CFIS 2024: Issue Notes (Part 1/2)
A Note from the Editors
The CELIS Blog is launching its second special series of blog posts ahead of this year’s CELIS Forum on Investment Screening (CFIS). The Issue Note series provides analyses which are published to elicit comment and to further debate. The series is written by our Programme Sherpas, promising young academics and practitioners in the field.
CFIS is the flagship event of the CELIS Institute and is now in its 6th year. It is Europe’s first and foremost forum for the discussion of investment control and economic security issues. Thought leaders in investment control and economic security from Europe, the US and beyond will discuss current practical challenges and influential ideas to outline geo-economic strategies for Europe. Participation is by invitation only. If you are interested, please contact events@celis.intitute.
Navigating Economic Security in Uncertain Times – Key Strategic Issues for OECD Countries
By Dominika Pietkun, CFIS 24 Programme Sherpa and PhD Candidate at the Institute of Legal Sciences of the Polish Academy of Sciences
As the global regulatory and investment landscape continues to evolve, OECD countries face a multitude of economic security challenges that demand urgent attention. With geopolitical tensions, shifting economic dynamics, and technological advancements reshaping the world, it is crucial for policymakers, investors, and stakeholders to address the most pressing strategic issues over the next years. This issue note outlines three critical strategic issues that warrant focused discussion at the upcoming CFIS 24 conference, providing insight into why these issues are paramount and how they impact the economic security of OECD countries.
I. Resilience of Global Supply Chains
Overview: The COVID-19 pandemic exposed significant vulnerabilities in global supply chains, with disruptions impacting everything from pharmaceuticals to electronics. As geopolitical tensions and natural disasters continue to threaten supply chain stability, ensuring resilience has become a strategic priority for OECD countries.
Why It Matters: The interconnected nature of global supply chains means that disruptions in one region can have cascading effects worldwide. For OECD countries, maintaining the flow of critical goods and services is essential for economic stability and growth. The ongoing war in Ukraine and instability in the Middle East have further highlighted the fragility of supply chains, emphasizing the need for robust strategies to mitigate risks.
Strategic Focus:
- Diversification and Localization: OECD countries need to diversify their supply sources and consider localizing critical production to reduce dependency on volatile regions. Initiatives like the CHIPS Act in the United States and strategic stockpiling in the EU are steps in this direction, but further action is needed to build more resilient supply networks.
- Technological Integration: Investing in advanced technologies such as blockchain and AI can enhance supply chain visibility and predict potential disruptions. Collaboration with the private sector to develop innovative solutions will be crucial.
- Public-Private Partnerships: Strengthening public-private partnerships can facilitate better coordination and information sharing, helping to address supply chain vulnerabilities more effectively.
Discussion Points:
- What specific policies and incentives can OECD countries implement to encourage supply chain diversification and localization?
- How can technology be leveraged to improve supply chain transparency and resilience?
- What role should international organizations and trade agreements play in supporting supply chain security?
II. Managing Energy Security Amidst Transition
Overview: Energy security remains a critical concern as OECD countries transition to renewable energy sources while managing their dependence on fossil fuels. Geopolitical conflicts, particularly involving major energy producers, have underscored the need for a balanced approach to energy policy.
Why It Matters: Energy security is vital for economic stability, affecting everything from industrial production to household energy costs. The transition to renewable energy presents both opportunities and challenges. Countries need to manage this transition carefully to ensure that energy supplies remain stable and affordable while reducing carbon emissions.
Strategic Focus:
- Balancing Transition and Security: OECD countries must navigate the dual goals of transitioning to renewable energy and maintaining energy security. This includes investing in energy storage technologies and diversifying energy sources to reduce reliance on unstable regions.
- Infrastructure Investment: Upgrading energy infrastructure, including the development of smart grids and investment in new energy technologies like hydrogen, will be essential for achieving a secure and sustainable energy future.
- International Cooperation: Collaborative efforts, such as those through the International Energy Agency (IEA), can support member countries in developing coordinated strategies for energy security and sustainability.
