Germany is considering tighter foreign investment rules to increase protection over its artificial intelligence and semiconductor sectors as multiple ministers raise alarm bells over Chinese national security threats.
Economy minister Robert Habeck has suggested combining a currently fractured review regime into a single comprehensive law that scrutinises investments that result in contractual access to domestic goods or technology, rather than just acquisitions of control, according to reports by the Financial Times and Reuters earlier this week.
The ministry is also reportedly assessing the significance of foreign companies building factories in Germany and whether the regime should cover certain research cooperation agreements. The government is also separately evaluating whether to implement outbound investment restrictions.
Meanwhile, German research minister Bettina Stark-Watzinger penned an opinion piece on Tuesday expressing a desire to restrict China from acquiring academic research. She said the geopolitical climate necessitates reconciling the value of academic freedom with Germany’s security policy interests.
“We must not be naive in dealing with a regime that has the stated goal of converting civilian research into military applications and achieving dominance when it comes to critical technologies,” Bettina Stark-Watzinger wrote.
Düsseldorf-based ROCAN partner Tobias Pukropski noted that the ministry has long mulled more extensive foreign investment reform and the introduction of a “distinct” law to govern the process.
While the ministry has seemingly decided to push forward, it may take some time before a public draft version of the law is released, Pukropski said. Rumours have circulated that the current rules may undergo minor amendments, he added.
Putting the existing rules into a distinct law would be a welcome move, he said, noting that the current framework is spread across different regulations and can lead to some uncertainty on how they interact with each other.
On substance, the ministry intends to broaden the scope of inbound investment scrutiny to include pure licensing agreements and greenfield investments, while also possibly lowering existing thresholds for sensitive sectors depending on the exact activities of the target, Pukropski said.
Once the government drafts the law, there will hopefully be a broad public consultation period, given that some of the proposals could lead to “a lot of uncertainty in practice”, he said.
Pukropski said that the government has responded with mixed reactions to separate plans for an outbound investment regime. He added that it would have to align any rules with the European Commission, which is also considering such a framework.
Aylin Hoffs, an associated partner at Gleiss Lutz in Düsseldorf, said the legislative efforts to extend the foreign investment regime threaten to make the German system “cloudy” while potentially burdening “even clearly non-critical investors unduly with additional regulatory complexities”.
They “will most certainly” create inconsistencies where export control laws allow for the cross-border transfer of know-how and technology – even without approval – but the foreign investment regime calls for enhanced scrutiny, she said.
Hoffs noted that the government recently affirmed – though not unconditionally – its stance toward economic cooperation in releasing its “China Strategy”. She said introducing an outbound framework to create another regulatory layer raises “certain further ambiguities”.
Despite calling for economic cooperation, the strategy document claimed that “Chinese direct investments pose particular challenges… owing to the political and economic circumstances in the country of origin.”
Western states have criticised Germany recently for its close business relationship with China. In May, the German government approved China COSCO Shipping’s acquisition of a minority stake in Hamburg port despite opposition.
Last November, the government blocked the takeover of a domestic semiconductor production facility by Silex Microsystems, the Swedish subsidiary of Chinese chipmaker Sai MicroElectronics.
Discussions surrounding potential outbound regimes in Germany and elsewhere have ramped up after President Joe Biden issued an executive order earlier this month restraining outbound US investments in Chinese companies that operate in high-technology sectors critical for the military, intelligence and surveillance.
