Will Hutton Submission to the Foreign Affairs Select Committee on the security implications of foreign takeovers (BFA0024)

• What role should the FCDO play in guiding UK Government decisions on intervening in foreign takeovers of UK companies, where there may be national security risks?

First and foremost there need to be common metrics hammered out between the FCDO, MoD, BEIS and the Cabinet Office to be used as the criteria for making a judgement on the risks of a proposed foreign takeover, and which should be publicly available to ensure maximum transparency. Plainly there is the direct threat of technologies and capacities essential to national security being compromised with defence and foreign policy implications by foreign takeover, hence the case for both FCDO and MoD involvement; but equally virtually all high-tech companies sit in supply chain networks where ownership changes will have knock-on consequences for any industrial strategy.

  The evidence of “home bias” ie companies favouring their home country and home nationals for investment, recruitment and promotion is overwhelming. Thus the UK government risks in any industrial strategy forfeiting investment or seeing many of the benefits of scaling up a UK based but foreign owned company being deployed outside the UK – whatever commitments and promises are made about retaining the UK as a regional HQ or research base.  Thus both our strategic security interests and industrial strategy objectives are compromised if too large a part of our technological base is foreign owned. China in its assessment of its own – and other countries’ power – looks at the totality of the economic base, and to a degree the US does the same. Britain should do no less. For example, I argue that the recent take-overs of both Arm and Cobham weaken the UK both strategically and in terms of our wider technological base – and both takeovers should have been blocked for that reason.

Details about the proposed Investment Security Unit to be based in BEIS are unavailable but my assumption is that its mandate will include the above. However BEIS also promotes inward investment, inevitably embedding policy tension. Thus once the risk criteria are agreed there is a powerful case for the FCDO at the very least to have co-responsibility in assessing whether the risk is such that the bid should be refused. It is the best equipped to make a judgement call about the politics of the country in which the aggressor company is domiciled, its strategy, its ownership, its connectivity with the government in question, its likely policy towards technological development and the integrity of its promises. These are not BEIS’s areas of expertise. A countervailing voice will be vital.

• How does the FCDO assess whether a potentially hostile party is seeking to secure significant influence or control over a UK company?

The following issues should be taken into account:

• What is the degree of control the aggressor company is aiming to win? In general a wholesale takeover, whatever guarantees are offered about maintaining a UK research base etc , will mean loss of control and influence by UK decision makers. Google is now moving much of DeepMInd ( which it acquired in 2014) to California and with it crucial AI capacity.  SoftBank’s assurances in the 2016 takeover of Arm expire in the summer of 2021 after 5 years, an important trigger in Nvidia’s proposed purchase of the company who know that the commitment is expiring. They are making similar assurances, but as far as possible not binding. In addition SoftBank may or may not retain control of crucial AI technologies, essential to Arm and the UK’s future strategic security. Arm will be a weaker company than had it been sustained in UK ownership.

However there may be occasions where the acquisition of a minority of the equity is acceptable if this achieves an infusion of extra capital and possibilities of technological learning and transfer, while overall control remains in UK hands. This, for example, is how China approaches foreign participation in its companies in what it regards as key sectors.

• Future possibilities for growth. One of the objections to current competition policy – and the same applies to security policy – is that it is too rooted in an assessment of current market strengths rather than future possibilities. Thus a succession of small high tech companies have been taken over that had the potential to grow into major corporations and important sources of strengthening national security. The UK needs to be constantly horizon scanning and updating its technological assessments, particularly of its SME population. The Catapult network is an important source of information and advice, and should be consulted in any proposed takeover.

• The country of origin’s strategic and technological objectives. The burden of proof on takeovers by companies based in countries outside the UK’s alliance system should be higher and more rigorous. Companies based in countries more committed to open innovation strategies ie placing the maximum amount of information in the public domain to foster collaboration should be more favoured than those who are more secretive, or where the state is dominant. Generally open innovation fosters more dynamic technological development.

• The impact on bilateral relations and geopolitical interests. See my comments below

• In what circumstances should the FCDO seek to intervene in decisions on takeovers on the grounds of the impact on bilateral relations or the UK’s geopolitical interests?

If a takeover is judged to have an adverse impact on bilateral relations or the UK’s geo-political interests, then the FCDO should automatically intervene.

• What safeguards are required in the forthcoming National Security and Investment Bill to ensure that the FCDO has a full role in the decision-making process in relation to interventions?

The points above should be written into the bill.

Will Hutton LSE and the University of Oxford, Co-chair The Purposeful Company 30.11.2020

December 2020