Discussion Points:
- How can OECD countries effectively balance the transition to renewable energy with the need to maintain energy security?
- What are the most promising technologies for energy storage and infrastructure development?
- How can international collaboration be enhanced to address global energy security challenges?
III. Navigating Cybersecurity Threats
Overview: As digital transformation accelerates, cybersecurity threats have become increasingly sophisticated, targeting critical infrastructure, financial systems, and governmental institutions. Protecting against these threats is essential for safeguarding economic security.
Why It Matters: Cybersecurity breaches can have severe economic and reputational impacts. The rise of cyber-attacks, combined with the growing digitalization of economic activities, makes cybersecurity a top priority for OECD countries. Effective cybersecurity measures are crucial for protecting sensitive data, maintaining public trust, and ensuring the integrity of financial and economic systems.
Strategic Focus:
- Strengthening Cyber Defense: Investing in advanced cybersecurity technologies and improving defenses against cyber-attacks is critical. OECD countries should enhance their capabilities to detect, respond to, and recover from cyber threats.
- Promoting Best Practices: The OECD’s Recommendation on Digital Security Risk Management provides a framework for managing cybersecurity risks. Adopting and implementing these best practices across sectors can improve overall cyber resilience.
- Fostering International Collaboration: Cyber threats are global in nature, requiring international cooperation for effective responses. Strengthening global partnerships and information sharing on cyber threats can enhance collective security.
Discussion Points:
- What measures can OECD countries take to improve their cybersecurity defenses and resilience?
- How can best practices for digital security be more widely adopted across different sectors?
- What are the most effective strategies for international collaboration on cybersecurity?
IV. Trade Tensions and the Rise of Protectionism vs. Promotion of Free Trade
Overview: The rise of protectionism and trade tensions poses significant challenges to the principles of free trade that underpin the global economy. Recent years have seen an increase in tariffs, trade barriers, and unilateral trade policies, which threaten to disrupt international trade and economic cooperation.
Why It Matters: Trade is a critical driver of economic growth and development. Protectionist measures can lead to trade wars, reduce market access, and hinder economic performance. For OECD countries, promoting free trade is essential for maintaining economic security, fostering innovation, and ensuring access to global markets.
Strategic Focus:
- Balancing Protectionism and Openness: OECD countries need to find a balance between protecting domestic industries and promoting free trade. This involves negotiating trade agreements that are fair and equitable while safeguarding national interests.
- Enhancing Trade Policies: Developing coherent and consistent trade policies that reduce barriers and facilitate smoother international trade can help counter the adverse effects of protectionism. The OECD’s FDI Regulatory Restrictiveness Index and related analyses provide valuable insights for shaping these policies.
- Strengthening Multilateral Trade Systems: Supporting and reforming international trade organizations such as the World Trade Organization (WTO) can help ensure that trade disputes are resolved fairly and that trade rules are upheld.
Discussion Points:
- How can OECD countries balance the need for economic protectionism with the imperative of maintaining open and fair trade practices?
- What role can the OECD play in mediating trade disputes and promoting multilateral trade agreements?
- How can trade policies be designed to benefit both advanced and developing economies?
V. Conclusion
The economic security of OECD countries is increasingly challenged by a complex array of issues, from supply chain vulnerabilities to energy security and cybersecurity threats. Addressing these strategic issues is crucial for ensuring resilience and stability in a rapidly changing global environment. The upcoming October 2024 conference provides a vital opportunity for stakeholders to engage in discussions, share insights, and develop actionable strategies to navigate these challenges effectively.
By focusing on these pressing issues, OECD countries can better position themselves to manage risks, capitalize on opportunities, and secure their economic futures amidst ongoing uncertainties.
Investment Screening and Economic Security in the Majority World
By Liam McGrath, CFIS 24 Programme Sherpa
I. Introduction
Investment screening and economic security are critical concerns for nations within the majority world, which comprises most of the global population but faces unique developmental challenges compared to highly industrialised countries. These nations strive to attract foreign direct investment (FDI) for economic growth while safeguarding strategic assets and national security. This issue note outlines three pressing issues in this area, presenting their significance and key discussion points. Addressing these issues is crucial for sustainable development and economic resilience, making them vital topics for discussion at CFIS 24.
