This presentation by Ashley LENIHAN, Deputy Director, MSFS and Professor of the Practice of International Affairs, Georgetown University, was made during the discussion “The Relationship between FDI Screening and Merger Control Reviews” held at the 139th meeting of the OECD Competition Committee on 30 November 2022. More papers and presentations on the topic can be found out at https://oe.cd/fdimc This presentation was uploaded with the author’s consent.

1. Foreign Direct Investment and
National Security: Current
Trends in Perspective
Professor Ashley Thomas Lenihan
Walsh School of Foreign Service
Georgetown University
© Ashley Thomas Lenihan, 2022

2. Overview
• Rise in FDI control mechanisms related to national security
• Current trends in national security based FDI screening regimes
• Select implications for competition regimes (and competition)
© Ashley Thomas Lenihan, 2022

3. Investment Liberalization and Benign FDI
0
500000
1000000
1500000
2000000
2500000
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020
Historical Global FDI Inflows
in US dollars at current prices in millions
Africa Americas Asia Europe Oceania
Source: UNCTAD STAT. https://unctadstat.unctad.org/ © Ashley Thomas Lenihan, 2022

4. Historical ‘Limits’ of Investment Liberalization
• Modern concerns over FDI and National Security emerged in WWI around:
• Espionage
• Sabotage
• And Solidified during the Cold War around:
• The potential for hijack / nationalization
• Export controls
• Strategic control
• Under customary international law:
• all states maintain the sovereign right to veto attempts by foreign entities to acquire
domestically based companies or assets, if they are believed to pose a risk to national
or essential security.*
*Lenihan, A. (2018). Balancing Power without Weapons: State Intervention into Cross-Border Mergers and Acquisitions. Cambridge: Cambridge University Press. doi:10.1017/9781316855430.
© Ashley Thomas Lenihan, 2022

5. *Lenihan, A. (2018). Balancing Power without Weapons: State Intervention into Cross-Border Mergers and Acquisitions. Cambridge: Cambridge University Press. doi:10.1017/9781316855430.
Locus of Perceived Risk Varies Over Time, Is Not Limited to Competitors
The locus of perceived risk varies over time, as competitors change:
• German investment in WWI & WWII
• Japanese investment in 1980s
• Middle Eastern investment after 9/11 and through the financial crisis
• Chinese investment (particularly since ~ 2010)
• Russian investment (since ~2014, and explicitly since ~2022)
But equally, investments from Allies may cause concern, when it comes to assuring:
• Export controls
• Defense industrial base
• Technological leadership
© Ashley Thomas Lenihan, 2022

6. Initial FDI Control Mechanisms
1st generation policies and review mechanisms, often focused on protecting:
• a narrow range of sectors associated with national security
• real estate in sensitive areas / borderlands
• particular ‘national champions’ in the defense industrial base☨
☨Source: OECD (2020). Acquisition- and ownership-related policies to safeguard essential security interests: Current and emerging trends, observed designs, and policy practice in 62 economies,

7. OECD Dialogue Countries that operate Foreign Ownership and Acquisition Policies
Related to National Security in 2000
OECD Countries with such policies
=
© Ashley Thomas Lenihan, 2022
Future OECD Countries with such policies
=
Future Candidate (+5) Countries with such policies
=
Non-OECD Countries with such policies
=
Information Sourced from: https://oe.cd/natsec2020

8. OECD Dialogue Countries that operate Foreign Ownership and Acquisition Policies
Related to National Security in mid-2021
Information Sourced from: https://www.oecd.org/investment/investment-
policy/Investment-policy-monitoring-October-2021-ENG.pdf
OECD Countries with such policies
=
Future Candidate (+5) Countries with such policies
=
Non-OECD Countries with such policies
=
Countries considering such policies
=
© Ashley Thomas Lenihan, 2022
Non-OECD Countries – such policies unknown
=
Non-OECD Countries – such policies passed,
but not in force
=

