Geopolitical Risk and National Security: Implications and strategies for global foreign direct investment

The significant and rapid geopolitical shifts over recent years underpin the rationale for the widespread introduction of FDI regimes: the UK Government’s Integrated Review of 2021 and 2023 Refresh consider the challenges of responding to a more contested and volatile world, in the context of developments including: shifts of economic power to the east, the growth of technological change as a vector of competition and the use of non-traditional levers (economic rather than military) to assert influence – alongside wider challenges like climate change and global pandemics.  In short, we are living in a changed – and still rapidly changing – world.  FDI regimes need to provide stability and allow businesses to operate effectively in competitive environments, whilst managing the risks and volatility of the geopolitical landscape. 

There is an increasing need for business to engage with these macro risks: it is not familiar, or easy, but it is necessary for businesses to consider these macro-level issues and risks.  Strong Board-level leadership is required – careful consideration of location decisions and understanding of supply chain security, with secure growth as the priority.

Internationally, Governments are engaging with, and learning from each other as FDI regimes evolve: the importance of cooperation with international counterparts is widely recognised, and there is a longstanding and continuing process of engagement at a strategic level - in addition to the ability to exchange information on specific cases where appropriate under the respective legal frameworks.   

The overarching message for the UK FDI regime is one of stability coupled with continuous improvement: it is vital that the regime provides predictability for businesses and investors.  It is intended to be pro-growth and carefully targeted – tightly focused so that it engages only a small number of the most sensitive sectors, and making interventions only where proportionate.  This rationale has not changed with the change of Government, and the regime has operated without interruption or disruption during this period of transition.  At the same time, there is a recognition that improvements can be made.  The UK Government has already acted on some of the feedback received, issuing an updated section 3 Statement and Market Guidance, and providing more engagement during the assessment period.  This process of listening and improvement will continue, although there will always be some limits on how transparent FDI regimes can be in the context of highly sensitive sectors and issues.

Key takeaways

• There is an ongoing need for FDI regimes internationally to be refined to minimise friction and risk, and achieve the aims of predictability and transparency as far as possible
• Businesses should look to engage more with macro level issues to help inform their strategic and operational decisions – this is far from easy, but increasingly necessary
• These two aspects can and should work together: business insights and collaboration are important to Governments as regimes evolve, to ensure they are proportionate and targeted.  Effective collaboration should encourage growth whilst protecting national security.

Authored by Charles Brasted, Robert Gardener, Brian Curran, Anne Salladin, Falk Schöning and Christopher Peacock.