Cherry picked winners: Why the concept of national champions is flawed
Catherine McBride // 22 May 2019
There is a current trend for corporate protectionism growing in the heart of the EU. Both the French and the German government as well as the EU as a whole, have introduced laws to prevent companies, that are deemed strategically important, from being taken over by foreign companies, particularly state-owned foreign companies, more particularly Chinese state owned companies.
France has declared 11 sensitive sectors of national interest where the authorisation of the government is required to approve a takeover. These sectors include artificial intelligence, microchips, space technology, data storage, energy, telecoms, transport, water and the health industries. France’s once free market supporting President has also proposed using state owned “golden shares” to prevent foreign takeovers and substantial fines to investors who buy stakes in companies considered strategically important. Germany has recently lowered the threshold at which the government can intervene to block a foreign takeover involving critical technology from 25% to 10%. Meanwhile the European Union leaders agreed to consider screening investments by state-owned Chinese firms as well as blocking Chinese investments. A draft EU law that proposes to limit the ability of non-EU firms to acquire companies and technology is being discussed.
Ironically, in 1990 the UK introduced the Lilley doctrine to prevent the ‘nationalisation by the back door’ of UK listed companies by state owned foreign companies but at the time the predators were European state owned companies, predominately from France and Germany.
The UK government has joined the party by amending the Enterprise Act 2002 to lower the turnover threshold for intervention in Military and Advanced Technology sectors from £70 million to only £1 million. They have also published a white paper on proposed reforms that would allow the government to intervene more widely and frequently if it felt that the national security was considered to be at risk.
The British government wants to overhaul its capacity to scrutinise and intervene in investments that raise national security concerns. Circumventing the competition and markets authority, the government would be directly responsible for national security assessments and have a broader set of trigger events such as a bidder gaining significant influence over a company or a sensitive asset of the company. The government expects that there could be up to 100 notifications each year that will require full national security assessments. At the moment, there are fewer than one public interest intervention by the UK’s Competition and Markets Authority each year.
But how would such a proposal address situations where companies have agreed to be bought by a foreign company? Or when a strategically important company is taken over by another company from the same nation? Or how would a government prevent a foreign company, who was given approval to take over a strategically important company then selling that company to another foreign company?
More importantly how do we determine the nationality of a company if it has global operations or multiple listings? But even if a company can be undoubtedly declared to be British or French or German, surely its assets and intellectual property belong to the company’s shareholders. What right does any government have to intervene to prevent a sale if the shareholders are happy to proceed? Companies don’t declare a pledge of allegiance to a country and unless they have large and exclusive government defence contracts, it is hard to justify how a government could claim their technology as its own. Surely the potential for government intervention in a company’s sale will deter entrepreneurs from establishing in that jurisdiction if they know that their “exit strategy” could be blocked.
The French, German, British and EU government proposals could lead to some complex choices between local employment, foreign ownership and market competition. Consider the recent purchase of the UK technology firm, Imagination Technology, by a Chinese government backed private equity fund, Canyon Bridge: If the UK’s proposed regulations had been in place, the UK government would have been left with a choice between;
The UK Government chose the second option and as yet has not decided to protect so called “national corporate champions”. To do so would require the government to pick winners by deciding which brands or businesses should be protected, rather than letting market forces decide. It’s not just that governments ought not ‘pick winners’ but in doing so governments are also picking losers. When government’s legislate in favour of one company or sector, it necessarily requires that other companies are disadvantaged – either the protected company’s competitors, or the entrepreneur whose ideas can’t be realized because government has preserved the obsolete or the taxpayers and consumers who end up covering the cost of the protection. Government interference in corporate mergers and acquisitions should only occur when a real strategic, financial or political risk is involved.
EPICENTER publications and contributions from our member think tanks are designed to promote the discussion of economic issues and the role of markets in solving economic and social problems. As with all EPICENTER publications, the views expressed here are those of the author and not EPICENTER or its member think tanks (which have no corporate view).