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Student ID number: 180586587

Module number: QLLM421

Module name: Multinational Enterprises 1

Word count: 4695 words (exclude cover sheet)

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Introduction
One of the distinctive features of multinational enterprises (MNEs) is their capacity to engage
international business by accessing and conducting value-added activities across national
borders.1 In order to penetrate foreign markets, MNEs have developed a wide range of
internationalisation strategies. Despite the diversity of these strategies, they are classified into
three categories of entry modes, namely exporting,2 contractual arrangement3 and foreign
direct investment (FDI).4 Among the three choices, only through FDI can an MNE establish a
physical business presence in a host state by controlling an enterprise there.5 In other words,
MNEs employ FDI as a way to officially enter into a sovereign country.
States, regardless of their degree of development, have been eagerly encouraging the FDI entry
of MNEs due to its contributions to the national economic growth relating capital, advanced
technology and employment opportunities.6 Thus, to attract more FDI, host countries have
pursued openness policies with a number of investment promotions and a considerable
decrease in entry barriers. However, such liberalisation might cause the states to be exposed to
more risks from inbound investment, especially those relating to national security. As a result,
there is a significant increase in FDI entry restrictions on the ground of national security
considerations.7
The focus of this essay is the national security-related policy on FDI entry from MNEs. It
argues that host governments must balance between the protection of national security and the
openness to MNEs as foreign investors to ensure the effective investment policy. To support
this argument, it refers to the National Security Review (NSR) of the People’s Republic of
China (China). The policy of China has been chosen as a case study of this essay for the
following reasons. First, China is constantly among the major developing host nations since
1995.8 Second, China has liberalised its investment policy with a considerable elimination of
entry conditions.9 Third, after nearly 40 years since the “open-door” policy in 1979, China has

1
John H. Dunning and Sarianna M. Lundan, Multinational Enterprises and the Global Economy (2nd edn, Edward
Elgar Publishing 2008) 6.
2
MNEs undertaking this entry mode sell products to directly or indirectly through export agents to foreign
consumers. See Monir H. Tayeb, International Business – Theories, Policies and Practices (Pearson Education
Limited 2000) 158-162.
3
Through this form of entry, an MNE and a local entity in the target country enter into a contract involving the
transfer of rights to use certain tangible or intangible assets (e.g. technology or equipment) or provision of services
(e.g. management or technical services) within a period of time for fee payments. These contracts are usually
licensing agreements, franchising agreements, management contracts and technical service agreements. Ibid 162-
166.
4
Ibid 168-175.
5
According to OECD, foreign direct investment is undertaken by a resident in one country (direct investor) to
establish a long-term relationship with an enterprise (the direct investment enterprise) in another country as well
as a significant influence on the management of that enterprise. See OECD, OECD Benchmark Definition of
Foreign Direct Investment (4th edn, OECD 2008) 48.
6
Peter. T Muchlinski, Multinational Enterprises and the Law (2nd edn, OUP 2007) 85.
7
UNCTAD, World Investment Report 2016 (United Nations 2016) 94-100.
8
UNCTAD, ‘Global trend’ in World Investment Report series 1995-2018 (United Nations).
9
According to OECD data, there is a sustainable decrease in the restrictiveness of the China’s FDI regulations,
from 0.627 in 1997 to 0.316 in 2017. See OECD, ‘FDI restrictiveness’ (OECD website) <
https://data.oecd.org/fdi/fdi-restrictiveness.htm#indicator-chart> accessed 10 December 2018.

