Introduction
In the past decades, China’s explosive economic growth has led the country to transform from a net capital importer to one of the world’s largest sources of foreign direct investment (FDI),Footnote 1 particularly since it launched the ‘Go Global’ policy in 2000.Footnote 2 The proliferation of Chinese FDI has raised concerns among host States, especially developed host States,Footnote 3 regarding potential implications for their national security.Footnote 4 These concerns have grown as a result of the current Chinese government’s assertive geopolitical stance in pursuit of ‘the Great Rejuvenation of the Chinese Nation’, also known as the ‘Chinese Dream’, and its emphasis on comprehensive national security protection as the foundation for this ambitious goal.Footnote 5 Host States’ growing concerns have contributed to an escalation of legal barriers that limit Chinese investors’ ability to invest in developed countries. According to the United Nations Conference on Trade and Development (UNCTAD), by the end of 2022, over half of the 39 ‘advanced economies’ identified by the International Monetary Fund have enacted legislative frameworks for foreign investment screening (FIS), which allow them to scrutinise proposed inbound investments to manage potential national security risks.Footnote 6 These economies include, among others, the United States (US), the United Kingdom (UK), the European Union (EU), Australia, and, in Asia, the Republic of Korea (Korea), and Japan.Footnote 7
Recent scholarship indicates that many Western economies, most notably the US, the EU, Australia, and Canada, strengthened their FIS regimes partly in response to national security concerns about Chinese FDI.Footnote 8 However, the existing literature has not paid enough attention to the FIS regimes in developed East Asian countries.Footnote 9 Specifically, despite Japan and Korea being the seventh and eighth largest recipients of Chinese FDI in developed-world countries as of the end of 2023 – amounting to US Dollar (USD) 6.67 billion and USD 5.08 billion, respectivelyFootnote 10 – there is currently no comprehensive legal study focusing on Chinese FDI and its interactions with the FIS regimes of the two developed East Asian countries.
This article seeks to supplement existing literature. It investigates the following questions: Has national security emerged as a point of confrontation between developed East Asian countries and China in the context of foreign investment frameworks? If this is the case, how has the confrontation impacted, or how will it impact, Korea’s and Japan’s implementation of FIS regimes with regard to Chinese investments? How might Korea’s and Japan’s FIS regimes conflict with their international investment law obligations?
To answer these questions, this article is organised as follows. The second section investigates the legal concept of national security in China, focusing on its role in China’s latest foreign investment policy. The third section provides a comprehensive analysis of the evolution and current state of the FIS regimes in Korea and Japan, as well as their practical applications to Chinese FDI. The fourth section assesses the extent to which Korea’s and Japan’s FIS regimes comply with their obligations under the international investment agreements (IIAs) with China. The fifth section concludes.
This article argues that a national security-focused confrontation between developed East Asian countries and China over cross-border investment has emerged as a result of their shared concerns about national security threats. The confrontation highlights the likelihood that Korea and Japan will impose more restrictions on Chinese investments under their FIS regimes. Korea and Japan should be cautious when applying their FIS regimes to Chinese FDI due to the possibility of breaching their obligations under the IIAs with China. Above all, they must refrain from politicising their FIS regimes in order to foster amicable economic relations in East Asia.
National security and foreign investment policy in China
Since 1979, when China first officially permitted outbound FDI under the ‘Enterprising Abroad’ policy,Footnote 11 successive Chinese governments have insisted on an interventionist approach concerning the directions of outbound FDI.Footnote 12 The government has been relatively forthright regarding its preferences for specific types of outbound FDI. These preferences are communicated to the public through foreign investment policy,Footnote 13 which is subject to continuous adjustments to accommodate shifting national demands and geopolitical dynamics.Footnote 14
China’s foreign investment policy has been extensively discussed in legal studies.Footnote 15 However, the studies do not analyse the latest policy within a broader context to explore its underlying rationales, which is of particular significance given the current Xi Jinping administration’s resolute geopolitical stance, particularly its emphasis on national security.
Since 2012, the Xi Jinping administration has prioritised national security as ‘the core and bottom-line’ of foreign policy in its pursuit of realising the ‘Chinese Dream’.Footnote 16 The past decade has seen China’s intensive legislative efforts to establish a national security framework, with the National Security Law 2015 (NSL 2015) at the apex.Footnote 17 Therefore, this section provides a comprehensive investigation into the role of national security in China’s latest foreign investment policy released by the Xi Jinping administration.
The concept of ‘national security’ in Chinese law
The concept of ‘national security’ first appeared as a pivotal concept in Chinese law in 1993, when the Standing Committee of the 7th National People’s Congress promulgated the National Security Law 1993 (NSL 1993). Rather than providing an explicit definition of the concept of ‘national security’, the law enumerated ‘acts endangering national security’ (Article 4). This primarily includes activities that threaten political stability and State sovereignty, such as plotting to subvert the government or overthrow the socialist system. This indicates that China’s national security policy prioritised traditional security concerns at that time.
Since the mid-2010s, the world has witnessed a rise in Sino-Western geopolitical tensions, partially due to the Xi Jinping administration’s assertive political stance.Footnote 18 In April 2014, President Xi set forth a ‘Holistic View of National Security’ initiative (the ‘Holistic View’), calling for a comprehensive understanding of China’s national security to cover both ‘traditional’ and ‘non-traditional’ security components, as the basis for China’s survival and sustainable development.Footnote 19 According to the official interpretation of the Holistic View as conveyed by the Central Party School of the Chinese Communist Party (CCP), the highest training institute for CCP cadres, ‘traditional’ security includes political stability, territorial integrity, and military security, while ‘non-traditional’ security includes economic, cultural, social, network, and biological security, among others.Footnote 20 China’s NSL 2015 codifies the Holistic View. Article 2 of the law broadly defines ‘national security’ as:
the relative absence of international or domestic threats to the State’s power to govern, sovereignty, unity and territorial integrity, the welfare of the people, sustainable economic and social development and other major national interests, and the ability to ensure a continued state of security.
NSL 2015 further elucidates the breadth of the concept of ‘national security’ by outlining specific tasks aimed at safeguarding the security components identified in the Holistic View.Footnote 21 Table 1 lists the national security components identified in the Holistic View, categorised by the CCP Central Party School as ‘traditional’ and ‘non-traditional’, as well as the associated protection tasks specified in NSL 2015. The table shows that NSL 2015 has broadened the concept of ‘national security’ to include almost all elements necessary for a country’s national strength and continuous development. This shift reflects the Chinese government’s profound national security concerns in the midst of ongoing geopolitical tensions. This broad spectrum of national security coverage has been confirmed by China’s latest National Security Strategy issued in 2021.Footnote 22
Table 1. The all-encompassing coverage of China’s national security
National security in China’s foreign investment policy
Extensive scholarly research has focused on China’s sophisticated regulatory framework for inbound FDI, as well as the implications and importance of national security that underpin the framework.Footnote 23 With China’s rise to prominence as a global FDI source, the country’s policies on outbound FDI have been significantly shaped by the government’s concerns about national security, with the underlying implication of the concept of ‘national security’ converging on the comprehensive scope under NSL 2015.
China’s foreign investment policy first mentioned ‘national security’ in the 2006 Industrial Guiding Policy for Overseas Investment (2006 Guiding Policy), which prohibited Chinese companies from making FDI that would ‘endanger national security’.Footnote 24 In the context of the Xi Jinping administration’s prioritisation of national security as discussed above, the concept of ‘national security’ has shifted from a prohibited boundary to a policy objective for outbound FDI. China’s 13th and 14th Five Year Plans (FYPs), the country’s supreme national strategic development plans for the period from 2016 to 2020 and 2021 to 2025,Footnote 25 highlight the national development goal of upholding the Holistic View and commit to the national development objectives of enhancing technology security, critical mineral security, and energy security through ‘global cooperation’ – a term commonly used by Chinese authorities to refer to international investment and trade. Based on this policy keynote, the following subsections investigate how the three non-traditional national security components have been reflected in China’s current foreign investment policy.
