The European Commission’s Fourth Annual Report on FDI Screening
By Sophie Bohnert, CELIS Blog
A. Introduction
This October is the month of investment screening. Not only did CFIS 2024, hosted by the CELIS Institute and convened by Steffen Hindelang and Roland Stein, take place in Paris (France) from 16 to 18 October 2024. It is also the month in which the European Commission (“EC”) usually fulfils its annual reporting obligations under Article 5 para 3 of Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (“FDI Screening Regulation” or “Regulation”), which became fully applicable in October 2020. The Fourth Annual Report on the screening of foreign direct investments into the Union (“Report”) was published on 17 October 2024 and covers the year 2023. In line with established tradition, the Report is accompanied by a Staff Working Document, providing more detailed information on selected issues. The EC’s press release refers to investment screening as “a critical part of [the EU’s] broader Economic Security Strategy (…)”.
As usual, this year’s report is divided into four chapters. The first chapter provides an overview of trends and figures on inward Foreign Direct Investment (“FDI”) into the European Union (“EU”). The second chapter discusses legislative developments in the EU Member States. The third chapter provides an insight into Member States’ FDI screening activities. The final chapter sheds light onto the functioning of the EU cooperation mechanism.
B. Highlights
The EC emphasizes the growing importance of the EU cooperation mechanism, as evidenced by the number of cases notified by the Member States. The number of cases notified to the cooperation mechanism increased by 67 compared to 2022, reaching a total of 488. The EC notes a clear upward trend in notifications to the cooperation mechanism, with an increase of 18% between 2021 and 2023. Interestingly, the group of “top notifiers” has largely remained the same. In 2022, Austria, Denmark, France, Germany, Italy, and Spain together accounted for 90% of all notifications. Following the introduction of a new national screening mechanism, Romania joined the ranks of the top notifiers, which together accounted for 85% of all notifications to the cooperation mechanism in 2023.
The increase in notifications to the cooperation mechanism can only be partly explained by the fact that 24 out of 27 Member States now have a screening mechanism in place and the number of Member States notifying to the cooperation mechanism has increased by 4 since 2021. However, even if the number of countries is kept constant (i.e., counting only those countries for which data are available for all three years), the number of notifications shows a significant increase of 8%. At the same time, the epistemic community in investment screening observes a progressive extension of the scope of application of national investment screening legislation. Therefore, the ever-expanding scope of application may also be responsible for the increase in notifications.
It is also noteworthy that only 8% of the notifications to the cooperation mechanism resulted in a Phase II investigation at the European level and thus a more detailed assessment by the EC. Most investigations are concluded within Phase I (i.e., within 15 days). The EC sees this as an indication that its recourse to a more detailed assessment is “targeted and limited to exceptional cases”.
C. Chapter-By-Chapter Analysis
1. Continuous Decline in FDI Inflows
Global net FDI flows continue to decline. Net FDI inflows into the EU27 increased compared to 2022 but remain negative. The total number of foreign transactions (i.e., greenfield and brownfield investments) has been increasing continuously between 2015 and 2023. Once again, this is seen by the EC as confirming the (continued) openness of Member States to foreign investment. At the same time, transaction-level data show a downward trend year-on-year, with the post-COVID surge coming to an end. The downward trend is attributed to an accumulation of risks, including Russia’s war of aggression against Ukraine, geopolitical tensions, and the conflict in the Middle East, as well as monetary tightening.
There has been no significant change in the top countries of origin of foreign investors compared to 2022. The United States (“US”) remains in first place, being the top country of origin of foreign investors for both greenfield and brownfield investment. Although both brownfield and greenfield investment originating in the United Kingdom (“UK”) fell by 17% and 29% respectively, the UK still ranks second. Certain offshore financial centres (“OFCs”), namely the Cayman Islands, Bermuda, the British Virgin Islands, Liechtenstein and Monaco, took third place for brownfield investment in 2023, with a 26% increase on the previous year. Brownfield investment from China continued to decline, falling by 9.1% compared to 2022. China’s greenfield investment is 39% lower than in 2022. Given the significant drop in investment, it could be argued that the EU’s toolkit of unilateral trade-related measures, including the FDI Screening Regulation, despite its “country blind” nature, is primarily targeting Chinese investment.
