Executive Summary
The future of Britain will depend on a new age of invention and innovation.1 Technological superpowers such as the United States and China are investing heavily in their futures, raising the possibility that everyone else will be trapped behind these two forces – a risk the European Union is belatedly recognising and acting upon.
The UK must find its niche in this new world. With science and technology as our new national purpose, we can innovate rather than stagnate in the face of increasing technological change. The United Kingdom has world-class technological strengths to draw upon, from artificial intelligence (AI) and life sciences to clean energy and cyber-security.
Yet over the past six years, a range of UK assets – from sterling to equities – have begun to look cheap relative to global markets. The UK’s discount reflects in part the structural composition of UK stock markets,2 a risk premium due to political uncertainty3 and the “Brexit discount”4 associated with a structural loss in competitiveness as a result of leaving the European Union.
Persistently low valuations have left UK companies vulnerable to foreign takeovers, with acquisitions up almost 400 per cent between 2015 and 2022. While inward investment has economic benefits, this boom has raised questions about whether UK companies are being bought on the cheap,5 and whether this trend is in the country’s best economic and national-security interests.6
Successive UK governments have welcomed foreign ownership of domestic companies. Investment from overseas normally brings many benefits to the economy, including new technological and managerial know-how, new competitive pressures, and potentially higher pay and productivity. Yet foreign direct investment (FDI) flows into the UK have fallen since 2016, with both reinvested earnings and intra-company borrowing from foreign parent companies falling relative to pre-referendum averages.
However, the recent wave of foreign takeovers has included approaches for companies in politically sensitive sectors, from semiconductor firms Arm7 and Newport Wafer Fab (NWF)8 to cyber-security firm Darktrace9 and defence companies Cobham, Ultra and Meggitt.10
The UK government has struggled to effectively scrutinise many of these takeovers. The aggregate effect of these approaches has been to reinforce an erosion of the UK’s industrial and national-security capabilities.
For example, when the private-equity firm Advent International bought the British defence company Cobham in 2018, the UK government imposed relatively weak conditions on Advent, requiring it to inform the Ministry of Defence (MoD) of any intent to dispose of sensitive assets but giving the government limited power to mitigate any potential national-security risks. Consequently, Advent was able to sell off half of Cobham within 18 months, leaving the company without any UK manufacturing sites and the government with almost no voice in the matter.11
In addition, the UK government has lost a degree of credibility and fostered uncertainty with its stop-start approach to reviewing the acquisition of NWF by a Chinese-owned tech company. Although the acquisition was initially cleared by then Business Secretary Kwasi Kwarteng in the spring of 2021 and the takeover was completed in July 2021, it was subsequently referred by former Prime Minister Boris Johnson to the National Security Adviser (NSA) for further review. Despite being cleared by the NSA, Kwarteng used new national-security and investment rules introduced at the beginning of 2022 to “call in” the takeover for review in May 2022. As a result of this review, Business Secretary Grant Shapps decided to block the takeover on national-security grounds 16 months after the acquisition was completed.
New national-security and investment rules12 introduced in January 2022 were designed to strengthen the UK’s regime for scrutinising the national-security implications of foreign takeovers. These new rules require mandatory notifications of qualifying acquisitions and investments in 17 sensitive sectors (including AI, defence and energy) and give the business secretary the power to call in any other acquisitions. The newly created Investment Security Unit (ISU) would assess these takeovers, either clearing them or requiring a full national-security review. The business secretary would then have the power to impose remedies to address any national-security concerns, to block deals, or to require acquisitions that have taken place to be divested or unwound.
Having new powers is one thing, but the legislation provides little clarity over when and how the government might deploy them or, most importantly, the framework through which it will assess national-security concerns. Such opacity raises the risk that political rather than strategic considerations will dominate decisions and leave uncertainty when making critical national-security determinations.
Traditional interpretations of national security as limited to the protection of the nation’s physical borders are no longer sufficient in a world characterised by high levels of interconnectedness, public-private partnerships in key sectors such as pharmaceuticals and energy, and a growing reliance on technologies and digital infrastructure that underpin the functioning of society.
The UK needs to remain open to inward investment if we want to modernise our economy, generate growth and protect our national-security and defence capabilities. As such, the government needs to further reform national-security investment rules to depoliticise sensitive decisions in favour of a regime with more predictability, transparency and accountability.