Last week, the European Commission laid out its position on sovereign wealth funds, saying that EU nations should avoid ‘uncoordinated responses’ that could scare off investors. In spite of this, Germany said on Wednesday it would push ahead with its own legislation aimed at shielding companies from unwanted foreign takeovers. The government’s draft bill could prevent foreign investors from buying 25% or more in a German company, or in a foreign company that has German interests that are viewed as crucial for national security.
Keeping a watchful eye on foreign investments to ensure that they don’t have negative consequences for national security is certainly important. However, at the same time, German policymakers need to realize that foreign direct investment (FDI) is highly beneficial and restricting it will have severe economic consequences, especially in the current climate of reduced domestic credit availability.
What is more, if Germany starts restricting FDI flows, there is a real danger that other countries will do the same. As Braden Cox and I have pointed out in a report on the politicization of foreign direct investment in the United States, America’s recent tendency to inject politics into investment reviews has resulted in a number of cases in which other countries have decided to retaliate and close their markets to American investments.
The safety of Germany and its citizens must not take a back seat to profit. If a proposed foreign investment poses a threat to national security, German lawmakers need to ensure that the investment cannot go through.
At the same time, lawmakers need to be aware that even during periods of financial stability, FDI brings with it a vast array of benefits for both individual companies and the economy as a whole. Innovative technology SMEs – an important engine of economic growth – are especially dependent on a constant flow of capital which can be invested into the research and development that often leads to breakthrough new products.
In staking out its position on foreign direct investment, Germany needs to tread very carefully and make sure it finds the right balance between safety and growth.