The New World of Foreign Direct Investment
1 . After more than a half century of increasingly liberalized world trade, there are signs of change. Do you see world trade patterns evolving in new and different directions? What does this mean for your country and your clients?
UK trade patterns have been affected by a combination of recent events: the UK’s withdrawal from the EU, the COVID-19 pandemic and the war in Ukraine. UK trade policy has evolved in response, and we outline the most significant considerations for traders and investors below.
The UK’s withdrawal from the EU (Brexit) has resulted in major changes to its trading relationship with the EU Member States and other members of the European Economic Area. The Trade and Continuity Agreement sets out the terms of trade between Great Britain and the EU going forward. Agreement on the Windsor Framework, which replaces the Northern Ireland Protocol from March 2023, has generated greater certainty in relation to the special position of Northern Ireland.
As a result of Brexit, UK businesses no longer have unfettered access to the internal market and regulatory divergence is set to increase over time. For both traders and investors, the UK therefore no longer necessarily offers an attractive ‘gateway’ to the European market.
One of the biggest changes in trade dynamics comes from the reintroduction of customs processes and other border measures, which have caused significant logistical difficulties for those seeking to move goods between the UK and the EU. Although the EU remains the UK’s biggest trading partner for both goods and services, figures on UK-EU trade show a considerable decline in trading activity. According to the latest ONS figures, between 2017 and 2021 the UK’s total exports to the EU fell from GBP 281.43 billion to GBP 267.40 billion (a 4.99% reduction). During the same period, the UK’s imports from the EU fell from GBP 353.10 billion in 2017 to GBP 292.21 billion in 2021 (a 17.25% reduction).
In the wake of EU withdrawal, the UK has increased its efforts to negotiate new trade partnerships and refresh existing free trade agreements (FTAs). The UK has negotiated FTAs with Australia and New Zealand and a cutting-edge Digital Economy Agreement with Singapore. In March 2023, it was announced that the UK’s application to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) has been formally approved. These new agreements demonstrate an ambitious approach to negotiating agreements and reflect the UK Government’s commitment to expanding the country’s international trade network.
The loosening of trade ties in Europe, combined with the UK Government’s tilt towards the Indo-Pacific as a region of specific focus for strengthening and deepening trade relations, could mark the beginning of a turn away from the regional bias that remains prevalent in international trade trends. While practical considerations such as transportation and logistics along with cultural factors such as long-standing business relationships mean this will not change overnight, we could see new patterns emerging over time. The dynamism and strong growth in the Indo-Pacific region have attracted UK business interest and recent and future UK trade agreements may serve to crystallise this focus.
COVID-19 imposed numerous stresses on the global trading system and although the impact of the pandemic has eased considerably, this has been replaced by pressures from the war in Ukraine. The global nature of supply chains means that constraints in any one part of the globe are likely to prompt effects around the world and UK businesses have been impacted accordingly. The impact of war in Ukraine is particularly significant as the country provides a large proportion of the world’s sunflower oil, cereals such as corn and wheat, and iron and iron ore as well as rare earths, including lithium and rare earth metals such as platinum and gallium.
In the short term, an uncertain trade landscape is likely to prevail. Within this uncertainty, strategic opportunities can nevertheless be found as companies seek to spread their risk and diversify their supply chains to minimise the impact of future shocks. Although businesses now face higher trade barriers with the EU internal market, the extent to which these present a challenge to export may lessen over time as they become accustomed to the new trade regime. Possible new trade avenues, including those in Asia-Pacific, may also become more attractive to businesses already exporting to the EU, as many of the export requirements will already be familiar.
2 . Historically, foreign direct investment was embraced by governments as a way to strengthen domestic economies. Has your country’s government adopted an aggressive posture in regulating foreign investors?
The UK is generally recognised as an open market for investment, with successive governments having sought to emphasise the UK as an attractive investment destination. As a general rule, foreign individuals and businesses have the same rights and obligations and the same ability to invest and conduct business, as those resident in the UK.
The National Security and Investment Act 2021 (NSIA) has introduced a more extensive national security regime for the UK which expands the types of transactions that are covered by national security reviews to include not just mergers and acquisitions but also minority investments and acquisitions of assets. This regime applies to both UK and foreign investors and also applies in the context of intragroup reorganisations.