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formulated a National Security Review in 2011 and attempted to modernise the regime in the
draft Foreign Investment Law.
Outline of the essay
The essay is divided into four parts. The first part explains how MNEs enter host countries
through FDI entry and why there is an increase in national security-related policies to control
inward investment. The second part provides an overall legal framework of China’s NSR to
control entry stage of FDI. The third part justifies the need for a balanced NSR between the
protection of national security and the openness to foreign investors, whereas the final part
considers what essential features that a balanced NSR must have.
FDI entry and the proliferation of national security-motivated policy to scrutinise them
Once selecting FDI entry mode, MNEs have two approaches in which the investment is
organised and operated in the target country, namely greenfield investment and cross-border
M&As.10 The former option is the establishment of a completely new entity from the beginning
in host country whereas the latter one is an international business transaction involving the
transfer of ownership of an existing asset in that country.11 FDI in the form of M&As can be
either cross-border mergers or cross-border acquisitions.12 Cross-border mergers occur when
an MNE and indigenous enterprise agree to integrate their assets and operations into a single
entity.13 Meanwhile, cross-border acquisitions refer to the transfer of control of assets and
operations to MNE by the purchase of controlling stake14 in a target company in the host state.15
Comparing between the two modes, the implication of cross-border M&As on host state is
greater than that of greenfield investment. This may occur due to the fact that MNEs taking
over local firms become greater in size; thereby quickly increasing market power and market
dominance which might affect the business environment in the host country. Moreover, MNEs
could gain access to valuable assets, regarding crucial technology, business secrets, supplier
networks, client data or infrastructures, which can only be acquired from domestic enterprises.
Hence, the host governments have greatly concerned that the foreign ownership of these assets
may pose a threat to national security.
One concern is that the home state of MNEs shall seek to influent over the host state by creating
a dependent relationship through foreign takeovers. A typical strategy is that MNEs owned or
controlled by the home government try to take over assets and infrastructures of domestic
companies in energy resource industries. By doing so, the home state can control over the
supply of a valuable resource; thereby gaining influence the host state due to its heavy reliance

10
UNCTAD, World Investment Report 2000 (United Nations 2000) 99-105. In this essay, the terms “cross-border
M&As” and “foreign takeover” are used interchangeably.
11
Ibid.
12
Ibid.
13
Ibid.
14
The controlling stake, according to OECD, must be at least 10% of voting share of the local company so that
MNE can exert a significant managerial control over such company. This threshold is to distinguish between FDI
and portfolio investment. The latter is an acquisition transaction of less than 10% of voting power, which the
investor does not have the right to control or manage the target firm. See OECD, OECD Benchmark Definition of
Foreign Direct Investment (4th edn, OECD 2008) 22.
15
UNCTAD (n 10).

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on such resource.16 Another emerging risk stemming from foreign ownership is economic
espionage. States have encouraged MNEs, usually in connection with governments, to engage
in cross-border M&As to acquire trade secrets, know-how and innovations of domestic
companies, particularly in military applications, aerospace and high-tech industries. These
acquisitions help the home countries of MNEs, at the expense of the host countries, to advance
technology and economic development, especially military capacities in order to enhance their
influence within international relations.17
In order to respond to the above threats to national security from foreign ownership in
indigenous enterprises, there is a rise in national security-motivated policy.18 Countries, both
developed and emerging ones, have adopted or adjusted investment screening mechanism for
national security reasons to control inward investment. These regimes mainly focus on
scrutinising cross-border M&As of MNEs to acquire domestic enterprises in sensitive
industries and critical infrastructure, especially when foreign governments are involved.19
The National Security Review of the People’s Republic of China
China is not an exception from the trend of national security-related policy. The dramatic
increase in cross-border M&As and the potential risks to the economic security of the
controversial Xugong acquisition led to national security concerns mentioned in M&A
Regulations 2006.20 However, this regulation does not provide any detailed framework for a
mechanism to review M&A transactions on national security grounds. Until 2011, a National
Security Review (NSR) system is formally introduced by two legal documents which are