II. Balancing FDI Attraction with National Security
1. Issue
Less industrialised nations heavily rely on FDI for infrastructure development and economic growth. However, this dependence poses significant risks to national security, as foreign investors may gain control over critical infrastructure and strategic assets.
2. Why It Matters
Striking a balance between attracting FDI and protecting national interests is a complex but essential task. Economic dependency on foreign investment can lead to vulnerabilities, while strategic sectors like telecommunications, transport and energy are particularly sensitive.
3. Discussion Points
- Economic Dependency: How does overreliance on foreign investment contribute to economic vulnerability, and what risks might arise from foreign entities using their investments for political or economic leverage?
- Strategic Sectors: What are the potential risks associated with foreign control in strategic sectors such as telecommunications, energy, and transportation, and how can these impact national security?
- Regulatory Frameworks: How can emerging economies establish or strengthen investment screening frameworks to mitigate risks, and what balance should be struck to avoid deterring foreign direct investment?
II. Navigating International Cooperation and Strategic Partnerships
1. Issue
In a globalized economy, countries cannot address economic security challenges in isolation. International cooperation and strategic partnerships are vital for sharing knowledge, resources, and best practices in investment screening and economic security.
2. Why It Matters
International cooperation enhances the ability of countries to manage economic security issues effectively. It allows for the pooling of resources, collective problem-solving, and alignment with global standards.
3. Discussion Points
- Regional Alliances: How can regional alliances such as ASEAN, MERCOSUR, and the African Union facilitate cooperation on investment screening practices and economic security strategies?
- Collective Resources: In what ways can pooling resources and expertise through international cooperation improve the effectiveness of investment screening mechanisms?
- Global Standards: How can aligning with international standards and practices help facilitate smoother investment flows and minimize barriers to trade?
III. Investing in Domestic Capabilities and Infrastructure
1. Issue
To reduce dependence on foreign investment and enhance economic resilience, emerging economies should consider investing in their domestic capabilities and infrastructure.
2. Why It Matters
Strengthening domestic industries and infrastructure is crucial for economic security. It reduces reliance on foreign investments, mitigates risks associated with foreign control, and makes countries more attractive for high-quality FDI.
3. Discussion Points
- Domestic Industries: How can building and supporting domestic industries help mitigate risks associated with foreign dominance in strategic sectors?
- Innovation and R&D: In what ways can fostering innovation and research and development (R&D) contribute to self-sufficiency and reduce reliance on foreign technology and expertise in sensitive sectors?
- Critical Infrastructure: How does investing in transportation, digital infrastructure, and other critical areas enhance overall economic security and resilience?
IV. Conclusion
Addressing the challenges of investment screening and economic security in majority world countries requires a multifaceted approach. By balancing FDI attraction with national security, fostering international cooperation, and investing in domestic capabilities and infrastructure, these nations can navigate the complexities of the global economic landscape and achieve sustainable development and prosperity. The issues outlined in this note are crucial for discussion at CFIS 24 and will help shape future policies for economic security in the majority world.
A Firm-Level Perspective on Investment Screening in the EU
By Floor Doppen, CFIS 24 Programme Sherpa and PhD Candidate at The University of Antwerp
I. Introduction
The CELIS Forum (CFIS) is Europe’s first and foremost platform to discuss foreign investment screening. In light of the recently announced Proposal (‘the Proposal’) on the screening of foreign investment in the Union and repealing Regulation (EU) 2019/452, this year’s Forum is uniquely placed to discuss, among others, the most pressing strategic issues that the Proposal seeks to address as well as highlight those issues that might have been overlooked.