Under the terms of the NSIA, qualifying acquisitions in one of the 17 qualifying sectors (see Question 3) must be notified to the UK Government and receive approval before they can take place. Broadly speaking, a qualifying acquisition occurs when an investor acquires a level of control above a certain threshold over a qualifying UK entity or asset (which can include land and both tangible and intangible movable property, including source code algorithms, software and trade secrets), and that entity or asset is in a qualifying sector. Constraints or conditions could be imposed on ownership of some entities and assets and, in extreme circumstances, the transaction could be barred from taking place. Even outside these 17 sectors, a transaction may be called in for review by the Secretary of State if there are potential national security concerns. This power can be used even after a transaction has taken place, meaning investors may be advised to file a voluntary notification as a precautionary measure.
It is anticipated that the screening process may be more stringent for overseas investors, although formally it applies to internal investors too. If an overseas investor is looking to invest in a qualifying sector, the ability to do so may be more limited than was previously the case.
It is too early to provide an in-depth assessment of the NSIA’s impact on foreign investment. Overall, the UK system is broadly in line with similar approaches which are being, or have recently been, introduced or updated elsewhere. However, the Act operates on a case-by-case basis and it is not clear what decision might be issued by the Secretary of State in any given scenario. As a result there remains some uncertainty about the extent and scope of its application and conversations around implementation are ongoing as investors and advisers familiarise themselves with the system. While the Act does not necessarily indicate that the UK Government is taking an “aggressive posture”, it nevertheless introduces potential barriers to or constraints upon investment.
More generally, the UK Government announced a review of its approach to attracting FDI to run from April to September 2023 (see https://www.gov.uk/government/publications/terms-of-reference-for-the-review-of-foreign-direct-investment).
3 . Are there specific sectors of your country’s economy or industries where foreign direct investment is barred or highly regulated?
Although the UK Government and UK law generally permits and encourages foreign investment, the NSIA has introduced a more extensive national security regime for the UK (see Question 2 above).
This Act identifies 17 qualifying sectors of economic activity, which are seen as critically important to national security:
- Advanced materials.
- Advanced robotics.
- Artificial intelligence.
- Civil nuclear.
- Computing hardware.
- Critical suppliers to government.
- Cryptographic authentication.
- Data infrastructure.
- Military and dual-use.
- Quantum technologies.
- Satellite and space technologies.
- Suppliers to the emergency services.
- Synthetic biology.
Many of the above-mentioned sectors were already highly regulated in their own right (for example Defence, Civil Nuclear and the Military) and restrictions on investment in these sectors would not be a new consideration for foreign investors. However, the new Act has both expanded regulation in respect of these areas, and introduced new regulation that applies to other sectors which would not previously have been subject to stringent conditions or restrictions.
As such, it is more important than ever for investors to obtain professional advice before entering into investment activity in the UK.
4 . The global supply chain has been collapsing worldwide since 2020. How has this impacted businesses in your country and what steps has your country’s government taken to respond?
Global supply chain pressures have forced price increases throughout global supply chains, affecting business in the UK. In order to spread risk, many businesses are looking to diversify their supply chain sourcing.
The UK Government has recognised these pressures. In October 2021, the UK used its Presidency of the G7 to agree to work together to support “resilient and sustainable supply chains” (see the G7 trade ministers’ statement at https://www.gov.uk/government/news/g7-trade-ministers-communique-october-2021).
The UK is already taking action on supply chains at a national level. The National Cyber Security Centre has published guidance to support the cybersecurity of supply chains (see https://www.ncsc.gov.uk/files/Assess-supply-chain-cyber-security.pdf). Meanwhile the Ministry of Defence (MoD) has also been running Project Defend, mapping and producing in-depth analysis of 65 critical global supply chains to develop mechanisms to guard against risks and boost supply chain resilience.
