The Investing In... 2023 guide provides the latest information on foreign direct investment, market trends, mergers and acquisitions, corporate governance and disclosure/reporting, capital markets, antitrust/competition, tax, employment and labour, and IP and data protection.
Last Updated: January 19, 2023
The benefits of globalisation have been touted for decades now. For the developed world, globalisation can bring access to new markets, solutions for optimising supply chains, connection with a global talent pool and diversification of revenues. For the developing world, globalisation can provide critical capital investment, importation of cutting-edge technology and expertise, and boosts to local employment and the economy at large.
The past decade has also shone a light on some of the costs of globalisation. Businesses with a web of suppliers across the globe have become exposed to the fickle effects of shifting tax regimes, unpredictable supply chains, trade and actual wars, and global health crises.
Countries that have benefited from offshoring large portions of their manufacturing base have been faced with divisive social consequences at home, arising from disempowered and unemployed segments of the population. Governments that have provided open access to foreign investment in critical industries have found key assets in the hands of geopolitical rivals or businesses with unknown or opaque ties to foreign governments or state-owned enterprises.
Developing nations have learned the hard way that the tap of foreign investment can be shut off as quickly as it is turned on – with dire consequences for currencies, capital accounts and economies.
Nonetheless, while businesses may ensure more local supply redundancies and governments may erect barriers to entry for geopolitical foes, capital is likely to continue to follow its inexorable path to profitable investment. Navigating this complex and precarious environment for FDI will only increase the demand for sound legal, financial, tax and operational advice for businesses that choose to look abroad for expansion, ideas and talent.
As one of the most direct proxies for globalisation, foreign direct investment (FDI) has followed a similar rocky path. In 2021, the global economy rebounded substantially from the COVID-19 pandemic-influenced year in 2020, with a corresponding increase in FDI. In 2021, global FDI flows increased to USD1,815 billion – up 88% from 2020 and 37% above pre-pandemic levels, according to the OECD – with the growth largely being driven by inbound investment to and outbound investment from developed countries. This rebound was significantly stronger in cross-border M&A than in greenfield investments.
This growth in global FDI flows continued into the first half of 2022, reaching USD972 billion and an increase of 20% from the first half of 2021. However, as the full impact of Russia’s invasion of Ukraine, as well as rapidly rising inflation and corresponding increases in interest rates, was felt across the world, global FDI flows dropped by 22% in the second quarter of 2022. It appears likely that this trend has continued for the rest of 2022, with additional headwinds such as the continued impact of COVID-19 in many parts of China that will provide a drag on the global economy.
Across 2021 and the first half of 2022, the United States has been both the largest source of outbound FDI flows and the largest destination for inbound FDI flows. While the United States is experiencing the same challenging stock market volatility, interest rate rises and high inflation as countries around the world, it broadly recovered from the pandemic-affected 2020 more rapidly than other countries.
Introduction to the Guide
As a brief introduction to the content of this Chambers Global Practice Guide, Investing In... 2023, the purpose of each country-specific chapter is to provide the reader with an understanding of the key legal issues that arise from investing in the subject country and to serve as a reference point for the key factors and considerations that should be evaluated prior to making a foreign investment in that country.
The Guide generally adopts the OECD definition of FDI for the types of investments that are addressed, which is an investment that reflects the objective of establishing a lasting interest (ie, long-term relationship with significant degree of influence on management) by an enterprise residing in one jurisdiction with an enterprise that resides in another jurisdiction. This includes transactions such as mergers and acquisitions, formation of partnerships and joint ventures, and significant minority investments.
Since other resources effectively cover the key considerations for owning or operating a business in various countries (see the Chambers Global Practice Guide, Doing Business In... 2022), this guide focuses on those types of investment transactions and not the establishment and operation of new “greenfield” businesses in the subject country.
Over the past year, flows of FDI have been buffeted by three key developments: (i) Russia’s invasion of Ukraine and the ensuing fuel, food and finance crisis, (ii) lingering effects of the COVID-19 pandemic, and (iii) continued expansion of national security review regimes and other national interest-driven policies.
Impact of war in Ukraine
As Russia’s war in Ukraine commenced on 24 February 2022, the world’s attention immediately turned to the humanitarian, security and geopolitical crises affecting the people of Ukraine and the region. As the war dragged on, the world quickly began to feel the dramatic impacts on the global economy. Global supply chains that had only recently been stitched back together as the world came to an uneasy co-existence with the COVID-19 pandemic were thrust back under pressure from the war.