Due to the slowdown in total FDI inflows, the number of foreign investments by target Member States has also decreased compared to 2022. Germany remains the top destination for brownfield investments, accounting for 19% of all acquisitions in 2023. With regard to greenfield investments, Spain is still in first place with a share of 24% of the total number of greenfield investments in 2023.
More than a quarter of foreign acquisitions of equity stakes were concentrated in manufacturing. Information and communication technology (“ICT”) came second, with slightly less than a quarter of foreign acquisitions. Foreign acquisitions in ICT decreased by a quarter compared to 2022. Professional, scientific and technical activities (“PST”) ranked third with 12% of foreign deals. In terms of greenfield investment, retail trade ranked first, accounting for around a third of the foreign projects. Manufacturing was slightly ahead of ICT with a share of 12%.
2. “Nudge Theory” Works after All
Although the FDI Screening Regulation does not oblige Member States to adopt screening mechanisms for the time being, its overall design has a strong nudge effect. In addition, the EC continues to encourage Member States to adopt national screening mechanisms. For example, the European Economic Security Strategy, a Joint Communication of the EC and the High Representative for Foreign Affairs and Security Policy, calls on Member States to implement national screening mechanisms without delay. Calls for the adoption of national screening mechanisms have recently become more urgent in the context of heightened geopolitical tensions and a rapidly changing technological landscape, in particular the rise of artificial intelligence.
As of 17 October 2024, 24 out of 27 Member States had screening mechanisms in place, with Bulgaria being the most recent Member States to adopt screening legislation. Croatia, Cyprus, and Greece have initiated a consultative or legislative process that is expected to lead to the adoption of a national screening mechanism. Other legislative activities related to the adoption of implementing legislation, reforms of screening procedures, the extension of the sectors covered, and the prolongation of the validity of temporary national screening mechanisms. For example, Romania amended the scope of application of its screening mechanism to include intra-EU investments.
At the same time, national screening mechanisms and practices continue to diverge. Critical areas of divergence include the triggering event for notification to the cooperation mechanism, the procedural deadlines under the national screening mechanisms, the sectoral scope of application of the national screening mechanisms, and the notification requirements of the parties to the transaction to the national authorities. These divergences persist despite efforts by the EC to promote greater convergence through technical and policy guidance, meetings, and information exchange.
3. Persistent Increase in Screening Activity
In 2022, the Member States reported a total of 1,444 requests for approval from foreign investors (including “consultations” on the eligibility of cases) and ex officio cases under their screening legislation. In 2023, this number increased to 1,808. This represents an increase of around 25%. In 2022, more than half of all authorisation requests and ex officio cases resulted in a formal screening procedure, compared to less than a quarter in 2020 and around a third in 2021. In 2023, the number of formal screening procedures remains broadly stable.
In 2023, 85% of formally reviewed cases for which the screening Member States reported a decision resulted in an unconditional clearance. This is a decrease of 1% compared to 2022. Approximately 10% of the clearance decisions were subject to conditions or mitigating measures, an increase of 1% compared to 2022. Only 1% of all cases decided resulted in a prohibition decision, which is in line with the annual average. 4% of cases were abandoned (i.e., withdrawn by the parties). The EC concludes that the high number of unconditional clearances shows that the EU remains open to FDI and that the increase in formal investigations merely reflects a greater awareness of potentially problematic FDI. As has already been pointed out with regard to last year’s figures, the low number of prohibition decisions may indicate that a large number of review procedures may be unnecessary and that the scope of many national review mechanisms is too broad. Over-inclusiveness and lack of clarity may lead investors to notify transactions as a precautionary measure. This may reduce legal certainty and result in an increase in compliance and enforcement costs.