9. Strategic FDI – Evolutions in International Dynamics and Risks
1. Fundamental revolution in technology
2. Shift to a multi-polar, contested, and more
competitive international environment
3. Shift to increased use of tools of economic
statecraft to gain power and position in
the international system
• Rise in strategic and / or state
sponsored and subsidized FDI as state
policy
• Corresponding adaptation and use of
FDI control mechanisms to protect
national security
• Led to the adoption of more
sophisticated next generation review
mechanisms with dedicated resources
and processes,☨
• With the primary objective of
protecting essential security, without
discouraging benign investment or
affecting competition unnecessarily.
• However, competition regimes should
expect that national security decisions
will be given primacy, even where they
might have sub-optimal outcomes for
competition or consumers.
☨See, e.g.: OECD (2020). Acquisition- and ownership-related policies to safeguard essential security interests: Current and emerging trends, observed designs, and policy practice in 62

10. Pre- and Post-Pandemic Trends in Concern
Global events and conditions  Concern over specific types of FDI:
• 9-11 / GWOT
• Critical physical infrastructure
• Global Financial Crisis in 2008 / Covid-19 Pandemic
• Depressed assets
• Environmental Change / Power shifts
• Finite or difficult to extract critical resources
• Energy security
• Digital Revolution
• Frontier and high technology companies
• ICT
• Holders of private data
• Covid-19 Pandemic
• Security and resiliency of supply chains, particularly around sole-supplier risk
• Healthcare © Ashley Thomas Lenihan, 2022

11. Regulatory Trends
Many countries are now:
1. Abiding by the 2009 OECD Principles around such regimes, for example by:
• Being more transparent about how to engage with the review process and providing
clearer guidance on coverage.
• Providing more predictable timelines for review
• Using an increasing variety of mitigation measures to ensure proportionality
2. Changing regulations to avoid ‘evasive’ tactics
• Lowering or doing away with ‘threshold’ requirements for review
• Adding coverage of asset investments (tangible and intangible) and green-field investment
• Increasingly moving to a MNC model (which mix mandatory notification in some sectors
with cross-sectoral call-in regimes)
 e.g. – US, UK, Germany, Australia, and China
© Ashley Thomas Lenihan, 2022

12. Further Regulatory Trends and the Interface with Competition Regimes
• Professionalization of FDI & NS regimes, and differing objectives  separation either wholly or
administratively from competition reviews.
• This is critical to ensure that NS review regimes are able focus on their remit, and become
properly institutionalized, resourced, and staffed.
• However, increased complexity and volume of FDI & NS reviews means that increased cooperation
and secure information sharing with competition regimes as appropriate may assist with:
• Horizon scanning as needed
• Better understanding of potential national security risks in specific transactions
• in relation to sole-supplier risk
• supply chain resiliency and potential points of leverage or dependency in certain sectors
• Competition regimes should be prepared that NS regimes will likely demand more information
than they can supply in return, and that these demands may increase over time.
© Ashley Thomas Lenihan, 2022

13. The Interplay Between Competition Regimes and NS FDI Regimes
• Harmonization of timelines between Competition and NS FDI regimes can:
• increase predictability for investors
• the memorandum of understanding between the new UK National Security and Investment
Act and the CMA, provides a potential model for this
• However, there are some issues to keep in mind:
1. National security reviews by their nature can take longer and be more unpredictable.
2. Flexibility is crucial
3. National security concerns (and timelines of their reviews) will take precedence
© Ashley Thomas Lenihan, 2022

14. Potential Implications for Investment and Competition
• While there is no clear evidence that FDI & NS regimes deter benign investment, they can increase costs of
doing business across borders, necessitating harmonization and cooperation between investment control and
competition regimes where possible.
• Select implications for competition and competition regimes:
1. Where transactions are reviewed by both regimes, national security decisions will take precedence,
even when they lead to sub-optimal outcomes for competition.
2. As states seek to ensure security of supply and technological leadership, especially in emerging,
foundational, and critical technologies, there may be both intended and unintended consequences for
competition.
3. As the number of mitigated transactions rises, and the complexity of measures taken to mitigate
national security risks increases, coordination will be needed to ensure such measures satisfy the
objectives of both regimes where possible.
© Ashley Thomas Lenihan, 2022