Technology security in foreign investment policy
China’s foreign investment policy has placed a particular emphasis on technology security as an objective for outbound FDI. As a latecomer to the global industrialisation scene,Footnote 26 China has prioritised technological development as the key to national prosperity, which has been largely embodied in the ‘Innovation-driven Development Strategy’ that the Xi Jinping administration launched upon taking office in 2012.Footnote 27 The strategy was subsequently enshrined in the 13th FYP (2016–2020) and the 14th FYP (2021–2025), which encourage outbound FDI in pursuit of foreign advanced technologies to promote the development of China’s ‘strategic emerging industries’, which refer to government-designated high-tech industries, such as biomedicine, advanced manufacturing, and aerospace.Footnote 28
In 2015, China launched the ‘Made in China 2025 Development Initiative’ (MIC 2025), a prominent national development policy with the stated goal of establishing China as the dominant player in global value chains (GVCs) for advanced manufacturing sectors by the year 2025.Footnote 29 This ambitious initiative encourages Chinese companies to gain access to foreign advanced technology and technological talent through mergers and acquisitions (M&As) and joint ventures (JVs), as well as the establishment of overseas research and development (R&D) centres, particularly in the designated ‘key technology sectors’ for which the government has committed to establishing complete value chains, such as aerospace equipment, new materials, and power equipment.Footnote 30
In addition, China’s latest ‘Guiding Opinions on Further Guiding and Regulating the Direction of Overseas Investment’ (2017 Guiding Policy) (replacing the 2006 Guiding Policy) broadly encourages outbound FDI involving cooperation with foreign technology companies and establishment of overseas R&D centres.Footnote 31 Notably, the policy continues the 2006 Guiding Policy’s prohibition on outbound FDI that may endanger national security and clarifies that such FDI includes investments involving core technologies in strategic sectors, such as pharmaceuticals, transportation, and telecommunications.Footnote 32 The combination of encouragement and prohibition suggests that the government recognises the potential for technology transfer via FDI and intends to utilise outbound FDI to procure foreign cutting-edge technology.
Critical mineral security in foreign investment policy
As technology advances, China, like the rest of the world, is experiencing increased demand for critical minerals, such as lithium, dysprosium, and rare earth minerals, which are essential to the application of cutting-edge technologies and indispensable production inputs in upstream GVCs for advanced manufacturing.Footnote 33 China has emerged as the world’s leading supplier of several critical minerals by developing its domestic resources and acquiring foreign mineral deposits.Footnote 34 However, the country still relies heavily on foreign suppliers for various critical minerals, such as nickel and iron ores, which are 80 percent and 95 percent reliant on imports, respectively.Footnote 35
Notably, NSL 2015 defines critical mineral security as ensuring a steady, sufficient, and sustainable supply of critical minerals (Article 21). It further specifies that the security can be partially achieved by acquiring foreign mineral resources (which the law refers to as ‘international resource cooperation’). With the law setting the tone, in 2017, the government unveiled the ‘National Mineral Resources Plan’ as a national action plan for enhancing critical mineral security.Footnote 36 The plan identifies 14 metallic and four non-metallic minerals as critical minerals that require guaranteed supplies. Significantly, it encourages Chinese companies to invest in the exploration and development of the overseas deposits of the designated minerals via M&A, JV, and supply agreements. China’s ‘Dual Circulation’ strategy has further solidified the plan. The strategy, launched in 2020 and incorporated in the 14th FYP (2021–2025), aims to rebalance the Chinese economy by prioritising domestic consumption (referred to as ‘internal circulation’) while maintaining openness to international trade and investment (referred to as ‘external circulation’).Footnote 37 Notably, the strategy emphasises the diversification of foreign sources of critical minerals that are scarce in domestic reserves by encouraging outbound FDI in mineral resources, with the goal of enhancing the resilience of China’s critical mineral supply chains.Footnote 38
Energy security in foreign investment policy
Energy security is defined by China’s 2020 draft Energy Law as the country’s capacity to ensure steady and adequate energy supplies,Footnote 39 which forms the cornerstone for China’s sustainable economic growth amidst rapid industrialisation. Since the inception of the ‘Go Global’ policy, China’s foreign investment policy has encouraged Chinese companies to acquire overseas energy resources that are deficient in domestic reserves.Footnote 40 The 2017 Guiding Policy consistently encourages outbound FDI in overseas energy resource exploration, particularly fossil fuel resources and minerals used in clean energy technologies (which may also fall under the critical minerals discussed above).Footnote 41 In addition, the Xi Jinping administration launched the ‘Belt and Road Initiative’ (BRI) in September 2013, with one of its stated objectives being to promote outbound FDI in the connectivity sectors along the Silk Road.Footnote 42 The initiative enables China to considerably enhance its energy security through several China-financed pipeline projects in BRI-participating countries.Footnote 43 This security objective may, however, be of limited relevance to this research, given that neither Korea nor Japan are energy-rich countries nor BRI participants.
China’s foreign investment policy has a significant influence on Chinese companies’ FDI activities. This is primarily accomplished by the government providing preferential treatment to policy-aligned investments in foreign exchange, credit, taxation, and insurance, among others, as well as pervasive informal institutional pressures in the socialist economy.Footnote 44 As a result, over the past decade, there have been notable rises in Chinese FDI outflows in pursuit of the three security objectives. According to China’s National Bureau of Statistics (NBS), from 2015 to 2022, Chinese outbound FDI in scientific research, technical services, and information technology (IT) sectors, which typically involve advanced technologies, increased tenfold in value, with an associated rise in share of total FDI values from 6.2 percent in 2015 to 44.5 percent in 2022.Footnote 45 In the metals and mining sector, the value of Chinese FDI in overseas nickel projects increased significantly from USD 680 million in 2013 to USD 20 billion by the end of 2022, and the value of Chinese FDI in fossil fuel mining increased sixfold from 2015 to 2022.Footnote 46 Similarly, Chinese FDI in the clean energy sector, such as solar and wind energy, has increased to account for 58 percent of the total value of Chinese FDI in the foreign electricity sectors by 2022.Footnote 47
China’s heavy reliance on foreign supplies to meet domestic demand for strategic assets explains its emphasis on the security of technology, critical minerals, and energy as objectives for outbound FDI. This emphasis on national security, however, may come into conflict with the national security protection objective that underpins FIS regimes in most developed countries, including Korea and Japan, which is examined in the following section.
An emerging landscape of national security confrontation in East Asia: Chinese FDI and the FIS regimes in Korea and Japan
Article 3 of the Organisation for Economic Cooperation and Development (OECD) Code of Liberalization of Capital Movements allows a member State to restrict FDI when it considers it necessary for the maintenance of public order or the protection of essential security interests,Footnote 48 leaving the concept of ‘essential security interests’ open to interpretation by each state.Footnote 49 This article provides a basis for major economies around the world to establish and strengthen their FIS regimes to manage the potential national security risks associated with FDI in response to changing geopolitical circumstances and development priorities.
Korea and Japan, as East Asian economic powerhouses, have converged on the global trend towards a more stringent FIS regime. This section investigates the FIS regimes in Korea and Japan, with a particular emphasis on the evolving meaning of ‘national security’ under the regimes and the implications of the concept for the regimes’ applications to Chinese FDI in practice.