The market most dramatically affected was global energy flows and the resulting impact on oil, gas and electricity prices around the world. European countries and economies accustomed over many years to operating on the basis of inexpensive oil and gas supplied by Russia were faced with inadequate supply and skyrocketing prices for fossil fuels. But developing nations were also severely impacted by the spike in energy prices, with the full-blown economic, political and humanitarian crisis in Sri Lanka being one of the most stark examples. In response, the global economy is rapidly being retooled to facilitate matching supply with demand, as Europe turns to imported liquefied natural gas or other sources of energy. An open question remains about the longer-term competitiveness of European industry as it seeks to resolve its immediate needs. In turn, the 2022 energy crisis will only serve to accelerate the push to greener forms of energy, adding a much-needed boost to the existing climate change imperative.
Equally impactful in the immediate aftermath of the invasion was the food and grain shortage facing hundreds of millions of people across the Middle East, Africa, Eastern Europe and elsewhere. Both Russia and Ukraine were major exporters of grains and fertilisers. As the world addresses these challenges, FDI flows will be needed to help bolster existing domestic investment in these areas. Opportunities will arise for foreign investors to meet capital needs and share technological developments across countries to build a more robust and resilient energy market, food sources and greener sources of electricity.
Finally, one of the most acute impacts of the war in Ukraine on FDI flows has been the significant and rapid decoupling of many Western nations’ economies from Russia. FDI inflows to and outflows from Russia in the first half of 2022 were both negative, as policymakers levied sanctions against Russian businesses, and individuals and companies experienced significant pressure to walk away from their investments and businesses there. Until there is a resolution of the ongoing war, it is difficult to see FDI flows between Western economies and Russia returning to any material amount, although some of that gap may be made up by other economies around the world.
Impact of COVID-19
The development with the largest impact on FDI in 2020 and 2021 was the spread of COVID-19 to every corner of the world, turning everyday life on its head and forcing significant retrenchment for many businesses.
In 2020, with businesses turning their focus to shoring up liquidity and adapting work practices to protect employees while maintaining productivity, there was minimal bandwidth or capital for investment abroad. Even factors as mundane as the inability to conduct in-person due diligence or negotiations hindered companies’ ability to source and evaluate FDI opportunities.
In 2021, economies across the world began to learn to co-exist with the effects of COVID-19 through the increased availability of vaccines and the improved ability of businesses to continue to operate while providing for the safety of their employees. Global FDI flows rebounded strongly in tandem with stock markets and economies, driven in part by pent-up demand for FDI and in part by new opportunities that the dislocation of 2020 had caused.
In 2022, the COVID-19 pandemic continued to linger and have profound effects on economies and FDI in many parts of the world. Perhaps the most significant impacts upon the global economy are the continued challenges faced by China in managing the pandemic. Parts of China experienced rolling lockdowns throughout 2022 as part of China’s “zero COVID” policy, and the closing months of 2022 saw China begin the process of loosening its restrictions – with a corresponding spike in cases.
The lasting effects of the pandemic on FDI remain to be seen, and businesses as well as governments will view their international exposure and related risks in a new light. However, they will perhaps also find new opportunities in a post-pandemic world to make supply chains more resilient, workforces and physical locations more flexible, and products and services more competitive on the global scale. Increased focus on sustainable development, climate change and ESG goals will likely push FDI in new directions as the priorities of investors, governments and the population at large rapidly evolve in these areas.
National security restrictions
Against the backdrop of these crises, governments around the world have been re-evaluating their regimes for reviewing and approving inbound FDI, which have become more proactive, broadly applicable and widespread in recent years.
In the United States, the passage of the Foreign Investment Risk Review Modernization Act in 2018 and its implementation expanded the scope of transactions subject to review, required certain mandatory filings for the first time and shifted the focus to transactions involving critical technologies, critical infrastructure and sensitive personal data.
In the United Kingdom, the National Security and Investment Act became law on 29 April 2021, and came into effect at the start of 2022. The Act implements a new regime for reviewing FDI in the post-Brexit world. Across Europe, new or revamped FDI review procedures have been recently implemented in Germany, Italy, Spain and France, and the EU’s framework for screening FDI came into effect on 11 October 2020.
Much of this focus has been driven by fear of investment from China. Accordingly, the impact on inbound Chinese investment around the world has been sudden and severe, with Chinese investment in the United States dropping to levels not seen since the 2008–09 financial crisis. Importantly, the net cast by these more expansive and proactive FDI review regimes reaches beyond just China, and governments view them as a tool not only to protect national security but to further national interests and the well-being of their citizens. Other national interest-driven legislation – such as the US CHIPS and Security Act adopted in August 2022 and the US Department of Commerce’s tightening of export controls in October 2022 to restrict the ability of China to access advanced computing chips, supercomputers and semiconductor software – has also had a chilling effect on investment.
Going forward, businesses around the world will need to proactively evaluate the applicability of these regimes and legislation upfront and effectively navigate their review in order to successfully achieve their FDI objectives.