

This move will safeguard the domestic development of key emerging technologies in defence such as artificial intelligence (AI), autonomous robotics, and quantum technologies – and language like ‘potentially malicious foreign investors’ indicates that Beijing appears to be one of the central targets of this bill.

Increased foreign direct investment scrutiny will likely raise the number of transitions scrutinised to around 70-95 a year, out of 1,000-1,800 total annual transactions, according to the impact assessment. This move follows actions from countries such as France, Germany, and Italy who also tightened their FDI rules this year, with Germany implementing the EU’s screening regulation, which encourages Europe-wide FDI cooperation on security grounds.

The US has specifically used FDI scrutiny to address concerns over Chinese investment in tech, with the Committee on Foreign Investment increasing scrutiny of investment by Chinese companies under the Trump administration. Increased supply chain scrutiny has included the CHIPS act, which aims to increase the domestic production of semi-conductors and decrease reliance on foreign producers.

The UK’s FDI screening has traditionally been significantly less rigorous than its Western partners, having only reviewed 12 transactions on the grounds of national security in the last eighteen years, and blocking none. This is the first update to FDI screening in that time and leads on from the review published by the UK Government in 2018, although it is a departure in that the current bill includes a mandatory notification regime proposed for transactions in core sectors.

Covid-19 has accelerated concerns about supply chain vulnerabilities and discussion around the strategic industry in the 21st century, not just in defence but in the health and technology sectors.

The blocking of potential transfers of intellectual property and asset transfer constitutes closing an existing loophole in FDI rules and shows that the UK Government is increasingly viewing foreign involvement in advanced technology as a national security threat and as having the potential to undermine the UK’s defence industrial base.

For more defence industry comment and analysis, visit GlobalData’s Aerospace, Defense & Security Intelligence Centre.

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