OECD Report: surge in FI regulation and enforcement is “historically unprecedented”

The recently released OECD Report on investment policy developments confirms what those involved in foreign investment have been observing on the ground – the era of increased FI regulation and enforcement is well and truly here.

The Report looks at investment policy developments that have taken place between October 2021 and March 2023 across 61 reporting economies, but also covers trends and design developments that have occurred over a longer period. The data shows a “historically unprecedented” surge of FI regulation and enforcement, arising largely out of a declining consensus on rules for international economic interactions and concerns over security of supply of essential products and services, including in response to the growing presence of State-funded investment. 

Two recent crises are also singled out: the pandemic saw many governments introduce new or adjusted policies, in light of new insights on their vulnerabilities. The war in Ukraine, however, triggered fewer changes because the economic disruption was less pronounced, enhanced policies were still in place from preceding crises, and sectors associated with military conflict were already covered by investment policies related to essential security interests in most countries.

A proliferation of investment screening mechanisms, alongside broader scope, and increased enforcement

Ever more countries use investment screening to protect national security...

In the past decade, there has been a significant increase in new and reformed investment policies. The OECD reports that 80% of the 61 reporting economies now have such a mechanism in place – and in over half of these economies, the mechanisms cover large parts of their economies or at least multiple sectors. But the real spike has occurred in the past eighteen months, when 30 of 61 participating economies introduced or amended foreign investment policies. 

…but not in some regions

Despite the increase in investment screening mechanisms in Europe, North America, East Asia and Oceania, the use of these tools to manage national security risks remains rare in Latin America, Southeast Asia and the MENA region. However, this may be changing, and scepticism of investment screening mechanisms also appears to be receding in countries like India, Saudi Arabia, South Africa, Vietnam, and Brazil, among others.

Scope expanding to cover new types of investment

The scope of FI screening has also broadened. Historically, mechanisms were largely focused on defence production or real estate in sensitive locations. Now, many instruments have diversified to include critical infrastructure, sectors like health and biotechnologies, advanced technologies, and media plurality. Many of these policy developments have occurred in the past eighteen months, with 20 of 61 participating economies introducing or amending policies related to national security, and 13 introducing investment-specific measures. 

Enforcement on the rise

The use of investment screening mechanisms has significantly increased in parallel, with the number of cases reviewed more than doubling in some countries since 2017 (such as in Canada, Italy, Finland, and Japan). For example, in Finland, the share of investment proposals that were subject to review went from 3.7% in 2017 to 9.2% in 2019, while in France this share increased from 11% to 23% between 2017 and 2020. These upward trends are due, in part, to the broadening scope of FI screening mechanisms, but also to the greater knowledge of notification obligations and - in Europe - the discovery of non-notified transactions through the cooperation mechanisms introduced by the EU FDI Screening Regulation. 

What does this mean for investors?

As investment screening mechanisms continue to change and evolve, and the risk of enforcement grows, there is an ever greater need to manage FI risk carefully. In particular, it remains important for FI issues to be considered at an early stage in the due diligence process, and to account for FI screening in transaction documents (see our recent posts on managing FI risk in an era of increased enforcement - Part I and Part II). 

Additionally, a significant number of investment policy developments have occurred in the past eighteen months, including in jurisdictions with existing screening mechanisms, with the majority of those measures related to national security. In some countries, multiple changes have been made within this time period. This means that even seasoned investors can be caught out by the changes, and provisions that might have worked in previous transaction documents but may no longer be sufficient or current. 

Looking to the future

The Report comments that the growth in FI mechanisms is “unlikely to slow or stop in the medium term”, with a particular acceleration of economies that operate systems that apply to a broader set of sectors or economy-wide. 

In Europe (where 18 EU Member States now have new or revised regimes in place, including most recently The Netherlands) at least 5 more regimes are expected in the coming year (Belgium, Luxembourg, Sweden, Ireland and Estonia). 

There is also anecdotal evidence to suggest that jurisdictions which have traditionally been hesitant to introduce or modernise policies may be reconsidering the merits of investment screening mechanisms as a means to manage security concerns, particularly with respect to critical infrastructure.