16
Russia is accused by the EU to employ its state-owned enterprise, Gazprom, to manipulated supply of oil and
gas in the EU through M&As to exert political pressure in the region. See Andreas Heinrich, ‘Gazprom’s
Expansion Strategy in Europe and the Liberalization of EU Energy Markets’ (2008) 34 Russian Analytical Digest
< http://www.css.ethz.ch/content/specialinterest/gess/cis/center-for-securities-studies/en/publications/rad/rad-all-
issues/details.html?id=/n/o/3/4/no_34_russian_business_expansionnr_34_ru> accessed 17 December 2018. For
an analysis of how Russia use energy for its foreign policy goals, see Rern Korteweg, ‘Energy as a tool of foreign
policy of authoritarian states, in particular Russia’ (2018) European Parliament's Committee on Foreign Affairs
Research Paper < https://publications.europa.eu/en/publication-detail/-/publication/1c80b8c6-58b6-11e8-ab41-
01aa75ed71a1/language-en/format-PDF> accessed 17 December 2018.
17
China has been accused by the United States and other Western nations for its excessive use of this method to
steal proprietary assets from their local firms. Alan Rappeport, ‘Justice Department Charge Chinese Company
with Espionage’ The New Your Times (Washington, 1 November 2018)
<https://www.nytimes.com/2018/11/01/us/politics/chinese-company-espionage-charges.html> accessed 17
December 2018; Andrea Shalal, ‘Germany risks losing key technology in Chinese takeovers – spy chief’ Reuters
(Berlin, 11 April 2018) <https://uk.reuters.com/article/uk-germany-security-china/germany-risks-losing-key-
technology-in-chinese-takeovers-spy-chief-idUKKBN1HI2IQ> accessed 17 December 2018.
18
UNCTAD (n 7).
19
Ibid.
20
Cathleen Hamel Hartge, ‘China’s National Security Review: Motivations and the Implications for Investors’
(2013) 49(1) Stan. J. Int’l L. 239. Regulations for Merger with and Acquisition of Domestic Enterprises by Foreign
Investors (Issued by MOFCOM, the State Assets Supervision and Administration Commission of the State
Council, the State Administration of Taxation, State Administration for Industry and Commerce, China Securities
Regulatory Commission, and State Administration of Foreign Exchange on 8 August 2006, effective on 8
September 2006). art. 12. <
http://english.mofcom.gov.cn/aarticle/policyrelease/domesticpolicy/200610/20061003434565.html> accessed on
10 December 2018; revised by No.6 Decree of MOFCOM on Promulgation of the Provisions on M&As of a
Domestic Enterprise by Foreign Investors on 22 June 2009
<http://www.fdi.gov.cn/1800000121_39_4115_0_7.html> accessed on 10 December 2018.

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Circular of State Council on the establishment of NSR (Circular)21 and Provisions of Ministry
of Commerce (MOFCOM) on the implementation of NSR (Provision).22 This framework
reflects four typical features of a traditional national security-related investment policy, which
are (i) NSR is triggered when there is an M&A transaction (ii) M&As are conducted by foreign
investors, (iii) control right is considered and (iv) NSR applies to inbound investment.23
China’s NSR is activated if there are M&A transactions to acquire domestic enterprises by
foreign investors in critical sectors under certain circumstances stipulated under the Circular.24
These sectors include military industry, military-related industry and other areas concerning
national security such as agriculture, energy and resources, infrastructures, transportation, key
technology and major equipment manufacturing.25 Both the Circular and the Provision do not
provide any definition or clarification of these sectors. Additionally, to circumscribe the
reviewable transactions, the NSR provides the principle of “actual control right”. This principle
determines three scenarios in which the foreign investors obtain the control right over domestic
firms through M&A transactions. First, the foreign investor acquires more than 50% of the
total shares of the local company.26 Second, the total shares owned by a foreign investor are
less than 50%; but his voting power enjoyed by the share is sufficient to influence the decisions
of shareholders or board of directors significantly.27 Third, the factual control of foreign
investors over decisions, finance, personnel and technology of local firms.28
Once an M&A transaction possesses all the features listed above, it must undergo a review
procedure initiated by either voluntarily filing of foreign investors, requests from governmental
agencies or reports of third parties.29 The procedure is conducted by a joint ministerial
committee consisting of National Development and Reform Agency and MOFCOM as
conveners as well as other departments.30 The committee shall review whether the subjected
transaction poses a threat to national security on the ground of its effect on four aspects, namely
national defence, economic growth, basic social living order and key technologies relating
national security.31 The result of the review may be one of the followings: (i) the transaction is
approved, (ii) where the transaction may negatively impact on national security and has not
been implemented, it shall be cancelled and (iii) where the transaction has produced or may

