Foreign direct investments (FDIs) were always one of the most important means which help improve not only economic development but also a state´s prestige, thanks to their support of local trade and technology transfer.

Yet, FDIs have both costs and benefits, and there are two possible ways a foreign investor could become part of the state´s economy.

Firstly, the objective of the investor can be based on purely market-oriented motives, driven by economic aims.

Secondly, however, FDIs can also be directed against the particular company because the investor could be motivated by political interests. This is especially relevant when a strategic company produces highly valuable technology or possesses unique “know-how.”

If such a company enables a foreign investor with unknown intentions access to its knowledge base, it could have a detrimental influence on the security of the affected state.

Czechia is aware of these risks, and is currently taking important steps to tackle this problem.

Hidden dangers

Railway bridge on the Trans-Siberian across the Kama River near Perm

Based on recent experiences of different states, one of the biggest strategic foreign investors with unclear intentions is China, mainly due to its Belt and Road initiative.

One of the features of this Chinese mega project are investments aimed at the strategic sectors of the state (e.g. microchips, aerospace, agriculture equipment, advanced robotics, renewable and nuclear energy).

Bearing these sectors in mind and given China´s communist-run political system where control is exclusively in the hands of the Communist Party, it is practically impossible to differentiate between the state and private companies, and therefore new investment proposals need to be assessed with greater vigilance.

Case in point, in 2016 the German technological company Kuka (which primarily designs industrial robots) was purchased by the Chinese company Midea.

Serious suspicion arose when the Chinese company gained access to valuable information through the acquisition though despite various attempts to prevent this sale, the government in Berlin did not have the ability to do so.

Consequently, Germany changed its attitude towards FDIs and started to strengthen its legal tools in order to protect strategically important companies. The government came to realise that the sale of similarly important companies could pose a threat to the security of the state.

Similarly, a regional example of possible dangerous investors in Czechia is China General Nuclear Power (CGNPC), one of the major potential candidates for the construction of nuclear blocks.

This company has infamous connections to Great Britain, specifically the nuclear power plant, Hinkley Point, which came under attack from high interest rates of this Chinese company. Fortunately, the UK´s government made modifications to the agreement, and only thereafter, could they start this project.

Strategic Options

Another notable case appeared in 2017 when the Czech company, HE3DA Technologies, invented a new kind of lithium battery. At that time, the company also started to work with a new partner from China, which complicated the situation immensely.

Hinkley Point

From the beginning, everything appeared fine on the surface; HE3DA even showed Chinese partners most of the information according to the contract, except for one really important and secretive aspect as it was unique part of that company (related to the content of the batteries).

After that the Chinese investors tried to simply steal the information, and unfortunately, they were successful. HE3DA filed a legal dispute, but in the end it was a failed attempt. This shows how making a deal with a foreign investor with unclear intentions who specialises in important technologies could be dangerous for the security of the state.

There is no doubt that cooperation between Czech and foreign investors is necessary, and it brings more advantages than disadvantages.

Yet, as the world is increasingly globalised, and both physical and abstract barriers are gradually disappearing, in order to improve the economic situation of the state, it is really important to adopt some security screening controls when it comes to FDIs.

Therefore, it is advisable to introduce a national screening mechanism which would help the state to better verify some types of FDI and also to have the possibility to prevent them if serious security issues arise.

The practical side

During any negotiations on creating the screening mechanism, it is necessary to focus on relatively wide range of sectors (e.g. media) which would necessitate such measures.

While the government screening process should not hinder or control any FDIs from entering into the media sector of any given country, the government should be made aware of who owns or is trying to purchase shares in a company, and there should be transparent discussions about whether or not it could become a security issue in the future.

Demonstrating this importance recently was the Czech station TV Barandov, whose majority share is owned by the company Empressa Media, which let the Chinese company CEFC/CITIC gain a notable shareholder influence.

Research showed that this situation contributed to a change in media coverage of topics related to China. What if similar companies started spreading their influence across the sector inhibiting the Czech population from getting critical information about Chinese activity in the country? The effect could be far-reaching and potentially a security risk.

The debate about establishing a screening mechanism is not only limited to Czechia; other member states of the European Union are equally affected.

In 2017, a new regulation was presented by the European Commission about the proposal on the framework for the screening of FDIs in the EU, and how to strengthen member state´s cooperation in monitoring such investments. It does not require a member state to set up a screening mechanism, but each member state will have to adopt measures in order to implement this regulation.

As states come under pressure from this phenomenon and desire to secure its valuable technology and know-how, such reforms will be of the utmost importance and necessity for the future. Moreover, it would be convenient for the state and security agencies to collaborate more with companies which specialise in strategic technologies.

This article is part of the #DemocraCE project organised by Visegrad/Insight. It was originally published in Czech on Forum24 and can be found here. For references and more material on the subject, click here.

a Project Assistant at the Prague Security Studies Institute (PSSI)


Report

The EU is at a critical juncture. For the first time since the launching of European integration, doubts about the future of the EU have been raised by mainstream politicians and large swathes of the European public. Read about four political directions that Europe may follow after the EP elections in 2019.

Visegrad Insight is published by the Res Publica Foundation. This special edition has been prepared in cooperation with the Konrad Adenauer Foundation and with the kind support of ABTSHIELD.

Download the EP2019 report in PDF