Why is pro-business Switzerland considering screening investments by foreigners?

Escalating global rivalry is forcing Swiss lawmakers to choose between openness to business and safeguarding key industries from potential adversaries. EPA/WU HONG

Swiss policymakers are preparing to introduce their first foreign-investment screening system for security-critical industries, signalling a break from the open-door stance that has long underpinned the country’s prosperity.

In May 2014, barely anyone noticed the takeoverExternal link of a Swiss developer of experimental aviation engines by a rice cooker maker in China. The buyout of Mistral Engines by Guangdong Elecpro was just one of several by the Chinese firm under a planExternal link to “obtain advanced foreign technology” and move into producing drones and helicopters.

A much bigger deal came three years later, when state-owned ChemChina paid $43 billion (CHF34.5 billion) , the country’s biggest overseas acquisition, for Switzerland’s agrochemical giant Syngenta. This time there was concern, particularly in some US farming states, that handing China a big chunk of the world market for seeds threatened food security.

Yet the plan went ahead with approval from regulators in both the United States and the European Union.

Less than a decade on and such transactions face scrutiny around the globe. Economic conflict between China, the US and Europe, including moves by Washington and Beijing to choke off supplies of computer chips and rare-earth minerals, is spurring nations to secure their critical industries and resources. Russia’s war on Ukraine, with both sides relyingExternal link on combat drones, shows the risk of sharing technology with potential rivals.

Mounting suspicion between economic superpowers has left Swiss lawmakers torn between sticking with policies that for decades helped propel business growth – and preventing potentially belligerent states getting hold of strategically important industries and technologies in an increasingly zero-sum world.

In 2016, a year after ChinaChem’s purchase of Syngenta, Beat Rieder, a member of the Swiss Senate, submitted a motion calling for a legal system to review and control foreign direct investment in Swiss companies.

After years of political wrangling and debate, the Swiss parliament has finally endorsed a draft law to introduce the first formal screening mechanism for foreign investments, particularly in sectors deemed critical to the nation. If the law passes as proposed next year, Switzerland will be following a well-trodden path.

What’s in the draft law?

Under Switzerland’s proposed Investment Screening Act, foreign acquisitions in certain critical sectors, including electricity grids, power generation, healthcare infrastructure, telecommunications, railways, airports, and major logistics hubs, require government approval, as they are considered essential to national security and public order.

When assessing takeovers, the Swiss State Secretariat for Economic Affairs (SECO) and other relevant authorities will consider whether the investor is state-controlled or acting on behalf of a foreign government, as well as the potential impact on critical infrastructure, defence-related sectors and other areas sensitive to security.

Other considerations include the presence of strategic, non-commercial motives and the implications for decision-making autonomy, employment and technological capabilities. If necessary, the SECO will consult the Swiss Federal Intelligence Service to determine whether the acquisition can be approved.

The approval process will take one to three months.

Why was the draft law controversial?

The key point of contention among Swiss parliamentarians in the session that concluded in early October had been whether to limit reviews to government-controlled investors or also include private businesses. Some groups, including the Federal Council – the country’s highest executive authority – said including non-state investors would increase the annual number of such audits almost tenfold.

“If the scope were extended to the private sector, many additional audits would be necessary,” saidExternal link Swiss Economics Minister Guy Parmelin. “This would harm Switzerland as a business location. Conversely, a restricted scope of screening would enable Switzerland to maintain its competitive advantage over other states.”

Some parliamentarians worried that even businesses not directly controlled by the government in nations such as China, Russia and the US would still come under the influence of the state. An analysis by the Dutch consultancy Datenna indicates that Chinese authorities had stakes in 53% of the Swiss companies bought by China between 2010 and 2020.

“It is common knowledge that Chinese multi-billionaires and Russian oligarchs must pledge allegiance to the state’s political agenda,” saidExternal link Carlo Sommaruga, a Swiss senator. “In the US there are economic barons who are now subject to the ‘America First’ political vision imposed by the Trump administration.” 

Another example of the risks has been German reliance on cheap Russian natural gas.External link By allowing companies such as Gazprom to buy infrastructure like gas storage facilities, Germany was left exposed when Russia cut supplies at the onset of the Ukraine war.

Despite such concerns, the Swiss parliament on December 2 agreed to a version of the proposed law that would limit its application to state-owned investors. Parmelin emphasisedExternal link that the scope of screening  could be expanded in the future.

The bill will now proceed to a vote in parliament in three weeks.

“We do not want to use this law to prohibit free trade,” said Rieder, whose motion back in 2018 put the nation on the road to changing the rules. “We want to enable free trade.”

“This law is more necessary than ever in the current geopolitical climate,” he told the Tages-AnzeigerExternal link newspaper, emphasising the deterrent effect of investment controls. “If a state can prevent such acquisitions when necessary, foreign powers with malicious intent won’t even attempt to make the purchases.”

What’s happening elsewhere?

While the Swiss are still working on passing their first such laws, others are already going further by tighten up existing rules. Around 80% of EU and Organisation for Economic Co-operation and Development (OECD) states already have legislation governing foreign investment.

In 2017, the Trump administration blocked China-backed Canyon Bridge from buying US chipmaker Lattice Semiconductor, justifying the move on national securityExternal link grounds.

At an EU summit the same year, France, Germany and Italy called for a European mechanism to scrutinise foreign investments in sectors including energy, banking and technology. The proposals aimed to “protect assets in the EU against takeovers that could be detrimental to the essential interests of the EU or its member states”.

Later, Germany’s cabinet approved rulesExternal link allowing the government to block non-EU investors buying stakes in domestic firms operating in critical infrastructure sectors.

In 2024, the Committee on Foreign Investment in the United States strengthenedExternal link its jurisdiction and enforcement, with fines for violations increased twenty-fold.

The US administration also outlined the following February a new approach to foreign controls in its American First Investment PolicyExternal link memorandum. It proposed fast-track reviews and reduced restrictions for investments sought by chosen US allies, while tightening curbs on those considered adversaries including China, Russia and Iran.

Meanwhile, the EU in 2024 presented a proposal to revise its Foreign Direct Investment Screening RegulationExternal link, in place since 2020. It would require all EU states to set up their own domestic systems and include investments made by EU-based entities controlled by foreign investors. The revised rules are expected to be adopted next year.

Are only rich nations increasing restrictions on investment?

While screening has proliferated in advanced economies, poorer nations are much more dependent on foreign investment for the money and technology they need to shift out of basic agricultural commodities toward higher-value manufacturing industries.

These countries, including many in Latin America, would have to pay higher interest rates to borrow from global financial markets to fund such investment and so are more wary of scaring away foreign businesses. They also can lack the strong legal systems necessary to address any risks posed by foreign ownership in sensitive sectors.

Still, great power rivalry over influence in Latin America and the salience of national security has spurred political debates across the region on reviewing foreign activity.

Brazil, the region’s biggest recipient of foreign direct investment, has received $57 billion from China since 2006, according to a report this year by the Berlin-based CELIS InstituteExternal link. Even so, Brazilian policymakers have been beefing up regulation of overseas ownership on national security grounds in recent years, the think tank says.

Elsewhere in the region, Argentina faces concerns from domestic and US politicians over some investments, including a deep space observatory controlled by the Chinese military that dates back to 2012, the CELIS Institute noted. Chilean legislators in 2020 presented a bill to set up a national mechanism for strategic areas, but with limited progress.

Edited by Tony Barrett/vm