4. Cooperation Mechanism: More Notifications But Divergence Persists
The number of notifications by Member States to the cooperation mechanism has increased for the fourth year in a row. In 2022, 17 Member States submitted a total of 421 notifications. In 2023, 18 Member States submitted a total of 488 notifications. This represents an overall increase of 18% over the period 2021-2023. This overall increase is said to not only be due to an increase in national screening mechanisms. Counting only those countries for which data are available for all three years, the number of notifications increased by 8%. Therefore, the increase in the scope of the national screening mechanisms is also likely to have contributed to the increase in notifications. The EC argues that the increasing number of notifications is an indication of the relevance of EU cooperation on FDI, especially in the light of growing geopolitical tensions. However, the EC also notes that divergences persist, as “notified transactions varied greatly in terms of sectors of the target company, value of the transaction and origin of the ultimate investors, among other parameters”.
In 2022, Austria, Denmark, France, Germany, Italy, and Spain submitted 90% of all notifications. In 2023, Romania joined the ranks of the “top notifiers” who were responsible for 85% of the notifications. In 2023, four Member States were responsible for 69% of the notifications, an increase of 3% compared to 2022. Interestingly, some Member States with a national screening mechanism did not notify any transactions to the cooperation mechanism. This uneven distribution suggests that it is time to establish a common understanding of what constitutes a formal screening of an FDI, triggering the notification obligations to the EU cooperation mechanism, and to define a common minimum sectoral coverage of national screening mechanisms.
The main sectors notified to the cooperation mechanism in 2023 were almost the same as in 2022, namely manufacturing, ICT, wholesale and retail, and professional activities (e.g., market research and public opinion polling, consultancy, research and development in biotechnology). In 2022 and 2023, manufacturing, ICT, and wholesale and retail were the top three sectors of FDI notified to the cooperation mechanism. Compared to 2022, the number of notifications related to financial activities (e.g., fund management activities, activities of holding companies, financial services, insurance activities) increased. This was followed by the ICT sector, which accounted for a quarter of all transactions.
Once again, the EC underlines the speed of its investigation procedures. In 2022, the EC closed 87% of the 421 cases that were notified in Phase I (i.e., within 15 calendar days). In 2023, 92% of the 488 Phase I cases were closed. Conversely, 8% of cases led to the opening of Phase II investigations. In 2023, therefore, there was a 5% increase in the number of cases subject to in-depth investigations. The sector with the highest number of Phase II investigations was manufacturing, which accounted for 39% of all cases. More than half of the cases concerned critical technologies (including defence related activities, aerospace, and semiconductors). More than a third of cases concerned critical infrastructure and more than a tenth involved the supply of critical inputs. Only 2% of all cases concerned sensitive information.
Pursuant to Art 6 para 3 of the FDI Screening Regulation, the EC may issue opinions on FDI subject to screening in a Member States. In 2022, the EC issued opinions in less than 3% of the cases notified by the Member States. In 2023, the EC issued opinions on less than 2% of notified transactions. These opinions remain confidential in accordance with Art 10 of the Regulation. In addition, the share of cases for which the Member States issued comments decreased by 1% to 6 % compared to 2022. The Report also shows that the EC made use of Art 7 of the Regulation, which allows the EC to examine an investment on its own initiative, irrespective of whether the Member States concerned has a review mechanism in place or not. Unfortunately, the Report does not provide any further information on the EC’s activities under Art 7 of the Regulation.
The number of multi-jurisdiction notifications (i.e., notifications concerning transactions subject to scrutiny in several Member States) increased by 16% compared to 2022. In 2022, only 20% of the notifications to the cooperation mechanism were multi-jurisdiction notifications. In 2023, this figure increased to more than one third of all notified transactions.
D. Zooming in on Russian and Chinese Investments
The Staff Working Document accompanying the Report contains a section on Russian public and private equity investment in the EU27. In April 2022, the EC issued a Guidance paper to the MS on FDI from Russia and Belarus, drawing particular attention to investment activity by entities or persons that are linked to the Russian or Belarusian governments targeting critical EU assets. According to the Staff Working Document, Russian investors influence or control almost 30,300 companies in the EU as in 2022, representing 0.1% of EU companies, as compared to 30,000 in 2021. This is despite severe sanctions targeting the energy, transport, technology and financial sectors, as well as restrictive measures against individuals. The Czech Republic continues to have the highest share of Russian-controlled companies (23%), followed by Latvia (14%) and Bulgaria (14%). As already reported in 2023, Russian investment is concentrated in wholesale trade, real estate, and PST. Direct control by the Russian government of companies in the oil and gas sector decreased by 15 compared to 2022, from 38 to 23. Direct control by the Russian government of companies in the electricity sector decreased from 36 to 32.
