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As Chinese language investments in Eire improve, Dublin is tightening the principles

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Chinese Vice President Xi Jinping (C) kicks a Gaelic soccer ball when visiting Croke Park in Dublin on February 19, 2012 to attend an exhibition on Gaelic soccer and hurling. Xi Jinping, China's waiting leader, arrived in Ireland for a three-day visit on February 18, nine years after he first visited the country. Xi will hold talks with Prime Minister Enda Kenny and attend an Ireland-China trade forum in Dublin that will involve around 300 companies.

PETER MUHLY / AFP via Getty Images

DUBLIN – Ireland's foreign investment rules are being updated as Dublin seeks to protect the country's valuable assets and aligns with Brussels regulations.

Ireland's industrial policy relies heavily on external investment, with several technology and pharmaceutical companies headquartered in the country, which is attracted by the country's corporate tax rate of 12.5% ​​and other factors.

In September, the Irish government announced that it would enact foreign direct investment screening laws in order to enact a European Union regulation that provides a framework for the screening and evaluation of investments in the EU by third country companies.

The EU wants to ensure greater control over investments by external actors, which may be heavily subsidized by the state and have an unfair competitive advantage.

Chinese companies have invested heavily in Ireland in recent years and while China has been cited as a common cause of concern internationally, the regulations do not single out a specific country.

Leo Varadkar, Ireland's Minister for Enterprise, Trade and Employment, said foreign direct investment remains an integral part of the country's economic strategy but needs to be protected from "strategic assets falling into the hands of unfriendly foreign governments".

Each country will create its own rules in line with the EU framework. It will allow Ireland to exchange information with the European Commission, the EU executive and other Member States on suspicious or commercial transactions.

Stephen McIntyre is a partner at venture capital firm Frontline Ventures and was previously Head of EMEA on Twitter when it set up its Dublin headquarters. Frontline invests in US start-ups and advises them on European expansion.

McIntyre told CNBC that many companies will not be too affected by the screening requirements, but certain sectors like cybersecurity will be looked at more closely.

"This topic hasn't come up in any CEO interview I've had in the US. That doesn't mean it doesn't matter, but it does mean that US CEOs aren't aware of it," said McIntyre.

Companies that held up European expansion during the pandemic will have additional criteria to consider when revisiting the plans, he said.

Industry response

The Ministry of Economy, Enterprise and Innovation launched a consultation earlier this year asking for feedback on how the laws should take shape.

Ibec, Ireland's largest corporate lobby group, said in its statement that any screening must be proportionate and avoid protectionism.

"Screening of completed FDI should be avoided unless there is reason to believe that FDI was closed according to certain criteria due to incorrect information or maladministration," Ibec said.

The government itself has stated that many business expansions would not require any review.

China

The screening takes place against the background of a close examination of China, although the US remains the largest foreign investor. According to the Rhodium Group, foreign direct investment from China to Europe declined in 2019, but the opposite is true for Ireland. Figures from Baker McKenzie show that investments by Chinese companies rose 56% in 2019 through multiple M&A deals and expansions – meaning the world's second largest economy is becoming increasingly important to the country.

Marta Domínguez Jiménez and Niclas Poitiers, analysts at Brussels think tank Bruegel, which studies state aid and investment audits in Europe, told CNBC that China represents a "relatively small share".

"However, given the size of China's economy, it can be very disruptive. We therefore believe that some tools are warranted to address the fact that one of our key global partners is a non-market economy."

The US has brought charges against Chinese companies in the West, and a trade conflict between Beijing and Washington is far from over. The US blacklisted Huawei and challenged ownership of TikTok owned by ByteDance.

However, Huawei has had mixed feedback in Europe. In a report from the UK Parliament earlier this month, Huawei was accused of colluding with China, a denial of charges, while also imposing a ban after UK telephone networks were ordered to pull out their gear by 2027.

The EU, on the other hand, released a 5G "toolbox" earlier this year to help countries screen 5G equipment providers, but it hasn't singled out any companies.

bureaucracy

Jiménez and Poitiers said there will be additional red tape for businesses, but a screening framework at EU level will help avoid a patchwork of different national regulations.

"Many Member States currently have FDI screening mechanisms in place to protect their strategic industries. However, this approach targets strategic industries and is not enough when it comes to market distortions in the EU's single market," they said.

Frontline's McIntyre said unnecessary red tape could arise depending on how the rules are implemented, be it in Ireland or any other European country.

"They're all good places to find, so small differences in approach can make a difference, and anything that adds to the bureaucratic burden won't be particularly positive."

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Katherine Clark