Korea’s FIS regime and Chinese FDI: A confrontation of technology security
Overview of Korea’s FIS regime
Korea has historically depended on FDI to advance its industrialisation and economic recovery from the Korean War.Footnote 50 Since the 1960s, Korea had enacted legislation that committed a diverse array of incentives to foreign investors with the aim of attracting FDI.Footnote 51 The recession that followed the 1997 Asian financial crisis prompted Korea to enact the 1998 Foreign Investment Promotion Act (FIPA),Footnote 52 which removed the prior approval requirements for FDI in most business sectors and established a liberalised FIS regime ‘with the ultimate view of contributing to the sound development of the national economy’.Footnote 53
According to FIPA, Korea is committed to liberalising foreign investment,Footnote 54 with the exception of cases where the investment poses a risk to national security, public order, health and sanitation, environmental preservation, or where it violates Korean laws, morals or customs.Footnote 55 Following this principle, foreign investors seeking to invest in Korea are generally only required to submit a pre-investment report to the Ministry of Trade, Industry, and Energy (MOTIE) to obtain a report certificate, with no security review required.Footnote 56 Ex-post reporting requirements apply to foreign acquisitions of shares of a Korean listed company through the Korea Exchange. Footnote 57 As an exception to the reporting rules, Article 6 (1) of FIPA obliges foreign acquisitions of Korean defence industry companies governed by the Defence Acquisition Program Act to undergo an ex-ante security review to obtain prior approval from MOTIE.Footnote 58
In 2022, MOTIE issued the Regulations on Operation of Security Review Procedures for Foreign Investment (2022 Regulations) as an amendment to the FIPA review framework. The document requires foreign investors to indicate in their investment reports or approval applications whether their investments fall within circumstances that could potentially pose national security risks to Korea, thus necessitating a national security evaluation.Footnote 59 The circumstances include:
(a) A foreigner intends to acquire de facto control over the management of an existing domestic company;
(b) Any of the following cases where:
(i) Manufacturing defence materials defined under subparagraph 7 of Article 3 of the Defence Acquisition Program Act … may be hindered;
(ii) Goods, etc. or technologies subject to permission or approval for exportation under Article 19 of the Foreign Trade Act are likely to be used for military purposes;
(iii) Contents of a contract, etc. classified as confidential information of the State under Article 13 (4) of the National Intelligence Service Act…are likely to be disclosed;
(iv) International efforts of the United Nations, etc. to maintain international peace and security may be substantially and critically hindered;
(v) Divulgence of national core technologies is highly likely.Footnote 60
The 2022 Regulations also authorises ministers supervising the relevant sectors to initiate a national security review for a specific investment based on the findings of the Security Review Expert Committee’s preliminary review of the investment report or application.Footnote 61 The Korean government’s broad discretion in deciding whether to initiate a security review is comparable to the FIS regimes in the US and Canada, which allow competent authorities to initiate ex-ante screening for almost any investment they perceive potentially threatening to national security,Footnote 62 as opposed to Japan’s FIS regime, which is discussed below.
In the national security review, a Foreign Investment Committee composed of the MOTIE Minister and ministers supervising the relevant sectors (collectively referred to as competent ministers) will determine whether the investment under review poses a threat to national security.Footnote 63 If it is determined that an investment poses a threat to national security, the MOTIE Minister may outright reject the transaction or may approve it with conditions to mitigate the perceived risk.Footnote 64
Apart from the FIS process under FIPA, Korea has set up additional FIS processes under the 2011 Act on Prevention of Divulgence and Protection of Industrial Technology (ITPA) and the 2022 Act on Special Measures for Strengthening the Competitiveness of and Protecting National High-Tech Strategic Industries (Special Act).Footnote 65 ITPA and the Special Act focus specifically on FDI that involves technologies with a significant impact on Korea’s national security and economic development, requiring a Korean company that possesses ‘National Core Technologies’ (NCT) or ‘National high-tech strategic technologies’ (NST) designated by MOTIE to obtain approval from the MOTIE Minister before proceeding with a foreign investment, respectively.Footnote 66 Should competent ministers determine that the investment may result in divulgence of NCT or NST, they may order to suspend or prohibit the transaction, or order the reporting institution to restore to its original state.Footnote 67 NST, being a subset of NCT, is arguably more sensitive than NCT. Therefore, in the application of FDI approval processes, the Special Act governing FDI involving NST has precedence over ITPA as it has its more stringent approval procedures.Footnote 68 The superposing approval processes highlight Korea’s commitment to protect advanced technology from unexpected overseas acquisitions, which have emerged as the focal point under Korea’s FIS regime.
National security in Korea’s FIS regime and the role of China
Although Korea’s FIS regime is based on the fundamental concept of ‘national security’, neither FIPA, ITPA, the Special Act, nor any other Korean law provides a definition of the concept. Korea’s 1948 National Security Act focuses on eliminating anti-government organisations – impliedly aiming at pro-North Korean anti-capitalist socialist parties in Korea – and thus has little bearing on the concept of national security in the context of the FIS regime.Footnote 69 In the absence of a legal definition of national security, Korea’s highly structured FIS legal regime shed light on the meaning of the fundamental concept in Korea’s FIS regime.
The 2022 Regulations provides a list of factors that the Foreign Investment Committee typically considers in the FIPA review. The factors include, among others, the investee company’s possession or production of core technology and materials, the investor’s or investee company’s technology and cyber measures, the risk of foreign control over Korean industries, and the investment’s impact on technology, supply chain, and commerce.Footnote 70 While neither the ITPA nor the Special Act specify general factors to be considered in the review processes for FDI involving NCT/NST, a proposed amendment to the ITPA announced in September 2023 is reported to specifically identify a factor relating to the investments’ potential impact on the national economy.Footnote 71 The factors exemplify the Korean government’s specific concerns about the economic implications of technology security, particularly the risk of technology leaks disrupting domestic development.
Korea’s substantial focus on technology security in the FIS regime is also reflected in the expanding scope of reviewable FDI. In response to the changing dynamics of global technological development and competition, MOTIE has substantially broadened the list of NCT that may trigger national security review process under FIPA (in the case of a high likelihood of technology divulgence), ITPA, or the Special Act (in the case of NST) over the past decade.Footnote 72 The latest version of the list of NCT, updated in August 2022, has been significantly expanded to include 75 technologies across 13 sectors, including semiconductor, biotechnology, display, automotive and railway, 5G system design, machinery, and robotics, among others.Footnote 73
Korea’s 2022 ‘National Strategic Technology Nurture Plan’ and 2023 ‘National Security Strategy’ both confirm the FIS regime’s focus on technology security protection. In the documents, the Yoon Suk Yeol administration emphasises the significance of technology as the cornerstone of Korea’s competitiveness and commits to preventing the divulgence of advanced technologies to foreign entities through the enhanced FIS regime.Footnote 74
China has played a significant role in promoting Korea’s shift of emphasis to technology security in the FIS regime. The MOTIE openly acknowledged that the enactment of the Special Act in 2022 was driven in part by China’s growing dominance as a powerful competitor to Korea in various high-tech industries.Footnote 75 In addition, Korea’s 2023 National Security Strategy explicitly states that China, as a key player in the global race for technological supremacy, has significantly contributed to the major national security challenges that Korea is confronting.Footnote 76 The strategy emphasises that the US-China competition has contributed to the weaponisation of industries and resources, which will result in a restructuring of the global semiconductor and battery sectors.Footnote 77
Korea’s focus on technology security in the FIS regime, however, points to a direct confrontation with China’s foreign investment policy, which, as discussed in the second section of this article, places a comparable emphasis on technology security. Specifically, the Korean government has committed to implementing the enhanced FIS regime as a means of preventing unauthorised technology outflow, thereby protecting Korea’s technology security. China’s foreign investment policy, on the other hand, promotes outbound FDI as a means of gaining access to advanced technologies, with the ambitious goal of achieving global technological dominance. This stark confrontation, therefore, warrants an examination of its impact on the practical implementation of Korea’s FIS regime in relation to Chinese FDI.