In the recently negotiated UK-Australia FTA, both parties agreed to “enhance cooperation, including the exchange of information… with a view to further developing trade facilitation, while ensuring compliance with their respective customs laws, regulations, and procedural requirements, and improving supply chain security” in a number of specific areas including “cooperation on improvement of their risk management techniques, including sharing best practices and, if appropriate, risk information and control results…”. The deal also introduced a Strategic Innovation Dialogue, through which the two countries have promised to enhance cooperation to promote and facilitate innovation in areas such as “value chain matters, including supply chain resilience”.
5 . In M&A transactions as well as joint ventures in your country, what are the most critical issues foreign investors must evaluate prior to contemplating a transaction?
Prior to completing a transaction, foreign investors need to ensure that the proposed merger or acquisition complies with UK competition law and that it does not fall within the scope of the 17 sensitive economic sectors covered by the National Security and Investment Act 2021 as doing so will trigger the compulsory notification procedure under that Act (see Questions 2 and 3 above).
In addition to ensuring that they are aware of the rules and requirements to undertake this initial investment, investors should familiarise themselves with:
- ongoing regulatory obligations such as permits, licences or authorisations specific to their business or industry;
- the tax position both for the entity they are investing in, and themselves; and
- their general ongoing requirements once the investment has completed (such as corporate filing requirements and accounting obligations, including production and publication of annual accounts), to ensure they are compliant with such obligations.
All investors, including EU investors, will also need to take account of the changing post-Brexit legislative landscape. Areas where legislation is currently aligned may increasingly diverge over time and this will need to be monitored, particularly given the UK Government’s stated intention to repeal a number of EU-origin regulations over the coming years.
6 . What is the best strategy for acquiring interests in real estate or other tangible property in your country? Is this more difficult for foreign investors?
The UK real estate market is one of the biggest and most liquid in Europe. The market is well developed and seen as an easy market for both new and existing foreign investors to engage with. One of the key advantages is transparency: information on available assets in both residential and commercial property categories is readily available. This combination of liquidity and transparency also provides accessible entry points at all levels of the market.
Property law is clear and well-established and the UK offers a landlord-friendly environment. This gives investors confidence in their rights.
The best strategic approach for acquiring property interests will vary from investor to investor. Property investors are well supported by a community of advisers including lawyers, accountants and the banking industry who can provide industry insights as well as the technical professional expertise required to facilitate acquisitions.
Investors should be aware of the new Register of Overseas Entities, held by Companies House. Overseas entities are required to provide details of beneficial owners and managing officers. The new rules came into force in August of 2022 and are intended to further public trust in the market by enhancing the transparency around ownership of land by overseas entities.
7 . What laws or regulations exist in your country to protect data exchange and privacy, and is the protection of intellectual property challenging for foreign investors?
At present, the UK’s personal data protection regime is governed by the UK General Data Protection Regulation and is closely aligned to the original EU General Data Protection Regulation. Following Brexit, it is anticipated that the UK’s personal data protection framework is likely to change. In March 2023 the Data Protection and Digital Information (No. 2) Bill was laid before Parliament. The explanatory notes identify one of the purposes of the Bill as “providing more certainty and stability for cross-border flows of personal data”. The Bill also includes provisions covering smart data schemes to facilitate sharing of customer data with authorised third providers in response to a consumer request and other provisions around sharing, aimed at supporting business growth.
The UK is recognised as a global leader with regards to protection of intellectual property (IP) rights, and offers a clearly articulated system of protection for both registered IP rights such as patents and trademarks and non-registered IP protections such as copyright, unregistered designs and trade secrets. The UK has numerous highly qualified IP practitioners, including trademark and patent attorneys, who can advise clients on the best way to protect their intellectual capital. Rights holders have the ability to ensure practical enforcement of those rights through the civil courts or alternative methods of dispute resolution.
8 . Describe the most common legal structures used by foreign investors when doing business in your country.
Foreign investors can utilise the full range of legal structures. It is most common for global companies to create private companies limited by shares (often referred to simply as ‘limited companies’), although it is also possible (although far less common) to create a private company limited by guarantee. This is because a limited company is recognised as a standalone legal entity and the liability of its shareholders is therefore more limited than it may be under other structures such as a UK branch, which would not have any legal personality of its own.
Other structures – namely public limited companies (PLCs), partnerships, limited liability partnerships, limited partnerships – are also available.
9 . What are the most attractive opportunities for foreign investors in your country at this time?
