Dr David Green: Conservatives shouldn't dismiss Lord Heseltine’s recommendations for foreign takeovers out of hand

Dr David G Green is Director of Civitas.

Lord Heseltine’s recommendation that foreign takeovers should be subject to a public interest test has provoked a storm of opposition. Jeremy Warner, for example, remarked in the Daily Telegraph, “I’d much rather take my chances with the invisible hand than the whim or personal self-interest of the politician when it comes to determining what’s in the national interest.” A law governing foreign takeovers, he thought, would be “a bit of nonsense”.

This call for the unfettered freedom of business corporations represents the puritan wing of the movement for freedom. No less a writer than Hayek voiced his frustration with doctrinal purity. Nothing has done as much harm, he thought, as “the wooden insistence of some liberals” on laissez faire. The important challenge, he argued, was to aim at the “gradual improvement of the institutional framework of a free society”. Hayek’s focus on the steady improvement of our institutions invites Conservatives to clarify their attitude to the nation state. Is there a common good that might be different from what any one commercial company might want? If so, is Parliament the legitimate guardian of that public interest?

Again, it was Hayek who said that the alternative to a controlled economy was not laissez faire but a “rational framework for competition”. There was “all the difference between deliberately creating a system within which competition will work as beneficially as possible, and passively accepting institutions as they are”. If Hayek was right, then should we passively accept takeover law as it is?

There have been beneficial foreign takeovers in recent years. The takeover of Jaguar Land Rover by Tata, for example, has been followed by significant new investment in the company. In other cases, the motive of investors was to weaken competition from a British rival or to strengthen monopoly. For example, the French company Alstom took over Metro-Cammell in 1989, but after it had completed its main contract, the factory was closed in 2005 and manufacturing transferred to France. Similarly, Coles Cranes, a successful North-East company, was taken over by an American crane manufacturer and eventually closed down in 1998. As guardian of our own national interest and the international community’s public interest, Parliament is entitled to ask whether or not specific investments are likely to increase or reduce competition.

In some cases a new owner may put the national interest of his own homeland above the interests of British workers. The head office may move overseas with the loss of valuable service contracts. Foreign owners are also more likely to close their British branch in a downturn. Often takeovers are funded by debt which is loaded onto the books of the acquired company, adding to its costs and making it more difficult for it to compete. In the meantime, the private-equity buyer has re-sold the company and moved on.

To pretend that every takeover is well-intentioned and economically beneficial is naïve. As Martin Wolf, one of our most distinguished economic commentators has noted, the modern era has seen the ‘the triumph of the global over the local, of the speculator over the manager, and the financier over the producer’.

The protection of both domestic and international competition is in the interests of all, and it would be fully justified for foreign takeovers to be referred to a body such as the Competition Commission to ensure that the outcome will not reduce worldwide competition. Until the 2002 Enterprise Act the Secretary of State could make an order to prevent an action that “harmed the economic interests of consumers”. A power to protect the public interest when dealing with foreign takeovers now urgently needs to be restored.

But there is a deeper question for Conservatives. To what idea do they owe their primary allegiance? Many would say the nation state, but only so long as its paramount task is to serve as the guardian of liberty. Inherent in this view of the nation state is the belief that to be free is to live under the protection of law, as contrasted with the arbitrary rule of a governing party. This world view also puts the market economy in its proper place. We face a choice between the idea that a nation is an economy and the idea that a nation has an economy. For Conservatives a market economy is but one dimension of a free life.

A nation is not a mere collection of self-serving people, but an enduring achievement by individuals who understand that their prosperity and their chances of advancing human civilisation depend on the institutions they have inherited. Moreover, a single generation could let it all go, unless each is willing to act as the custodian of the culture of liberty – the institutions that make Britain a decent place to live.

In this world view, where do international companies fit? Their very existence depends on there being law-governed places where it’s safe to do business. And yet they are free to move from one to another depending on their own private advantages, without necessarily contributing much to the maintenance of the institutions and culture vital for their own survival and for the prosperity of all. When a company takes over a firm it holds the destiny of the employees in its hands. Is it their intention to do their best to develop the capabilities of the workforce as the main business asset of the company? Or does the company plan to extract what it can before abandoning the workforce? Such questions are not just about our national interest, or the interests of workers who might be abandoned. There is an international common interest in maintaining competition.

There is a tendency to confuse all patriotism with aggressive nationalism. But it is perfectly possibly to be legitimately patriotic, to refrain from nationalistic animosity, and yet unashamedly to pursue our national interests in a spirit compatible with international reciprocity.

Some critics of Lord Heseltine have said that if we restrict the ability of foreign companies to take over British firms, then “our companies” might face limitations on their power to buy overseas companies. As an aside, it is highly unlikely that there would be such limitations. Most other countries already restrict foreign takeovers. The more important question is what do we mean by “our companies”? In what sense are they ours? In truth, modern international corporations are more like “stateless” organisations than national entities. They owe their allegiance to their own interests.  Again it was Hayek who spoke of the tendency of business corporations to “develop into self-willed and possibly irresponsible empires, aggregates of enormous and largely uncontrollable power”. Nor was it, he thought, “a fact which we must accept as inevitable”.

International companies can be useful. We would like some of them to stay here. But there is such a thing as the common good and it may not coincide with the immediate interests of any one company. Parliament is entitled to make laws to protect our common interests.