Federal Capacity in Chinese Foreign Direct Investment

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for regulation of Foreign Direct Investment is thus not only ineffective, but also deemed unlawful.

The discussion on regulation of Foreign Direct Investment could simply end here with a simple conclusion: Regulation is only permitted on EU level, which strives to abolish regulation of FDI flows into Europe altogether.

However, the case is not that simple. Regardless of the EU’s exclusive

competence laid out in Art.207 TFEU, a constriction of foreign capital flows can still be undertaken by the individual member states due to a loophole provision:

Article 65 TFEU allows member states to constrict FDI in areas that infringe upon public safety and order. (Beuttenmüller 2011, 289) The definition of the term thus marks the spectrum of regulatory capacity for the individual states.

Regulation by all means still remains a member state capacity.

7.2.2 Federal Capacity in Chinese Foreign Direct Investment

As can be seen from the above discussion, the negative confinement available to the federal government of Germany is clearly limited. While the European Union sets a general tone for a liberalized and free flow of FDI to the Union, it nevertheless leaves considerable leeway to national governments in restricting certain kinds of FDI.

The most important sphere for developing and executing legislation for the federation of the 16 German states is the federal (colloquially termed national) government. The federal government consists of a bicameral system of government, steered by the chancellor with her cabinet and the federal ministries. The state is formally headed by a Federal President (Bundespräsident), who mainly fulfills ceremonial and

representative functions.

The Federal Diet (Bundestag) is the only directly elected parliamentary body at federal level. It is elected every four years and in turn elects the Chancellor. Its main task is to draft and pass legislation and approve the national budget. Usually the Federal Diet is not headed by a single party majority, but by coalition government, as

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The Federal State Council (Bundesrat) is an indirectly elected parliamentary body, comparable to the second chamber in the UK. Its members are the heads of the state diets (state governors and ministers), which represent the federal states interests at national level. The Federal State Council fulfills a main function in creating and approving legislation.

Figure 16: The federal governance of Germany

Source: based on Gerlach 2010.

Most important for the executive functions are both the Chancellor (Bundeskanzler) and her Cabinet and the national level Ministries. The Chancellor is the head of government and thus of the executive. She heads the chief executive body, the cabinet with all ministers. The ministers and ministries play a key role, as they draft a large share of all laws passed in the federal council and federal diet. The ministers carry out their duties independently, but are bound by the Chancellor’s political directives.

Indeed, ministries play the key role when it comes to design and execution of federal policies. The Federal Ministry of Economics and Technology (BMWI) is the central stakeholder when it comes to Foreign Direct Investment Regulation. It is currently

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headed by Vietnamese-born Dr. Philipp Roesler who is also Vice-Chancellor of Germany. The Ministry is the main body to formulate and execute the Foreign Trade Laws, which also govern flows of FDI from- and to Germany.

Germany has long regulated FDI flows through its Foreign Trade Law.²⁴ The law became obsolete for within the European Union through the treaty of Maastricht in 1992, but remained valid for movement of capital- and goods between Germany and a non-EU country.

In April 2009, only shortly after the exclusive competence for regulation of FDI was moved to European level, the German Foreign Trade Law was amended to fit the new circumstances. While the EU has granted itself exclusive competence, Germany had by no means lost its power to restrict FDI to the EU institutions- Germany has instead made use of the (temporary) loophole provision in EU Law to increase its leeway.

(Menke 2010) While formerly only able to restrict investments in military industries, the Ministry now holds the power to restrict regardless of industrial sector. As long as a stake of at least 25 per cent is acquired by an investor from outside the EU, the ministry holds the power to restrict or forbid the investment. (Beuttenmüller 2011, 282) The rewritten version of the Foreign Trade Law of 2009 justifies these

restrictions of Foreign Direct Investment flows to Germany, based on concerns for public order and safety in the Federal Republic of Germany. (Art.7 Sec. 1 No. 4 AWG) According to Art.7 Sec. 2 No.6 AWG such concerns may exist in all

acquisitions of more than 25 per cent, which include foreign investors. The investor is deemed foreign if either directly or indirectly controlled from outside the EU.²⁵

The new formulation of the German Foreign Trade Law is in itself rather problematic.