The implementation of Korea’s FIS regime in relation to Chinese FDI
China has become a significant investor in Korea, with FDI flows to Korea reaching USD 6.6 billion in terms of stock by the end of 2023.Footnote 78 In the past few years, the Korean government has exercised its discretionary authority to subject a few FDI proposals, including some from China to ex-ante screening. Notably, FIPA obliges the MOTIE Minister to publish all his or her FIS decisions, including explanations, and, in the case of conditional approval, specifics of the conditions.Footnote 79 Since 2013, when the Xi Jinping administration took office and began implementing its foreign investment and national security policies, MOTIE has published decisions on four Chinese investments as of May 2024. Table 2 compiles basic information about the four investments, as well as their security review details published on the MOTIE website. The case studies of the four FIS reviews demonstrate that the China-Korea technology security confrontation in the cross-border investment landscape has had a significant impact on Korea’s application of the FIS regime to Chinese FDI.
Table 2. Security reviews for Chinese FDI under Korea’s FIS Regime Since 2013
Ningbo Shanshan’s acquisition of LG Chem’s display polariser business
In June 2020, LG Chem, the largest Korean chemical company, announced the sale of its liquid crystal display (LCD) polariser business to Chinese lithium battery producer Ningbo Shanshan (Shanshan).Footnote 80 Although LG Chem claimed that the business did not involve NCT and, thus, the investment was not subject to government approval, MOTIE initiated a security review pursuant to Article 11 of TIPA, explaining that it was necessary to examine whether LG Chem’s LCD polariser technology is associated with thin film transistor LCD manufacturing technology, which fell under NCT.Footnote 81 The review, which was completed after six months, concluded that the transaction involved no NCT or NCT-related technologies, and thus posed no national security threats to Korea.Footnote 82
The lengthy review process revealed that, in practice, the scope of reviewable investments under ITPA has been expanded beyond those involving NCT as defined in Article 2.2 of the law to include investments involving NCT-related technologies. In addition, the review process includes a preliminary phase to determine whether the transaction involves NCT or NCT-related technologies.
Wise Road Capital’s acquisition of Magnachip Semiconductor
In March 2021, Magnachip Semiconductor, a Korean-based organic light-emitting diode (OLED) driver chip developer, announced its sale to Wise Road Capital, a Chinese private equity fund specialising in semiconductors and other high-tech industries.Footnote 83 Magnachip did not file an application for approval to MOTIE because the core technologies involved in the transaction, OLED display driver chip-related technologies, were not NCT.Footnote 84 However, MOTIE requested technical data from Magnachip to determine whether it possessed NCT, and three months later, announced the inclusion of OLED display driver chip-related technologies in NCT.Footnote 85 As a result, MOTIE initiated a security review of the transaction under ITPA Article 11-2.
It should be noted that in May 2021, the US FIS administrator Committee on Foreign Investment in the United States (CFIUS) also launched a security review of the Wise Road-Magnachip transaction, claiming that Magnachip was publicly traded in the US and had a Delaware-incorporated entity, making it a ‘US business’ subject to CFIUS jurisdiction under the Foreign Investment Risk Review Modernization Act (FIRRMA).Footnote 86 The parties abandoned the transaction in August 2021, when MOTIE was still in the review process, because CFIUS rejected it on the grounds of potential threats to US national security interests.Footnote 87
It is difficult to determine the extent to which the CFIUS review influenced MOTIE’s review process, particularly the decision to initiate the review. The Wise Road-Magnachip transaction, however, underscores MOTIE’s broad authority to expand the scope of NCT under ITPA even after a foreign investment has been reported, allowing it to scrutinise an investment that would not otherwise require government approval at the time of announcement. This increases unpredictability and uncertainty surrounding the implementation of Korea’s FIS regime.
Focuslight Technologies’ acquisition of Cowin
The most recent Chinese investment subject to MOTIE review is the proposed acquisition of Cowin DST, a Korean manufacturer of optical semiconductor equipment, by Chinese laser component developer Focuslight Technologies. The transaction was announced in September 2023, and the parties announced in February 2023 to abandon the deal when MOTIE was still examining whether the technologies owned by Cowin DST fell under NCT.Footnote 88 According to Focuslight, the transaction was abandoned due to the prolonged review process and the resulting uncertainty.Footnote 89
MOTIE’s five-month technical examination should be substantially driven by concerns that the technology transfer may enable China to surpass Korea in the GVC for advanced semiconductor devices. However, the case demonstrates how the lengthy review process under Korea’s FIS regime could be a major impediment to FDI.
Qingdao Doublestar’s acquisition of Kumho Tire Co Inc
As shown in Table 2, Chinese State-owned tyremaker Qingdao Doublestar (Doublestar)’s takeover bid for 45 percent of Korean tyremaker Kumho Tire Company was the only Chinese FDI that was subject to a MOTIE review but did not involve NCT. The transaction was announced in March 2018 and triggered a national security review under Article 6(1) of FIPA because Kumho was a defence industry company governed by the Defence Acquisition Program Act, supplying tyres to the Korean Air Force.Footnote 90
MOTIE completed the review within a month and concluded that Kumho’s military aircraft tyre business accounted for only 0.2 percent of the company’s revenue and thus would not have a significant impact on military supplies.Footnote 91 This exceptionally rapid process contrasts sharply with the lengthy reviews for the NCT-related acquisitions discussed above. The transaction was approved primarily on economic grounds, with then-President Moon Jae-in publicly expressing his hope that the acquisition could save Kumho, Korea’s second-largest tyre manufacturer with a large workforce, from bankruptcy.Footnote 92
Based on the preceding case analysis, some general observations can be made about the practical application of Korea’s FIS regime to Chinese FDI.
First, given that competent ministers have broad discretion under Korea’s FIS regime to decide whether to initiate a national security review for a foreign investment, the fact that only four Chinese investments have undergone ex-ante screening indicates the Korean government’s cautious approach to FIS implementation. This may be partially justified by the Confucian-rooted legal traditions in Korea, which emphasise harmony and interpersonal (inter-State) cooperation.Footnote 93
Second, the Korean government is especially concerned about Chinese FDI in high-tech strategic industries where Korea has a technological advantage, such as the display sector. According to the China Global Investment Tracker, the only publicly accessible dataset launched by the American Enterprise Institute and the Heritage Foundation that compiles Chinese outbound FDI valued at over USD 100 million (mega FDI) from 2005, Chinese investors only made three mega FDI to Korea’s display sector since 2013. The three investments were all subject to ex-ante screening under the FIS regime, as shown in Table 2.Footnote 94 Korea’s concerns should be significantly influenced by its experiences with China’s rise to technological dominance in the global LCD sector in the past two decades. The growth of Chinese LCD manufacturers was primarily achieved through a series of acquisitions, the most notable of which was the acquisition of Hydis Technologies Company by Chinese State-owned display maker BOE Display in 2003.Footnote 95
Third, MOTIE’s FIS jurisdiction extends beyond the legal delineation. Specifically, the scope of reviewable investments under ITPA (arguably also under FIPA in the case of a high likelihood of NCT leakage) has been broadened beyond those involving NCT as defined in Article 2.2 ITPA to include NCT-related technologies. It is likely that the Special Act review has been also expanded to include investments involving NST-related technologies. In addition, the Wise Road-Magnachip case implies that MOTIE is authorised to retroactively designate NCT under Article 11 of the ITPA. In other words, it enables MOTIE to add technologies associated with a specific investment to the list of NCT after the investment has been notified (or noticed), and then conduct a security review of the investment.