What is and what is not a pressing issue of course depends on the perspective of the different stakeholders that populate the field of investment screening. After all, the explicit aim of investment screening is to hand EU Member States and the Commission the legal toolbox to safeguard security and public order, while domestic and foreign firms find themselves navigating an increasingly complex regulatory field that has the potential to curtail access to much needed capital. It is the balance between security and retaining an attractive investment climate that demarcates the tension at the heart of many discussions when it comes to investment screening. A second balancing act is that between the Commission and the EU Member States, where the former pursues more harmonization on investment screening but is dependent on the cooperation of the latter. Thinking along these lines allows for the isolation of a few important strategic issues that will need to be addressed in the upcoming Proposal and in the years that follow.
II. Balancing Security Needs and Firm-Level Concerns
How can the regime address gaps in the Regulation without increasing compliance costs in the form of increased bureaucratic red tape and excessive notifications and screening reviews? The aim of the Proposal is to fix some of the shortcomings that have become apparent in the first 5 years of the Regulation’s existence. For example, EU Member States that do not have a screening mechanism receive significant shares of FDI essentially “unscreened”.[i] There is also the concern that the current system does not capture all risky investments in screening states, in particular greenfield investments and indirect foreign investments made through EU subsidiaries controlled by non-EU actors.
The solutions proposed in the Proposal range from making investment screening mandatory for all EU Member States (not a contentious element), adding indirect foreign investments to the scope of application, introducing a mandatory sectoral scope for investment screening (Annex II), to including greenfield investments in the Proposal. These latter solutions leave significant room for debate, and are more contentious than the inclusion of the obligation to adopt a screening mechanism.
For starters, the inclusion of a mandatory scope and to allow for the screening of indirect foreign investment screening may have the very real potential of overburdening domestic FDI screening authorities and scaring off investors as they introduce more red tape for more businesses by increasing notification obligations.[ii] Similarly, firms fear that the introduction of indirect foreign investment screening will lead to a much larger proportion of transactions subject to screening as it would practically apply to many intra-EU transactions, potentially leading to excessive administrative costs and more strain on bureaucracies that deal with an increase in screening cases, delaying the domestic screening process.[iii] Some businesses in response have proposed that the Commission develop an approach to investment screening that is more targeted with a risk-based filter to exclude low-risk investments from the Proposal.[iv]
How to balance the need to detect high risk investments currently not covered by domestic or EU Regulation, while excluding the low-risk transactions, has been an important discussion point. Doing so requires more definitional clarity than the Proposal currently possesses as Annex II of the Proposal (which contains the list of sectors where screening is set to become mandatory), is very vague and broad in scope.[v] For many businesses, therefore, delineating the scope of mandatory notification is central to achieving a manageable balance between ensuring the cost of FDI screening does not exceed the security gains it seeks to achieve. This is also apparent from the calls of national business associations to their governments when these adopted their own screening mechanisms.[vi] Yet, it is unclear how sectors could or should be defined in order to address firm concerns and achieve a more risk-based approach.
Another aspect central to firm-level concerns is the lack of transparency of the review process. As it stands, EU Member States are only required to provide high-level information in aggregated and anonymised format in their annual reports, which fails to provide the necessary actionable guidance on interpretation of jurisdictional concepts, approach to substantive assessments and underlying reasons for remedial enforcement and prohibitions.[vii] Similarly, there is (depending on the Member State) only limited interaction with the actors undergoing a review. Moreover, since many Member States don’t have a long tradition of investment screening and as a result of the confidentiality of the review process, there are not many cases that can act as a guide to better understand the screening process, its outcome, and applicability. Combined, this makes that investment screening right now often still remains a black box for investors, domestic firms, and lawyers, creating uncertainty in the investment and deal-making process. This is particularly the case for small and medium sized firms, who often don’t even have access to existing know-how on investment screening that is available, for example through larger law firms.
Moving forward, especially in the implementation phase of new legislation, attention should be paid to finding ways to increase transparency of the review process without prejudice to the need for confidentiality in individual cases or the state’s prerogative to screen cases to ensure national security. How to do so will require including domestic stakeholders such as firms & legal representatives in domestic conversations on investment screening.