The law states that the acquisition must lead to a genuine threat to public order and security in order to justify restrictions. This formulation is criticized extensively, as it does not establish clear criteria for the ministry on which to evaluate restriction of an investment, thus providing very little legal security to investors. (Lecheler/

Germelmann 2010, 176) The new Foreign Trade Law thus extensively relies on

24 Refer to: AWG-Außenwirtschaftsgesetz, http://www.gesetze-im-internet.de/awg/index.html

25 Directly: Investor from outside the EU; Indirectly: 25 per cent or more of the investing company are held by a foreigner from outside of EU.

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discretionary decision-making on the side of the ministry. In order to ease the legal insecurity of possible prohibition, investors can apply for clearance at the ministry before they make their investment. There is however no obligation to inform the ministry of an investment and after three months the investment cannot be denied.

(BMWI 2009a) This new German regulation is valid only so long as the EU does not pass further legislation overruling it. (Lecheler/ Germelmann 2010, 168)

Several sectors have already been outlined as generally closed for investments,

including telecommunications, electricity or other services of strategic relevance (such as transportation and air travel). (BMWI 2009b) Another sector with definite legal investment prohibition with regard to security and public order lies in production of military goods and particularly dual use goods. Acquisitions of German companies in this sector are strictly prohibited, based on a European weapons embargo on China since 1989.

The second case study in chapter 6.4.2 is a good example for such an investment.

Shenyang Machine Tool Group (SYMG) is a major producer of machinery, but also produces military tools and technology. If SYMG would have attempted to purchase a company in the military sector or had used its investment in the German target to enhance its production in the military goods production, the investment would likely have been prohibited by the Federal Ministry of Economics and Technology. If SYMG had already acquired the German target, the ministry could cancel voting rights and appoint a Public Trustee to reverse the transaction. For Chinese investors with an investment into dual goods, the situation is almost the same, as the weapons embargo for China still applies. A genuine threat of public order and security can be justified through the embargo, leading to a general ban of investments. However, to date no such ban has been reported and the EU is already softening its stance on the issue, with several member states selling non-lethal parts of military machinery and weapons to China.²⁶

While it may seem the ministry has been issued a blank check, it has been modest in the application of its new powers, as to date no investment has been prohibited.

26 Refer to: Deutsche Welle (n. d.). Waffenembargo gegen China ist löchrig. DW n.d.

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(Menke 2010) The Federal Ministry of Economics and Technology is the sole body responsible for assessing investments with regards to possible infringements of security and order. Thus its power is comprehensive. Yet, as mentioned above, it only uses these powers in a very limited way. To date no bans on investments have been issued and no applications been rejected. Only a fraction of the investments are actually reported to the ministry, with a large share simply taking place without approval. This is not only due to the soft stance of ministry in the issue, but also due to basic questions of capacity. The ministry may simply not possess the necessary numbers of personnel to look into each and every transaction.

On the other hand, Germany also tries to win investors through investment promotion.

On national level, the ministry of Economics has established a national investment promotion agency: GTAI- Germany Trade and Invest. The organization has come to exist from a merger of different investment promotion agencies at national level since 2003 and informs about investment opportunities in Germany. Its services are also provided in Chinese, which suggests the importance of this target group. The GTAI provides comprehensive services to investors and advises on all matters of investment.

It does however “(…) not provide target lists of companies that are looking for strategic business partners or financial investors.“²⁷ The GTAI thus fulfills mostly an informative function with little aim to regulate or influence investment flows. While the GTAI devotes particular attention to providing information on investment locations in East Germany, this does not constitute much of a pronounced influence on investment flows, as such information is equally available for all federal states alike.