Fourth, Korea’s FIS security review of a foreign investment involving NCT/NST (and related technologies) typically follows a two-step process: first, technique determination, which entails ascertaining whether the transaction involves NCT or NCT-related technologies; and second, risk determination, which entails assessing the potential for divulgence of the relevant technologies. Notably, the sole technique determination step may take more than six months to complete.
MOTIE’s rigorous reviews of Chinese FDI in the display sector indicate that Korea’s FIS regime has already become a significant barrier to Chinese FDI entering the high-tech industries. Given the Korea-China confrontation over technology security in foreign investment policy, it is reasonable to expect Korea to intensify its scrutiny of Chinese FDI in high-tech strategic industries to prevent technology leakage to China. However, the ambiguous scope of reviewable investments, the potential for retroactive expansion of NCT coverage, and the prolonged review processes can substantially diminish the predictability and certainty surrounding the implementation of Korea’s FIS regime. As a result, future Chinese investors looking to invest in Korea’s high-tech industries may face unexpected security reviews and restrictions at the point of entry.
Japan’s FIS regime and Chinese FDI: A confrontation of economic security
Overview of Japan’s FIS regime
Japan, historically a leader in economic development in Asia,Footnote 96 had previously implemented a restrictive FDI policy since the 1950s.Footnote 97 Following its accession to the OECD in 1964, the country maintained a stringent screening process for all inbound investments, approving transactions only in exceptional circumstances.Footnote 98 In 1991, Japan amended the Foreign Exchange and Foreign Trade Act 1949 (FEFTA), which established the framework for the current FIS regime.Footnote 99 The regime replaced the ex-ante screening rule with the rule of ex-post reporting,Footnote 100 marking a turning point in the FDI liberalisation progress in the country. Since then, Japan has been adjusting its FIS regime by amending FEFTA, with the most recent 2019 amendment coming into effect on 7 June 2020.Footnote 101
Overall, Japan’s current FIS regime allows FDI inflows with minimal restrictions.Footnote 102 Under the regime, a foreign investor is subject to an ex-post reporting requirement if it acquires more than 10 percent of a Japanese company’s shares.Footnote 103 Pre-notification is only required when a foreign investor seeks to make an investment that falls under FEFTA’s definition of ‘inward direct investments’ and the investee company, including its subsidiary, is engaged in a ‘designated business sector’,Footnote 104 which typically refers to sectors that are closely related to Japan’s national security, public order, or public safety, such as electricity and public transportation.Footnote 105 In addition, the 2019 FEFTA amendment imposes a pre-notification requirement when a foreign investor acquires shares in a non-listed Japanese company in a ‘designated business sector’ from another foreign investor.Footnote 106
In the case of pre-notification, Article 27 of FEFTA authorises the Ministry of Finance (JMOF) Minister and ministers supervising the relevant sectors to review the investment and determine whether it poses a threat to national security, disrupts the maintenance of public order and public safety, or negatively impacts the effective operation of the Japanese economy.Footnote 107 If it is determined that an FDI is a matter of national security, the ministers may issue a recommendation to the investor to modify the substance of the investment or to discontinue it.Footnote 108 In addition, Japan’s 2019 FEFTA amendment introduces a review mechanism for admitted investments, requiring that a foreign investor’s ‘certain actions’ (primarily those involving substantial interference with the investee company’s business operations) after the completion of its investment be pre-notified for security review.Footnote 109 A ‘certain action’ will be prohibited if it is determined to be of national security concerns.Footnote 110
Japan’s FIS regime exhibits two features that are favourable to foreign investors. First, its notification and review procedures are uncomplicated. This contrasts with the FIS regimes in Korea and Australia – the former, as discussed above, comprises multiple review processes under different laws, while the latter divides foreign investments into three categories and imposes distinct notification and review rules for each.Footnote 111 Secondly, the terms ‘designated business sector’ and ‘inward direct investment’ in FEFTA delineate a predetermined scope of reviewable investments under Japan’s FIS regime,Footnote 112 providing greater certainty for foreign investors. This contrasts with the FIS regimes in Korea and the US, which afford competent authorities broad discretion in deciding whether to subject a foreign investment to ex-ante screening.Footnote 113
Notably, Japan has significantly expanded its FIS jurisdiction in recent years, in line with the global trend towards a stricter FIS regime, indicating growing national security concerns about FDI. Specifically, the 2019 FEFTA amendment broadens the scope of ‘inward direct investment’ to encompass actions taken by a foreign investor that include, among others, acquiring any amount of shares in a Japanese unlisted company, acquiring shares in a Japanese listed company that results in the investor (or its closely related persons) holding more than one percent of the company’s shares (the shareholding threshold was 10 percent before the amendment), establishing a subsidiary in Japan, and agreeing with a substantial change of the business purpose of a Japanese company or certain matters having a substantial impact on the management of the company.Footnote 114 This scope is significantly broader than the comparable concept of ‘foreign investment’ under Korea’s FIPA, which requires the acquisition of over 10 percent of a Korean company’s shares or voting rights.Footnote 115 In addition, in response to global dynamics and domestic development demands, the Japanese government has actively expanded the list of ‘designated business sectors’ in recent years, which is discussed in the following subsection.
National security in Japan’s FIS Regime and the role of China
FEFTA, like the FIS laws in Korea, does not provide a clear definition of national security. Over the last decade, Japan has developed a robust legal framework for protecting national security, which mainly consists of the ‘Legislation for Peace and Security’ (LPS, a legislative package consisting of 10 laws) and the Act for the Promotion of Ensuring National Security through Integrated Implementation of Economic Measures (ESPA).Footnote 116 While neither of the statutes provides a definition of national security, a comparison of their legislative purposes reveals that LPS, adopted in 2015, focuses on the military aspects of national security, aiming to improve Japan’s ability to maintain domestic and international peace and stability,Footnote 117 whereas ESPA, adopted in 2022, focuses on ensuring Japan’s economic resilience and security through economic measures.Footnote 118 This suggests that, like China, Japan’s emphasis on national security over the last decade has shifted from (or grown beyond) traditional security domains to economic domains that were not previously considered security concerns. Japan’s FIS regime likewise reflects this shift.
As noted earlier, under FEFTA, only foreign investments in ‘designated business sectors’ may trigger ex-ante screening due to their potential implications for national security. It is noteworthy that the 2019 FEFTA amendment introduces ‘core business sectors’ as a subset of ‘designated business sectors’, referring to those with material implications for national security, such as weapons manufacturing and nuclear facilities, and thus have fewer exemptions from pre-notification applicable.Footnote 119 Therefore, the coverages of ‘designated business sectors’ and ‘core business sectors’ provide insight into the meaning of national security as it pertains to Japan’s FIS regime.