The UK has always been an attractive destination for FDI. There are some key fundamentals driving the UK’s attractiveness that remain constant: use of English, which has become the international language of business; a time zone that makes it easy to interact with the rest of the world; and a strong legal and regulatory framework – although Brexit will mean aspects of the regulatory framework will evolve.
There have been dips in FDI activity into the UK recently. According to EY’s UK Attractiveness Survey (see https://www.ey.com/en_uk/attractiveness/21/how-uk-resilience-in-winning-fdi-creates-opportunity), the number of FDI projects landing in the UK is down from recent peaks but the value of investments remains high. The latest survey saw the UK recover some ground from 2020’s pandemic-driven decline, while the UK was second in Europe for total FDI project numbers; London remains Europe’s most attractive city for FDI.
Some of the biggest future opportunities may well be found in the eight Freeports in England announced in March 2021 (https://www.gov.uk/guidance/freeports). Similar to Special Economic Zones (SEZs) in other parts of the world, these would have different economic regulations and benefit from tax and customs incentives to drive innovation, job creation and accelerated development. These include tax reliefs, zero stamp duty, direct access to regulators to drive innovation, several years of zero business rates, lower tariffs and customs obligations, as well as streamlined planning processes. Two additional Green Freeports have been announced in Scotland in Cromarty and Forth (https://www.gov.scot/policies/cities-regions/green-ports).
Another area that is creating opportunities for investment is the transition to clean growth. The UK was the first G7 country to embrace a legal obligation to achieve net zero emissions by 2050 (78% by 2035) and wants to become a leading destination for innovation, testing and adoption (see https://www.gov.uk/government/news/uk-enshrines-new-target-in-law-to-slash-emissions-by-78-by-2035 and https://www.instituteforgovernment.org.uk/explainers/net-zero-target%20for%20more%20information). The UK’s ‘Carbon Budget’ approach has become the standard global mechanism for reducing greenhouse gases following the UN Paris Agreement (see https://climate.ec.europa.eu/eu-action/international-action-climate-change/climate-negotiations/paris-agreement_en).
Strategic policy initiatives are reinforced by GBP 26 billion in funding opportunities for business, designed to incentivise up to GBP 100 billion of private investment by 2030. This has been offered across a range of green initiatives, from support of electric vehicles and infrastructure to alternative energy sources such as hydrogen, offshore wind and advanced nuclear fuels.
These opportunities are likely to be bolstered by the recent changes in the visa system, for example the new Scale-Up Worker and High Potential Individual (HPI) visa routes, which demonstrate to businesses the appetite of the UK government to act in a targeted way, enabling investment opportunities to be exploited.
10 . Do specific laws or mechanisms exist in your country to protect foreign direct investors?
The UK is a strong proponent of the rule of law and, as a general rule, it does not discriminate between foreign and domestic companies. Investors into UK companies can expect to benefit from the same rights and remedies as fully domestic companies. UK courts are trusted to be fair and impartial. In addition, investors can make use of alternative forms of dispute resolution, such as arbitration and mediation.
The UK has negotiated an extensive network of Bilateral Investment Treaties (BITs) and FTAs with its trade and investment partners. Many of these agreements contain dedicated provisions for protection of overseas investors from the partner country, including a number which incorporate the possibility for investors to bring dispute settlement proceedings against the UK directly, if they believe their rights have been infringed. UNCTAD’s Investment Dispute Settlement Navigator records only one instance of a claim having been brought against the UK, further reinforcing the UK’s reputation as a safe environment for foreign investors. It is also worth noting that some of the investment protections found in these agreements overlap with certain protections recognised under international law more broadly, which are available to all foreign investors.
The UK Government generally (subject to the terms of the National Security and Investment Act 2021 and competition law) encourages foreign investment. It publishes useful guidance to assist foreign investors in understanding what requirements will be placed on them and how to comply. It also has taken steps to make foreign investment easier, for example by avoiding any requirement for a UK company to have UK resident directors – instead directors can all be domiciled internationally if that is preferred. The Department for International Trade (DIT) offers an investor support service and the Office for Investment is also designed to provide assistance to those looking to invest in the UK.