21
Circular of the General Office of the State Council on the Establishment of the Security Review System for
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors (Issued by the General Office of the State
Council on 3 February 2011, effective on 2 March 2011)
<http://english.mofcom.gov.cn/article/policyrelease/aaa/201103/20110307430493.shtml> accessed on 13
December 2018. (Circular)
22
Provisions for the Implementation of the Security Review System for Merger and Acquisition of Domestic
Enterprises by Foreign Investors, (Issued by MOFCOM on 25 August 2011, effective on 1 September 2011)
<http://english.mofcom.gov.cn/article/policyrelease/aaa/201112/20111207869355.shtml> accessed on 13
December 2018. (Provision).
23
OECD, Current trends in investment policies related to national security and public order (OECD 2018), 4.
24
Provision, art 1 and Circular, section II.
25
Circular, section I.
26
Circular, section III.1 and section III.2
27
Circular, section III.3
28
Circular, section III.4
29
Provision, art. 1 and 3.
30
Circular, section III.1
31
Circular, section II.

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produce an adverse impact on national security, it shall be terminated or take necessary
measures such as divesting assets to eradicate that impact.32
This regime, according to some commentators, bears a major resemblance to the CFIUS
process – the NSR of the United States which has been active since 1975.33 However, it is
criticised as a dormant regime because of ambiguities and uncertainty in terms of regulations
and implementation. The criticism is primarily concerned with the broad and vague critical
sectors and assessment criteria in which foreign M&As may pose a threat to national security.34
Moreover, there has been no publication of the number of M&A cases subject to NSR as well
as the results since this regime was launched, which raises questions about transparency and
effectiveness of the implementation of the review process.35
To overhaul the above deficiencies, the PRC issued the draft Foreign Investment Law (FIL) in
January 2015 for public discussion, in which chapter four dedicates to the national security
review.36 The new NSR in the draft FIL keeps several features of the old regime such as the
joint ministerial committee and the review process, but also includes certain crucial changes.37
Particularly, the scope of NSR is broadened to “any foreign investment” that threatens or might
threaten the national security, instead of only foreign M&As.38 A non-exhaustive list of
assessment criteria is applied to review investment proposal, replacing the four factors in the
current regime.39 The foreign investment authority is obliged to publish annual reports on the
enforcement activities of the NSR.40 Especially, foreign investment in financial sectors will be
subject to a separate NSR.41
The need for a balance national security policy
The fact that the NSR is modernised and incorporated in a separated chapter in the draft FIL
indicates that this regulatory regime will play a crucial role in China’s investment policy to
control inbound investment. This movement serves a counter-balance to response to the
potential risks of FDI for national security as China is currently undergoing FDI policy reform
to be closed to international practices. Over the past years, China has pursued investment
liberalisation with a considerable decrease in entry restrictions. One notable liberalisation is
the introduction of “national treatment”42 of FDI admission through the Negative lists and

32
Provision, art. 7
33
Hartge (n 20). Also see Xingxing Li, ‘National Security Review in Foreign Investments: A Comparative and
Critical Assessment on China and U.S Laws and Practices’ (2015) 13(1) Berkeley Business Law Journal 255.
34
Ibid.
35
Ibid.
36
Z. Alex Zhang and Vivian Tsoi, ‘China’s New Proposed Foreign Investment Law – What to expect’
(White&Case, 17 April 2015) < https://www.whitecase.com/publications/alert/chinas-new-proposed-foreign-
investment-law-what-expect> accessed 20 December 2018.
37
Draft Foreign Investment Law of the People’s Republic of China (Issued by MOFCOM on 19 January 2015)
(Draft FIL) < https://www.uschina.org/china-hub/english-translation-draft-foreign-investment-law> accessed 20
December 2018.
38
Draft FIL, art 48
39
Draft FIL, art. 57
40
Draft FIL, art. 69
41
Draft FIL, art. 74.
42
This is an obligation in international investment agreements which requires contracting parties to accord foreign
investors no less favourable treatment than national investors in similar circumstances. Negative list provides
industries which foreign investors are not entitled to national treatment. See UNCTAD, National Treatment