Over the past five years, Japan has actively expanded the list of ‘designated business sectors’ (the List) in response to global geopolitical dynamics and domestic demands.Footnote 120 Specifically, the List used to be limited to sectors that were traditionally regarded as sensitive to national security, such as nuclear facilities and public transportation. In 2019, Japan announced to add a number of cyber security-related businesses to the List, such as data processing and semiconductor memory media.Footnote 121 Notably, the announcement came three months after the US issued an executive order aimed at countering China’s market dominance in the relevant sectors via diversifying international supply chains.Footnote 122 In 2020, in response to the Covid-19 pandemic, Japan added pharmaceuticals for infections and the manufacturing of ‘specially controlled medical devices’ to the List.Footnote 123 In 2021, Japan added metal mining for 34 specified mineral resources that are essential for technological application, such as cobalt and rare-earth elements, to the List as ‘core business sectors’.Footnote 124 Notably, following this move, Japan joined the US-led Mineral Security Partnership, with the stated goal of diversifying supply chains for critical minerals and reducing reliance on China for supplies.Footnote 125 More recently, in 2023, Japan expanded the List to include nine advanced manufacturing sectors that rely heavily on foreign supplies as ‘core business sectors’, such as storage batteries and metal 3D printers.Footnote 126 This expansion is complementary to ESPA, as the sectors added correspond to the ‘specially designated critical commodities’ under the law that are eligible for government support to establish stable supply chains for economic security purposes.Footnote 127
Japan’s efforts to expand the FIS purview highlight two specific points. First, the government views ‘national security’ under the FIS regime as increasingly centred on Japan’s economic security interests. As demonstrated above, the newly added ‘designated business sectors’ are primarily those that rely heavily on foreign supplies or involve advanced technologies, reflecting Japan’s particular concerns regarding foreign disruption of supply chains and the preservation of global technological supremacy. The concerns are also reflected in JMOF’s 2020 guidance on the general factors to be considered in an FDI security review, which include the investment’s potential impacts on technological development and the stability of the supply of goods and services in the relevant strategic sectors.Footnote 128
These concerns are centred on Japan’s economic security, which, according to ESPA, primarily entails ensuring stable supplies of ‘specially designated critical commodities’ (Chapter 2), safeguarding critical infrastructure (Chapter 3), and preserving technological advancements and superiority (Chapters 4 and 5). This economic security implication has been affirmed by Japan’s latest ‘National Security Strategy’, which identifies supply chain vulnerabilities, growing threats to critical infrastructure, and the global race for advanced technologies as major economic security challenges for Japan.Footnote 129
Secondly, geopolitical factors, particularly China’s growing economic influence and ongoing tensions with the US, have significantly contributed to Japan’s emphasis on economic security under the FIS regime. In an interim report on the 2019 FEFTA amendment, the Japanese government admitted that concerns about Chinese FDI motivated by ‘State-led economic policies’ were a major driving force behind Japan’s FIS reforms.Footnote 130 This is corroborated by the fact that Japan has relied heavily on China for many critical inputs, such as electronic products and rare earth minerals.Footnote 131 The significant reliance raises the risk of Chinese disruptions of critical supplies, reminiscent of China’s 2010 restriction on rare earth supply to Japan in retaliation for Japan’s arrest of a Chinese skipper following a boat collision near the disputed Diaoyu/Senkaku islands.Footnote 132
In addition, as demonstrated above, there has been a clear correlation between Japan’s List expansions and the US’s strategic moves to counter China’s global dominance over strategic resources and critical goods. Notably, Japan’s interim report on the 2019 FEFTA amendment stated that the amendment was also motivated by the US’s adoption of FIRRMA, which substantially expanded the jurisdiction of CFIUS under its FIS regime.Footnote 133 It highlights the Japanese government’s commitment to maintaining the same level of stringency in its FIS as Japan’s allies, as failure to do so would make Japan’s FIS a ‘loophole’ that would ‘deter foreign companies [from allies] from developing business relationships with Japanese companies’.Footnote 134 Japan’s National Security Strategy explicitly refers to China as a non-ally, citing China’s pursuit of technological supremacy and global dominance over critical resources as a threat to Japan’s economic security.Footnote 135 Therefore, a confrontation over economic security has arisen between Japan and China in the context of foreign investment policy.
The implementation of Japan’s FIS regime and Chinese FDI in Japan
As discussed above, Japan’s FIS regime requires national security reviews for all foreign investments subject to mandatory pre-notification requirements. Since Japan has significantly expanded its FIS purview under FEFTA in recent years, the number of pre-notifications submitted to JMOF has increased from 594 in 2018 to 1946 in 2019 as a result of the 2019 FEFTA amendment, and has remained above 2000 annually since then.Footnote 136
According to JMOF, China was the third-largest source of foreign acquisitions in Japan that were subject to pre-notification requirements in 2022, with 73 reviewed acquisitions in total (including 50 from Hong Kong and 23 from mainland China).Footnote 137 In contrast to Korea’s FIPA, FEFTA does not require the JMOF Minister to disclose his or her FIS decisions. As a result, the Japanese government has not made public any restrictions on Chinese FDI.
Japan appears to have exercised considerable caution in restricting FDI under FEFETA. As of May 2024, the government had publicly blocked only one investment under Article 27 of FEFTA, which was an acquisition proposed by a British hedge fund in 2008 to increase its holding in Japanese power company Electric Power Development Company (J-Power) from 9.9 percent to 20 percent.Footnote 138 The prohibitive order was given primarily on the ground of J-Power’s sensitivity as a key player in Japan’s electricity supply system, concluding that even non-controlling foreign ownership would likely jeopardise electricity supply stability in Japan and pose a long-term threat to Japan’s energy security.Footnote 139
The J-Power rejection reflects Japan’s commitment to energy security at the time. Given the FIS regime’s present particular emphasis on the broader concept of economic security, the case implies a prediction that Japan may restrict investments under FEFTA based on concerns regarding potential foreign disruptions in a broader spectrum of supplies considered indispensable for the effective functioning of the Japanese economy, such as critical minerals and highly sophisticated components.
In the absence of specific cases pertaining to Japan’s application of the FIS regime on Chinese FDI, a comprehensive analysis of Chinese investments in Japan can provide valuable insights into the extent to which these investments correspond with China’s foreign investment policy and the potential implications for interactions with Japan’s FIS regime. Table 3 lists Chinese mega FDI transactions (deals valued over USD 100 million) in Japan since 2013, as recorded by the China Global Investment Tracker. The following observations from Table 2 are particularly noteworthy.
Table 3. Major Chinese investments in Japan since 2013
First, as shown in Table 3, Chinese investors have made 19 mega FDI in Japan since 2013, including 17 acquisitions and two JVs. Many of these investments were in ‘designated business sectors’, such as semiconductor and storage battery manufacturing, and thus were subject to mandatory pre-notification for screening under FEFTA unless exemptions were applied. Therefore, Japan’s acceptance of all Chinese investments demonstrates the government’s ongoing commitment to the ‘minimum necessary control’ principle, as enshrined in Article 1 of FEFETA.
Notably, Chinese technology behemoth Tencent Holdings acquired three Japanese businesses after the 2019 FEFTA amendment, including Japanese game publishers FromSoftware and Kadokawa, as well as Japanese online retailing giant Rakuten Group (Rakuten). The target companies were all engaged in data processing and software services, which, as noted earlier, were added to the List in 2019. The Japanese government reportedly had economic security concerns about the Rakuten acquisition, particularly about the potential leakage of customer data and relevant technologies.Footnote 140 The transaction was eventually approved with (the condition of) Rakuten’s promise to keep sensitive data from Tencent and not to involve Tencent in company management.Footnote 141 This indicates that Japan has not taken an especially stringent stance regarding Chinese FDI under its FIS regime.