III. Harmonization and Cooperation
National screening mechanisms vary significantly across the EU, which has both practical implications for firms as well as security implications for different Member tates and the EU as a whole. How can the regime become more harmonized?
For reasons of security this variation in screening mechanisms is problematic because investment in one country has the potential to undermine security in another or deteriorate the EU’s collective security situation, even when the host State itself is not affected per se. This is where cooperation between the EU and its Member States and between the EU Member States themselves becomes very relevant: Accountability mechanisms, communication on decisions taken in a review case, streamlining the notification procedure to the cooperation mechanism provided by the EU Screening Regulation, streamlining domestic time-lines, are all proposed solutions to improve cooperation in safeguarding security and public order in the EU.
For firms, the variation of rules between different Member States has created the opportunity for regulatory arbitrage where foreign firms might focus their investments on those environments with more lax screening regulation. This has been confirmed by an audit commissioned by the EU that points out that much investment is flowing into States that have only limited or no investment screening . Domestic firms have confirmed that they worry about their country’s attractiveness for FDI compared to other economies, as they fear the FDI they seek might be diverted to lean investment control regions.[viii] Moreover, the variation between Member States also becomes highly relevant for firms when they face multi-jurisdictional filings, i.e. when an investment needs to be screened by multiple member states, increasing administrative costs and delays in the transaction.
Many stakeholders are not opposed to increased harmonization,[ix] although they fear that the Proposal does not do enough to minimize divergence between Member States, neither on the domestic procedural side (timelines, information requested, decisions, etc.) nor when it comes to harmonizing the sectoral scope, as Annex II still allows for significant interpretation by Member States.[x] Achieving more harmonization will therefore require a significant amount of cooperation between Member States, also beyond the adoption of the Proposal.
IV. Conclusion
The pace at which investment screening in the EU has evolved over the past year represents an important shift for firms when it comes to their economic activities and business strategies. The reality is that many firms are forced to increase their awareness of their own strategic position in their supply chains, sectors, and countries. This means that they too, have to adapt and consider how to align their own expectations and strategies within this new geoeconomic playing field.
For this reason it is important to include firms in the conversations on some of the strategic issues that moving forward will need to be addressed. First, how can the cost of investment screening be kept as low as possible? Second, how can states increase transparency without prejudice to the need for confidentiality? And lastly, how can more harmonization be achieved in light of Member States’ prerogative to screen investments how they see fit? At CFIS 2024 it is the aim to discuss these questions, and many more pressing issues in the field of investment screening.
[i] European Court of Auditors (2023).
[ii] https://www.linklaters.com/en/insights/blogs/foreigninvestmentlinks/2024/january/eu-published-fdi-reforms.
[iii] Contributions to Commission feedback on the proposal that explicitly mention ‘delays’, ‘costs’, & ‘burden’ in the context of compliance costs: Medef, Business Europe, CMS, Allen & Overy, Svensk Näringsliv, ITI, Fund Apps, AEGIS Europe, VDMA, Austrian Federal Economic Chambers, ITI, ESF, AmCham, ESPO (15 out of 20 contributions). See also SWD (2024)23.
[iv] Contributions to Commission feedback on the proposal that explicitly call for a more ‘targeted’ or ‘risk-based’ approach: CMS, ITI, FundApps, AmCham EU, ESPO, ESF (6 out of 20 contributions).
[v] Contributions to Commission feedback on the proposal that explicitly mention ‘Annex II’ in the context of legal uncertainty: VDMA, ITI, ESF, Amcham, Business Europe, CMS, ASD (7 out of 20).
[vi] Doppen et al., 2024.
[vii] See AmCham contribution.
[viii] CIPE analysis; interview with lobby group.
[ix] See SWD(2024)23.
[x] Contributions to Commission feedback on the proposal that explicitly ‘divergence’, ‘variation’ & ‘Single market’ in the context of the proposal’s ambitions: Amcham, ICLA, ITI, ESF. See also SWD(2024)23.