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simply investment approval procedures. In particular, foreign investors, whose projects do not
fall into sectors prohibited or restricted in Negative lists, are not required a case-by-case
approval but only an investment record-filling procedure.43
Given such a major investment liberalisation, it is reasonable for China to protect national
security from the risks of FDI. However, the NSR is a form of investment restriction which
can allow China to formally veto an investment proposal when it is believed to pose a threat to
state security. Such a restrictive measure, if it is excessive or misused, might have a negative
impact on the national economy and investment environment. An excessive regime may
significantly reduce the attractiveness of China to FDI from MNEs. Expanding abroad requires
higher costs and longer-term commitments than domestic operation. When engaging FDI, an
MNE prefers the country which has a favourable investment environment that has as few
restrictions as possible on the means of operating investment so that the MNE can arrange its
investment in a way to maximise competitiveness, obtain the highest return and offset the cost
of foreign operations.44 Thus, if China introduces an excessive NSR, MNEs might be
discouraged from entering China since the NSR can limit their free choices of investing means,
especially M&As, to further their above interests; thereby decreasing FDI inflow to China.
This also undermines the liberalising efforts of the government to attract more FDI from MNEs
to harness its benefits to economic development regarding technology progress, enhancement
of employment quality and business competitiveness. Additionally, apart from FDI inflow, FDI
outflow of China might be affected. When China imposes an unreasonable NSR on inward
investments from MNEs in other countries, these countries could follow a similar system on
reciprocal consideration or retaliation. As a result, outbound investments of Chinese MNEs
might encounter difficulty when entering into other countries. Therefore, it is essential that the
NSR policy must strike a balance between the need to protect national security and the
openness to MNEs as foreign investors to avoid these negative effects.
What constitutes a balance national security-related policy?

(UNCTAD, 1999) <https://unctad.org/en/Docs/psiteiitd11v4.en.pdf> accessed on 20 December 2018. In China,


there are two Negative lists applying for Free Trade Zones and the remaining areas. The two lists comprise
industries divided into two categories: (i) Restricted Industries which imposes restrictions on foreign investments
and (ii) Prohibited Industries which completely bans foreign investment.
43
Kromann Reumert, ‘Chinese Foreign Investment Law Reform: From Approval Requirement to Filling’
(Kromman Reumert, 4 Septermber 2018) <https://en.kromannreumert.com/News/2018/04/Chinese-foreign-
investment-law-reform-From-approval-requirement-to-filing> accessed 20 December 2018.
44
This can be explained clearly through the relationship between Ownership-specific (O) and Location-specific
(L), in the “Electric Paradigm” developed by Dunning. The O factor refers to assets such as capital, managerial
skills and especially intellectual properties which an MNE own to gain comparative advantages over other MNEs
in the same industry. Over the past years, MNEs have pursued strategic asset-seeking FDI to complement the
existing O of the firms to enhance their global competitiveness. Thus, MNEs have employed cross-border M&As
as a way to acquire the assets, particularly proprietary assets, of foreign enterprises, resulting in the growth of
global M&A deals. Meanwhile, the L factor refers to a set of advantages which a state possesses to attract more
FDI than others. These advantages include FDI policy (i.e. entry and operations rules, competition and tax
regulations, etc.), economic determinants (markets, resources, technology, etc,) and business facilitation
(incentives, investment promotion, etc.). Dunning explains the investment decision of MNEs in a specific country
over others by the interplay between O and L. An MNE will invest in a state where it can exploit or augment its
O advantages to offset the costs of foreign operations and obtain highest returns. See Dunning (n 1) 116-144.