Secondly, the industrial distribution of the investments listed in Table 3 demonstrates a strong correlation with China’s foreign investment policy. As indicated in the table, before 2017, Chinese investors showed a strong interest in Japan’s tourism, real estate, and light industry (textile and appliance manufacturing). This pattern ceased after China issued the 2017 Guiding Policy, which explicitly discourages outbound FDI in these industries on the grounds that it contradicts China’s macroeconomic policies.Footnote 142 Following the 2017 Guiding Policy, Chinese mega FDI in Japan has concentrated on advanced manufacturing sectors, including automotive, pharmaceuticals, consumer electronics, and semiconductor display. These sectors are among the ‘key technology sectors’ identified in MIC 2025, for which the Xi Jinping administration aspires to establish self-reliant GVCs.Footnote 143
Thirdly, the investments in Table 3 and their policy correlation corroborate Japan’s concerns about Chinese FDI driven by ‘State-led economic policies’ and the resulting risks to its economic security. Table 3 shows that three of the four Chinese mega FDI transactions in Japan’s automotive sector were towards electric vehicle (EV) battery production. Envision Group, a Chinese renewable energy firm, carried out two of these transactions. In 2018, it acquired Nissan Motor’s EV battery manufacturing division. In 2021, it formed a JV with Nissan to build an EV battery plant in Tokyo. The 2018 acquisition enabled Envision to acquire the world’s second largest EV battery manufacturer, Automotive Energy Supply Corporation (AESC), as well as Nissan’s battery manufacturing plants in the US, the UK, and Japan.Footnote 144 Through the 2021 JV, Envision began supplying batteries to major Japanese automakers like Nissan, Honda, and Mazda, further solidifying its position as a world-leading EV battery supplier.Footnote 145 As noted earlier, EV battery manufacturing was added to Japan’s List as a ‘core business sector’ in 2023, and EV battery was designated as a ‘specially designated critical commodity’ in ESPA. In addition, the sector has been designated as a ‘key strategic sector’ under China’s MIC 2025. Given Japan and China’s shared security concerns about the sector, Envision’s expansion in Japan exemplifies the typical trajectory of a Chinese company that, through FDI that complied with State policy, managed to become a dominant supplier to Japan’s strategic industries.
The findings above provide substantiation for the rising economic security confrontation between Japan and China. One possible explanation for Japan’s cautious approach to implementing its FIS regime is the country’s long-standing policy of attracting foreign investment to promote economic growth.Footnote 146 Although China is a major investor in Japan, the following factors may prompt the Japanese government to target Chinese FDI in future FIS implementation.
The first factor is the advancement of China’s pursuit of global dominance over critical supplies and the implications for Japan’s reliance on Chinese supplies, particularly for the sectors and commodities covered by the List under FEFTA or by ESPA. Should this heavy reliance grow, Japan’s perception of the economic security risks associated with Chinese FDI that aligns with Chinese national security policy will escalate, necessitating the country to impose restrictions on Chinese investments in the relevant sectors under FEFTA to mitigate the risks at the point of entry.
The second factor is the changing geopolitical climate, particularly the US-China tensions, which, given the longstanding US-Japan alliance,Footnote 147 have a significant impact on China-Japan economic relations. As Sino-Western tensions persist, it will become impractical for Japan and China to address the economic security confrontation through a political initiative to establish an effective dialogue mechanism, which might prompt Japan to impose FIS restrictions on Chinese investments as a unilateral measure to mitigate any perceived security risks.
Third, Japan’s FIS application for Chinese FDI will be influenced by its progress in supply chain diversification. As noted earlier, Japan has participated in several US-led coalitions that advocate for ‘friend-shoring’ critical supply chains (which refers to relocating production of critical supplies to ally countries), with the stated goal of reducing economic vulnerability to China. More recently, in 2023, Japan and the Netherlands joined the US in restricting the export of semiconductor manufacturing equipment to China, aiming to curb China’s ability to manufacture advanced chips.Footnote 148 The initiatives may drive Japan to restrict Chinese FDI in relevant sectors as a means to achieve the specific objectives.
The preceding analysis reveals that the FIS regimes in Korea and Japan are based on well-structured regulatory frameworks. However, their implementation, which is currently being carried out with great caution, could potentially be influenced by policy, geopolitical, or industrial factors with regard to Chinese FDI. Notably, the FIS regimes have demonstrated a clear policy confrontation with China’s foreign investment policy over national security protection, with a focus on economic and technology security, respectively. Given China’s assertive foreign investment policy in the midst of rising geopolitical tensions, the security confrontation raises the possibility that prospective Chinese investors in Korea and Japan will encounter more stringent entry barriers under their respective FIS regimes. This highlights the risk of conflict between Korea’s and Japan’s FIS regimes and their obligations under the international law.
East Asian security confrontations under international investment law
As Voon and Merriman pointed out, a country’s FIS regime might conflict with its obligations under international investment law to protect foreign investments and investors.Footnote 149 Over the past three decades, Korea and Japan have entered into a number of IIAs with China that are concurrently in force.Footnote 150 Japan has three IIAs with China, including the 1988 Japan-China bilateral investment treaty (BIT),Footnote 151 the 2012 China-Japan-Korea trilateral investment agreement (TIA),Footnote 152 and the 2020 Regional Comprehensive Economic Partnership (RCEP, a free trade agreement (FTA) between 15 Asia-Pacific countries).Footnote 153 Korea has four IIAs with China, including the 2007 China-Korea BIT,Footnote 154 the 2015 China-Korea FTA,Footnote 155 as well as TIA and RCEP. Under the treaties, Korea and Japan have obligations to protect FDI from China and vice versa.Footnote 156
Given the increasing likelihood that Korea and Japan will enforce their FIS regimes more rigorously on Chinese FDI in response to the security confrontations, their multiple IIAs with China highlight the risks of treaty violations, potentially leading to an increase in investor-State dispute settlement (ISDS) claims filed by Chinese investors. Therefore, this section assesses the extent to which the FIS regimes of Korea and Japan comply with their obligations under IIAs with China through examining some major protection clauses in the treaties.
The post-establishment protection coverage of the IIAs
The five IIAs between Korea/Japan and China were all carefully drafted to preserve the Parties’ right to regulate FDI admission. This should be attributed to the existence of the Parties’ FIS regimes during the period of treaty negotiations, particularly the historically stringent FIS regimes of Japan and China.Footnote 157 The preservation objective was achieved primarily by limiting the scope of treaty protection to investments that have been lawfully established. Specifically, the Japan-China BIT, the China-Korea BIT, the Korea-China FTA, and RCEP expressly limit investments eligible for treaty protections to those have been admitted ‘in accordance with the applicable laws and regulations’ of the host Parties.Footnote 158 In addition, with the exception of RCEP, all IIAs between Korea/Japan and China contain an investment promotion obligation requiring the Parties to admit investments from other Parties ‘in accordance with the applicable laws and regulations’.Footnote 159
These legality qualifications effectively safeguard the regulatory authority of Korea and Japan to impose limitations on Chinese FDI prior to entry, on the condition that such restrictions are enforced in adherence to their respective FIS legal frameworks. Notwithstanding this post-establishment coverage, the FIS restrictions imposed by Korea and Japan on Chinese FDI may still breach specific obligations under their IIAs with China.
Pre-entry restriction: potential breach of most-favoured-nation treatment obligation
Under the IIAs with China, Korea and Japan commit to most-favoured-nation treatment (MFN) for Chinese investments, which refers to treatment no less favourable than that accorded ‘in like circumstances’ to investments from any third country.Footnote 160 The MFN commitments are specifically extended to the admission stage of covered investments, potentially conflicting with Korea’s and Japan’s FIS restrictions on Chinese FDI at the point of entry.
The FIS regimes of Korea and Japan do not violate the MFN commitments by virtue of their existence, as neither country has granted preferential FIS treatment in any IIAs, such as exempting investments from specific IIA partners from certain ex-ante screening trigger events.Footnote 161 Nevertheless, their de facto discrimination in FIS implementation could potentially give Chinese investors grounds to claim a breach of the MFN obligation under the treaties.
