Reevaluating Israel’s FDI Approach Amid Security Threats

With the ongoing Gaza war and global tensions, Israel faces a delicate balancing act. It is trying to attract foreign investments while also protecting its national security. This has become even tougher as diplomatic challenges have intensified and Israel is trying to maintain its reputation as a ‘startup nation’ for global capital. Recent developments at the International Court of Justice (ICJ) have underscored Israel’s diplomatic isolation, with a significant number of nations opposing its stance on the Gaza issue. This international pressure stands in stark contrast to Israel’s robust economic ties with various global partners, creating a challenging landscape for foreign direct investment (FDI).

The relationship with China serves as an illustrative example of this landscape. Chinese investments in Israeli infrastructure, notably in the Bay Port in Haifa, slightly north of the main Haifa Port, have been substantial. However, China has started to adopt troubling positions against Israel in international forums, aligning itself with Israel’s enemies. This in turn raises serious concerns about China’s involvement in Israel’s strategically vital economic sectors.

Recently, these concerns were brought into focus when the Chairman of the Ashdod Port recently called for barring the Chinese company Shanghai International Port Group (SIPG) from operating the Bay Port in Haifa during wartime. The concerns cited revolve around potential access to sensitive information and China’s affiliations with countries such as Iran and Russia, highlighting the profound national security implications of certain foreign investments. It is worth noting that the Bay Port competes directly with the Ashdod Port. This context may partly explain the Ashdod Port Chairman’s statement, although the security concerns raised remain valid. Moreover, the proximity of the Bay Port to Israeli naval facilities further amplifies the security considerations related to similar foreign involvement.

At the same time, Israel’s current regulatory framework for FDI, including the Advisory Committee established in 2019 and updated in 2022, has not fully addressed the complex challenges posed by geopolitical tensions and national security concerns. The absence of a mandatory screening process for investments in strategically sensitive sectors could leave potential gaps in the nation’s security measures. Despite the Advisory Committee’s efforts to scrutinize foreign investments, its recommendations are not legally binding, which limits its effectiveness in addressing emerging threats. Additionally, the absence of a clear legal framework and national security policy for the screening process introduces uncertainty about the basis for its decisions, leading to a lack of transparency.

Many countries are now stricter about foreign investments. They have adopted screening mechanisms of FDI, designed to ensure that national security interests are not compromised if foreign investors from certain countries are allowed to invest in, and thereby control, strategic sectors. For instance, the United States has expanded the powers of its Committee on Foreign Investment (CFIUS), the European Union has implemented a bloc-wide FDI screening framework, and countries like Japan and Australia have tightened their FDI regulations in response to evolving geopolitical dynamics. On the other hand, in order to ensure fair and objective rules and practices, these mechanisms need to be embodied in transparent legislation, open to judicial scrutiny. At the moment, Israel does not have such legislation, and this may be the time to reconsider the existing framework.

Moreover, the World Trade Organization (WTO), of which Israel is a member, is currently negotiating a new agreement named the Investment Facilitation for Development Agreement (IFD). The IFD emphasizes the need for transparent and well-defined domestic frameworks for managing FDI while fostering economic growth. As a WTO member, Israel could consider joining this agreement in the future. It would involve aligning its FDI regulatory approach with evolving international norms. Hence, developing a clearer FDI legal framework and guidelines for evaluating national security risks would not only enhance national security but also provide greater clarity and transparency for foreign investors, thereby boosting confidence in the Israeli market.

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The above was coauthored by Prof. Arie Reich and Igor Klotsman. Prof. Arie Reich is the Vice Rector of Bar Ilan University and an expert on International Law and Mr. Igor Klotsman is a doctoral student in the Bar Ilan University Faculty of Law.