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It is a challenging task for policymakers to design a sound NSR which can safeguard national
security with a minimum effect on the openness to foreign investment. However, the OECD
recommends that a balance NSR needs to be built on certain key principles, namely: (i)
transparency; (ii) regulatory proportionality and (iii) accountability,45 which transparency is
the most crucial feature for a well-function regime.
The first principle refers to transparency in terms of regulations and procedures of the NSR to
increase the predictability of the regime and help foreign investors understand their
obligations.46 Transparency of regulations requires that all rules and policies related to NSR
must be made available to the parties subject to the regime, whereas procedural transparency
comprises three stages of the NSR process.47 The first stage refers to the beginning of the NSR
process, which must clearly define why a specific investment is subject to NSR. 48 As
mentioned above, the Chinese draft FIL extends the purview of NSR to “any foreign
investment that endangers or might endanger national security”. This broad scope leaves the
joint ministerial committee great discretion, which might put the NSR danger of politicisation
and arbitrary abuse for protectionism as well as make the regime uncertain and unpredictable
to foreign investors. Instead, policymakers should employ a rigorous empirical study to
circumscribe the scope of NSR to key industries that inherently related to national security
which typically are military, aerospace, energy, transportation, natural resources and
telecommunication.
The second stage is the evaluation procedure concerning assessment criteria and guidance,
timeline and confidentiality.49 Transparency in this phrase is enhanced when assessment
criteria and guidance are published and narrowly focus on crucial security concerns so as to
help foreign investors understand how a particular investment is reviewed and as well as
increase the predictability of the outcome.50 The new NSR of China provides a non-exhaustive
list of factors that the review committee takes into account when reviewing, including the
impact of a foreign investment on national defence, key technologies and critical infrastructure,
energy and resources, economic stability, public order and other factors deemed to be
necessary.51 The evaluation based on this non-exhaustive list will heavily rely on the subjective
perspective on national security of the officials in charge, which encounters the same problem
of the above broad purview of NSR. Moreover, the vague terms such as “key technologies”,
“critical infrastructure” or “economic stability”, without any clarification, will remain to
criticism like the current dormant regime. Therefore, the Chinese government should follow
the closed-list approach for assessment criteria that narrowly focuses on security interests and
provide more guidance, especially review methods and definitions for vague terms, on
evaluation process; thereby guaranteeing fairness and predictability of the procedure.52

45
OECD, International Investment Perspectives: Freedom of Investment in a changing world (OECD 2007) 56.
46
OECD, Transparency and Predictability for Investment Policies addressing National Security concerns: A
Survey of Practices (OECD 2008).
47
Ibid.
48
Ibid.
49
Ibid.
50
Ibid.
51
Draft FIL, art. 57.
52
Certain OECD countries, such as the United States, Canada or Germany, generally define “critical
infrastructure” to screening foreign investments in certain sectors on national security grounds. These definitions

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Besides, the closed-list criteria and clear guidance may assist subjected foreign investors to
propose measures to avoid the potential security risks from their investments under new NSR,53
or enable them to self-assess and prepare beforehand to avoid the costs and damage in case of
the high possibility of rejection. Furthermore, the joint ministerial committee must conduct the
review within the prescribed timeline.54 Strictly compliance of timeline is of importance to
foreign investors as it enables them to plan investments accordingly to react to any unexpected
changes during the review process as well as guarantees that the NSR is not disguised as
protectionism through lengthy delays. In order to ensure this compliance, the committee should
develop stringent working rules which assign responsibilities and duties among participating
agencies. In addition, the inter-ministerial committee must take all necessary measures to
protect sensitive business information of all involved parties acquired for evaluation process
from disclosure to the public and competitors.55 This is to create confidence in the parties in
the review authority to willingly provide the necessary information and cooperate for a smooth
process without any delays. Besides, given the nature of the NSR, it is also the interest of the
government to secure the confidentiality of information relating to national security.
The final stage of procedural transparency is the report of enforcement activities of the NSR.56
While sensitive information must be protected, adequate information on the outcome of the
review process should be disclosed, particularly the cases resulting in blocking investment.57
This disclosure enhances the predictability and certainty of the NSR as the concerned parties
can see how the overall framework formally works in practice. In the draft FIL, the foreign
investment authority is obliged to publish annual reports of the NSR.58
Regarding regulatory proportionality, this principle is that restrictive measures of the NSR on
investment (i.e. mitigating measures or blocking investment) are imposed only to address
essential national security concerns.59 In other words, these measures should serve as the last
resort when there are no other alternatives (e.g. investment licensing, competition policy) that
can eradiate security threats posed by investment. If restrictive measures are used, the NSR
authority should prioritise mitigating measures to avoid rejecting potential foreign investments.
The mitigating measures should be specific on how they can respond to national security threats
from particular investment proposals.
On the other hand, the remaining principle requires procedures that ensure the accountability
of the NSR.60 One procedure is judicial review which foreign investors can recourse to seek
review of decisions on investment restrictive measures.61 However, the constitutional roles of