To make such a claim, a Chinese investor must demonstrate that it has received less favourable treatment under the FIS regime than a comparable non-Chinese foreign investor with similarity in sectors and areas of activity (ie, ‘in like circumstances’Footnote 162).Footnote 163 In addition, it may be necessary to determine whether the differential treatment can be justified by legitimate public welfare objectives.Footnote 164
While challenging, it is not impossible to meet the evidentiary burden in practice. For example, a government statement confirming that nationality influenced a negative FIS decision on Chinese FDI might be considered circumstantial evidence of de facto discrimination. While the Korean and Japanese governments have not made such statements regarding specific Chinese investments, Australia provides one possible example. In 2021, after rejecting China State Construction Engineering Corporation’s takeover bid for Australian construction firm Probuild, then-Treasurer Josh Frydenberg admitted that he was rejecting Chinese proposals that would have previously been approved because ‘Australia is dealing with a different China under President Xi Jinping’.Footnote 165
It should be noted that such an MFN claim is unlikely to be established under TIA or China-Korea FTA, as the MFN obligations under the treaties are explicitly subject to the Parties’ obligation to admit investments in accordance with applicable laws and regulations,Footnote 166 which can shield the Parties’ FIS application from MFN violations.
Post-entry restriction: potential breach of expropriation obligation
The IIAs between Korea/Japan and China all include an expropriation clause that prohibits the Parties from taking measures that have similar effect as expropriation (ie, indirect expropriation) on covered investments unless the measures are in the public interest, non-discriminatory, in accordance with due process of law, and include reasonable compensation.Footnote 167
As discussed in the third section of this article, Chinese investors have made substantial investments in Korea and Japan in sectors that are closely related to national technology and economic security. The established investments may raise red flags with the Korean or Japanese governments, potentially leading to the need for retrospective reviews under the FIS regime out of national security concerns. While Korea’s FIS regime has not placed a significant emphasis on retrospective review mechanism, Japan’s 2019 FEFTA amendment, as noted above, authorises the competent ministers to review foreign investors’ ‘certain actions’ after the completion of their investments.
However, Japan (and Korea, if it introduces retrospective review mechanisms in the future) should exercise great caution before initiating any reviews of a Chinese investment that has been admitted. If a national security threat is identified, a retrospective review may result in restrictions on the investment, such as prohibiting a proposed transfer of the investee company’s business in ‘designated business sectors’,Footnote 168 which may be challenged as an indirect expropriation under the applicable IIAs.
Specifically, when determining whether an indirect expropriation has occurred, ISDS tribunals typically require interference with the investment’s property rights,Footnote 169 such as the deprivation of essential components of the property rights or the removal of the use or reasonable-to-be-expected economic benefits of the investment.Footnote 170 In addition, Japan’s amended FEFTA makes no mention of compensation related to the review for ‘certain actions’.Footnote 171 In light of the criteria outlined in the treaties and established in ISDS practices, an order imposing FDI restrictions resulting from a retrospective FIS review could readily satisfy the criteria.
It should be noted that such an expropriation claim is unlikely to be established under China-Korea FTA or RCEP. The treaties clarify that non-discriminatory regulatory actions for legitimate public welfare objectives do not constitute indirect expropriation.Footnote 172 As a result, national security-based FIS restrictions should be exempt from expropriation violations, provided they are implemented in a non-discriminatory manner.
Investor-State dispute settlement clause of the IIAs
With the exception of the RCEP, the IIAs between Korea/Japan and China all contain an ISDS clause,Footnote 173 allowing investors to initiate international arbitration proceedings against the host State alleging treaty violations.Footnote 174 The potential conflicts between the FIS regimes of Korea and Japan and their obligations under IIAs with China, as outlined above, raise the prospect of Chinese investors affected by negative FIS decisions in Korea or Japan filing ISDS claims against the countries under the treaties. It should be noted that China-Japan BIT limits ISDS arbitrability to disputes dispute concerning the amount of compensation.Footnote 175 RCEP does not include an ISDS clause; instead, it provides a work programme for subsequent ISDS negotiations.Footnote 176
The preceding compliance evaluation demonstrates that Chinese investors affected by Korea’s FIS regime may file ISDS claims against Korea for MFN violations under China-Korea BIT (in the case of pre-entry restrictions) or illegal expropriation under China-Korea BIT or TIA (in the case of post-entry restrictions). Chinese investors subject to post-entry restrictions under Japan’s FIS regime may file ISDS claims against Japan for expropriation under TIA. Alternatively, the relevant disputes arising from the IIAs could be resolved through amicable consultation between the Parties.Footnote 177 The following recommendations for Korea and Japan concerning FIS operations and reforms may help the countries avoid allegations of violations of their obligations under IIAs with China.
First, Korea and Japan should ensure that FIS regimes are implemented solely for national security purposes, as national origin discrimination in FIS implementation could potentially be contested as a violation of the MFN or expropriation clauses in their IIAs with China.
Second, the countries should exercise caution when deciding to impose restrictions on admitted Chinese investments, as such restrictions could potentially conflict with the expropriation clause in the applicable IIAs with China.
Third, in addition to non-discrimination, Korea and Japan should ensure that their FIS regime adheres to the principles of transparency, predictability, proportionality, and accountability, which are best practices for foreign investment policy outlined in the 2009 OECD ‘Guidelines for Recipient Country Investment Policies Relating to National Security’ and the 2016 G20 ‘Guiding Principles for Global Investment Policymaking’.Footnote 178
Although Korea and Japan have made substantial efforts to enhance their FIS frameworks and review processes in recent years, Korea’s prolonged FIS review processes and Japan’s absence of a disclosure obligation for FIS review results may increase the perception of uncertainty among Chinese investors (and other foreign investors) and, as a result, their inclination to pursue remedies under international investment law should unexpected FIS decisions affect their investments. Therefore, it is highly desirable that the countries improve the transparency of their FIS review procedures, ensuring that investors have adequate opportunities to respond to government concerns and propose appropriate mitigations during the review process.Footnote 179 This will facilitate mutually acceptable investment arrangements with agreed-upon conditions for mitigating any potential national security risks between themselves as host States and the investors.
Conclusion
This article demonstrates that a national security-focused confrontation between developed East Asian countries and China over cross-border investment has emerged as a result of their shared concerns about national security threats. Over the past decade, China has expanded the legal concept of national security to encompass nearly all components necessary for national prosperity. In line with this stance, China’s latest foreign investment policy prioritises the security of energy, critical minerals, and technology as outbound FDI objectives – all with the goal of achieving comprehensive national security. Korea and Japan, as East Asia’s leading advanced economies, have substantially enhanced their FIS regimes in recent years as a significant means of protecting their technology and economic security, respectively, from potential compromise by foreign investments, particularly those from China. The national security confrontation has been observed to have a significant impact on Korea’s application of the FIS regime to Chinese FDI, but not on Japan’s implementation of the FIS regime, which is most likely due to the absence of a disclosure obligation for FIS decisions under FEFTA. Given China’s assertive foreign investment policy in the midst of rising geopolitical tensions, the national security confrontation raises the possibility that prospective Chinese investors in Korea and Japan will encounter more restrictions under their respective FIS regimes.
This article has assessed the extent to which the FIS regimes of Korea and Japan comply with their obligations under IIAs with China, and revealed that the countries’ pre-entry and post-entry restrictions on Chinese FDI may violate their MFN and expropriation commitments under specific IIAs with China, which Chinese investors may challenge through ISDS arbitration. Therefore, this article recommends that Korea and Japan implement their FIS regimes for Chinese FDI in a non-discriminatory and more transparent manner in order to avoid allegations of treaty violations and facilitate the influx of Chinese FDI while ensuring that the associated risks are adequately mitigated. Should Korea and Japan politicise the implementation of FIS regimes in relation to Chinese FDI, the consequences would be far-reaching for Eastern Asia’s geopolitical stability and regional economic growth and harm their economic relations with China.
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