One year on, UK investment law shows how West is strengthening economic security

The National Security and Investment Act gives the UK government powers to review, block and even undo investments on national security grounds
It is clear that ministers are likely to increasingly use these new powers given the growing range of geopolitical, economic and technological challenges facing the country

Andrew Hammond

Published: 12:30am, 4 Jan 2023

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The whirlwind of UK politics in 2022 included three prime ministers and four finance ministers, not to mention major foreign policy challenges like the Ukraine war.

However, below the radar, one of the key developments in the machinery of the UK government was the National Security and Investment Act (NSI), introduced a year ago on January 4. While the new UK measures are not targeted on any single country, a number of the earliest decisions have impacted Chinese firms such as Beijing Infinite Vision Technology and Shanghai-listed Wingtech.

The UK legislation is by no means an isolated development internationally. Across much of Europe, and indeed the Western world, policymakers are debating how to update their economic regimes in light of new national security challenges, including technological and geopolitical changes which mean that reforms to public powers to scrutinise investments may well be needed much more regularly in the future. The central policy challenge is how best to maintain a broadly open approach to the international economy, while ensuring appropriate security safeguards.

The United States has long been a pioneer in this agenda through the Committee on Foreign Investment in the United States. CFIUS is an inter-agency committee of the US government that was first established by US president Gerald Ford in 1975 to monitor foreign investment. In the 1980s, Congress passed an amendment which empowered CFIUS to reject investment deals.

CFIUS does not acknowledge which deals are under review, and does not publicly announce its findings. It is chaired by the US Treasury secretary, and includes representatives from 16 US departments and agencies, including defence, state, commerce and homeland security.

All US companies proposing to be involved in acquisitions with a foreign firm are supposed to voluntarily notify CFIUS, but the committee can review transactions that are not voluntarily submitted. The body’s primary concern in most reviews is that technology or funds from an acquired US business might be transferred to a sanctioned country as a result of being acquired by a foreign firm.

The UK’s investment legislation, whose key stakeholders in the government include the business and international trade departments, plus the Home Office and the Treasury, has drawn some parallels with CFIUS. It represents the biggest shake-up of the UK’s investment screening arrangements in decades by modernising the government’s powers to investigate and intervene in potentially hostile foreign direct investment.

The new powers reflect the fact that the United Kingdom faces continued, broad-ranging hostile activity from actors seeking to compromise national security which, unless checked, will increase vulnerability to disruption, unfair leverage and espionage. The UK’s screening powers have also been extended to include assets like intellectual property, as well as companies.

The 17 defined sensitive sectors are advanced materials, advanced robotics, artificial intelligence, civil nuclear, communications, computing hardware, critical suppliers to government, cryptographic authentication, data infrastructure, defence, energy, military and dual-use, quantum technologies, satellite and space technologies, suppliers to the emergency services, synthetic biology, and transport.

Under the new legislation, the government can impose targeted, proportionate conditions on an acquisition, or, if necessary, unwind or block it, although the vast majority of deals will still be able to proceed without delay. The act also grants the government a five-year retrospective power to call in acquisitions in the wider economy which may raise national security concerns.

However, these do not apply to acquisitions which took place before the legislation’s introduction to Parliament on November 11, 2020, so businesses and investors have certainty about historical deals. This reflects the ambition to provide such stakeholders with the clarity and transparency they need to do business in the UK.

One early decision under this legislation came a few weeks ago concerning the proposed sale of Newport Wafer Fab, the UK’s biggest semiconductor firm, to a Dutch-based technology firm, Nexperia, which is a subsidiary of Wingtech. This was blocked by UK ministers on national security grounds with Nexperia required to divest 86 per cent of the company, leaving it with the 14 per cent stake it held before launching a takeover in 2021.

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And in July, the UK government blocked the licensing of locally-developed technology to Beijing Infinite Vision Technology, preventing a deal that would have provided the firm with robot vision tech. The intellectual property, known as SCAMP-5 and SCAMP-7, was developed by the University of Manchester.

Another recent example is the ministerial decision to order an investment firm, Letterone Holdings, to sell regional broadband provider Upp. The investment firm, whose investors have included a number of sanctioned Russian businessmen, has been told it must sell 100 per cent of Upp, which provides services across the East of England and East Midlands. The order also compels Upp to complete a full security audit of its network ahead of the sale.

One year into the new national security regime, while there is still some uncertainty about how it will work in practice, one thing is much clearer: ministers are likely to increasingly use these new powers given the growing range of geopolitical, economic and technological challenges facing the United Kingdom and the wider Western world.

Andrew Hammond is an Associate at LSE IDEAS at the London School of Economics