We don’t often comment on national security legislation, but it’s not often that national security legislation has a direct impact on the ability of entrepreneurs to attract foreign direct investment in their businesses. The National Security and Investment Bill, which passed its third reading in the Commons last week, creates a regime that is significantly less welcoming to foreign investment in British startups.

Under the new law, any investment worth more than 15% of a company’s value in a “strategic industrial sector”, of which there are seventeen, including many that have as much or more civilian applications as military like artificial intelligence, energy and transport, can be blocked on national security grounds by the Investment and Security Unit (ISU), a soon to be created regulatory body.

In the Financial Times, John Fingleton, the former chief executive of the Office of Fair Trading, argues that the new investment regime goes way further than moves in a similar direction elsewhere:

The scope is incredibly wide. It covers all sectors of the economy, and the investment threshold for mandatory notification is incredibly low. The UK government will even be able to intervene in cases involving businesses that have no UK assets, because the law will cover foreign companies that are active, or sell goods and services, in Britain.

Second, the powers of intervention are draconian and can be applied retrospectively. The government can “call in” deals up to five years after they have been completed, and it then has the power to declare them to be null and void. This applies to any investments made after the bill was introduced

This law will have a chilling effect on foreign investment. The risk of a lengthy legal battle will discourage overseas investors. The ability to apply the rules retrospectively compounds the problem. Yet bizarrely, the Government states:

“The vast majority of the transactions will not be called in, and this process can therefore provide more certainty and confidence for businesses and investors that the Government will not intervene in their investment.”

This seems unlikely. As Fingleton notes, many investors will need to seek full clearance from the ISU before parting with their cash, because being called in after a deal is done is so costly and disruptive. And it is likely that the process for clearance will be lengthy. The ISU is expected to examine around 200 cases each year and intervene in about a quarter. This would represent a massive increase on existing numbers. By contrast, the CMA currently only recommends remedies in 20 cases a year on competition grounds.

The low threshold for notification (15%) will be of particular concern to entrepreneurs. Tech startups in AI, quantum computing or cryptography seeking seed investment from the US or EU will be burdened with additional legal risk even for taking minority investments.

Not only will startups find it harder to grow through foreign investment, but they will also be less attractive to UK investors. After all, selling out to a larger company is a common exit strategy for startups, especially specialised ones whose products are most likely to be valuable as part of a larger product bundle, which can best be built via mergers. If overseas takeovers and investment becomes fraught with legal risks, entrepreneurs will have fewer options for exit.

Part of the problem with expanding the scope of national security objections to overseas investments is that they are often used to stop takeovers that have nothing to do with national security.

In France, they were used to block PepsiCo’s takeover of Yoghurt maker Danone in 2005 (protecting the country’s “strategic yoghurt reserve”, as some quipped at the time). In the case of the GKN/Melrose merger, a deal which involved two British firms, not a foreign buyer, the mere threat of a national security review was enough to extract commitments, many of which – such as adding to the company’s pension pot – had nothing to do with national security. These highlight that even tools ostensibly designed for national security purposes will likely become a tool for general political ends.

Foreign takeovers often enhance productivity and in some cases, ultimately save jobs by bringing over better management practices and capital investment. The classic case is Tata’s takeover and turnaround of Jaguar Land Rover, which saved 35,000 jobs.

But they are often controversial. Some workers can lose out, as can domestic competitors. Special interest groups who stand to lose out from takeovers will inevitably lobby ministers to intervene on national security grounds. This law will empower them.

In the government consultation on which sectors should covered by the national security and investment bill, the executive summary begins:

“The UK economy thrives from Foreign Direct Investment, and as a result of Foreign Direct Investment.”

It’s time they acted like they believed it.