tend to be broad as the governments would reserve a regulatory space in case that unexpected security risks
emerge. See OECD, Protection of ‘Critical Infrastructure’ and the Role of Investment Policies relating to
National Security (OECD 2008).
53
Draft FIL, art. 65
54
All subjected investments are undergone a general review within 30 working days. The investment proposals,
which do not pass the general review, will be undergone a special review within 60 working days. Draft FIL, art.
61 and 63.
55
OECD (n 45).
56
Ibid.
57
Ibid.
58
Draft FIL, art. 69
59
OECD (n 44).
60
Ibid.
61
Ibid.

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the court system and the nature of judicial independence in China, which are influenced by the
executive branch and political party, might limit the effectiveness of this procedure. 62 Also,
judicial proceedings might be time-consuming and costly for both foreign investors and the
implementing authority of the NSR. Another procedure to be considered is parliamentary
oversight through monitoring implementation of the NSR by parliament organs or reports to
the parliament.63 Nonetheless, the mechanisms for accountability should be cautiously taken
to avoid improper political interferences and disrupting the NSR to perform its role of
protecting national security.
Conclusion
MNEs deploy FDI, either in the form of greenfield projects or cross-border M&As, to enter
sovereign states. Apart from benefits, FDI from MNEs comes with potential threats to host
states. In particular, foreign ownership of domestic enterprises’ assets in certain sectors
acquired by M&As may pose risks to national security of host countries such as political
pressure or espionage. To guard against these risks, host governments develop national security
review system to screening FDI entry of MNEs on security grounds, especially M&A activities.
China, in parallel with the surge in FDI and the investment liberalisation, has also formulated
NSR to address national security concerns. The current regulatory regime is ambiguous and
non-transparent; thereby failing to implement. The draft FIL is an attempt of the Chinese
government to modernise NSR to control inward investment on national security grounds
effectively. Nonetheless, the policymakers face a challenging task to ensure the new regime
strike a balance between the national security interests and the openness to investment. Failing
to attain this balance may reduce the attractiveness of China for FDI as well as adversely affect
economic development and outflow investments. Therefore, to guarantee this balance, the new
NSR regime and its implementation must be guided by three principles of transparency,
regulatory proportionality and accountability, especially narrowing down excessive
generalisation of the scope of review and evaluation guideline. By doing so increases the
predictability and certainty of the NSR to foreign investors. Otherwise, the new NSR might be
misused for pollical purpose or become another regulatory barrier that might deter potential
investors.

62
Congressional-Executive Commission on China, ‘Judicial Independence in the PRC’ (CECC)
<https://www.cecc.gov/judicial-independence-in-the-prc> accessed 22 December 2018.
63
OECD (n 44).

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Queen Mary, University of London

School of Law Assessment Comment Sheet

Student No:
180586587
Module Code: QLLM421
Word Count:
Date Submitted:

ASSESSMENT
Please consider the following assessment criteria in your comments. Evaluate whether the paper is
excellent, very good, good, or sufficient in light of these criteria. The comments should justify the final
mark in light of the grading of these criteria.
Assessment criteria:
 Relevance and accuracy
 Quality of analysis and argumentation
 Independent/ Original analysis
 Organisation and structure
 Use and scope of relevant sources
 Accurate and appropriate source referencing and citation
 Quality of written language

Examiner’s Comments:
Excellent essay. This considered China’s national-related policy on FDI entry from
MNEs. It is well structured, lucid and supported by a plethora of sources

Mark:
76%

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