Chinese investors (including Hong Kong investors) influence or control almost 49,300 companies in the EU, representing 0.2% of EU companies. Italy has the highest number of Chinese-controlled companies (23%), followed by Germany (21%) and France (17%). Similarly, France (29%), Italy (20%), and Germany (12%) are the top countries in terms of the number of Chinese-influenced companies. The top sector for Chinese investment is retail, followed by accommodation and manufacturing.
E. Insights into the Semiconductor Industry
As last year, the Staff Working Document also contains a section on semiconductors. It highlights the fact that the EU has taken several initiatives to increase its strategic autonomy, including the entry into force of the European Chips Act, which aims to increase the EU’s competitiveness in the semiconductor sector. Similarly, the European Economic Security Strategy identifies as one of its priorities “diversifying sources of supply and export markets, or fostering the research and industrial base in strategic areas such as advanced semiconductors (…)”. It is therefore of utmost importance to document and understand the patterns of investment flows in the semiconductor sector.
Foreign investment was mainly in the form of venture capital (“VC”). The number of VC investments decreased by 14% in 2023 compared to 2022. Most of the target companies in 2023 were active in the “Electronics and equipment” industry, as defined by the primary industry code. This sector includes companies that manufacture machinery and equipment for chip production. Investment came mainly from the US, followed by the UK, and developed Asian economies. It is worth noting that investors from China accounted for only 3.6% of all deals in this sector, down from 6% in 2022.
F. Conclusion and Outlook
Overall, the 2024 Report presents similar findings to its three predecessors. In contrast to last year’s Report, the EC does not mention that the “EU cooperation mechanism continues to function very well”. On 24 January 2024, the EC published a comprehensive evaluation alongside its proposal to revise the FDI Screening Regulation. The evaluation covers the period from the entry into force of the Regulation on 11 April 2019 until 30 June 2023. The evaluation builds on the findings of the OECD’s 2022 report and the European Court of Auditors’ 2023 report, both of which assessed the effectiveness of the FDI screening framework. The overall assessment of the Regulation is positive in terms of its effectiveness and EU added value, as it has enhanced protection against risky FDI to a level that individual Member States could not achieve on their own.
However, certain shortcomings were identified which continue to limit the effectiveness of FDI screening in the EU. According to the EC, these issues include a lack of harmonization in Member States’ timelines and the scope of national mechanisms, as well as the absence of an efficient cooperation procedure for multi-jurisdiction transactions. In addition, the current definition of FDI is considered too narrow, as it excludes investment by foreign investors through EU companies.
The reform proposal was presented as one of five initiatives of the EC’s Economic Security Package, as discussed on the CELIS Blog. The proposal emphasises the need for mandatory FDI screening in all Member States, ensuring that certain foreign investments are screened regardless of where the target is located. It also seeks to establish harmonized criteria and timelines for reviews across the EU. The revised Regulation would also extend its scope to investments made through EU subsidiaries controlled by non-EU investors, thereby strengthening measures to prevent circumvention of FDI screening. This would ensure a consistent approach to the risks posed by investments ultimately controlled by third country investors, whether made directly from outside the EU or indirectly through EU entities. Finally, the proposal also addresses the issue of multi-country transactions, seeks to improve consistency with other regulatory instruments, in particular those involving pre-notification requirements, and to improve the effectiveness and efficiency of the cooperation mechanism.
The Council began technical discussions on the proposal in January 2024, with substantial progress made under the Belgian Presidency in clarifying its key elements. Following the elections in June 2024, the newly elected European Parliament will now start its deliberations on the proposal. The European Economic and Social Committee (“EESC”) and the Committee of the Regions (“CoR”) have also been consulted. The EESC delivered its opinion on 10 July 2024, while the CoR is expected to deliver its opinion in the fourth quarter of 2024.
