Understanding Investment Screening Mechanisms in the European Union
“European security screening of new investments is neither desirable nor feasible.”, Karel De Gucht (2012), European Commissioner for Trade
“We are not naïve free traders. Europe must always defend its strategic interests. This is why today we are proposing a new EU framework for investment screening.”, Jean-Claude Juncker (2017), President of the European Commission
The experience of the Covid pandemic, coupled with concerns about critical Chinese takeovers and technological transfers, has brought security threats to the forefront. Consequently, screening incoming foreign direct investment (FDI) for national security reasons has become a common practice. The traditional understanding that FDI exclusively boosts economic benefits has evolved into a more complex understanding. In the face of rising FDI from non-OECD countries, particularly in strategic sectors, concerns have emerged about the potential loss of technological edge and threats to European security. This shift in perspective is evident in the statements of Karel De Gucht in 2012 and Jean-Claude Juncker in 2017, which reflect the evolution of EU policy on investment screening. This blog post briefly analyses the FDI screening mechanisms within the EU, highlighting the different factors at play and their implications for member states.
What is Investment Screening? Who is in the driving seat, member states or the EU?
Investment screening refers to the government’s systematic evaluation of incoming foreign investments based on predetermined criteria. It distinguishes itself from other approaches like prohibitions and ad hoc case reviews by establishing regulatory frameworks and procedures for evaluating investment proposals. Although the EU introduced Regulation 2019/452 in March 2019 to provide an EU-wide coordinating mechanism for information sharing and cooperation, it does not have a single direct screening authority. This is because the solid reference for national security keeps the member states in the driving seat for designing and governing their national mechanisms.
Is it new?
Most countries have had some domestic arrangements for decades to screen and address potential national security risks arising from specific FDI. However, for a considerable duration, such measures were not considered essential, as the adoption of neo-liberal policies during the 1980s led many countries to dismantle control restrictions, and FDI primarily occurred between developed nations or among members of the same security alliances. Consequently, the prominence of national security concerns was diminished.
Starting from the early 2000s, the landscape of investment screening shifted due to the rise of emerging economies and technological advancements. Developing countries’ investors, often lacking traditional security alliances and transparency, raised concerns about potential harm to critical infrastructure in developed economies. This concern intensified after the 2008 crisis and accelerated further with the COVID-19 pandemic and the Russian invasion of Ukraine, prompting many countries to strengthen their screening mechanisms. Consequently, beyond conventional security, the scope of investment screening policies has expanded to cover other areas. Multisectoral or cross-sectoral investment screening mechanisms have been introduced by many member states, especially after 2010. Depending on this, intense policy-making activity has become the “norm rather than the exception” across the EU.
Understanding the Puzzle
The puzzle at the heart of EU member states’ commitment to multilateralism and a rules-based trade order lies in their approach to FDI screening. While emphasising the importance of safeguarding national security and public order, member states often utilise a rather ambiguous concept of “national security”, which opens the door to circumvent the principles of capital freedom. This situation is compounded by the broad spectrum of risk identification across countries, making it challenging to foresee the triggers for investment screening and their implications. As a result, the distinction between protectionist industrial policy and the protection of public order and national security becomes increasingly blurred.
Even though the investment screening is intended to ensure a level of economic playing field while addressing, the puzzle lies in maintaining this equilibrium without resorting to protectionist tactics, which could hinder free trade or adopting policies that might favour certain domestic industries over others.
The puzzle deepens when viewed from different angles. First, the timing of investment screening adds complexity, especially in the wake of the Covid-19 pandemic when attracting FDI is crucial for economic recovery. Historically, attracting FDI has been a well-documented strategy for economic revival, which was witnessed following the 2008 financial crisis. Second, while the EU defines foreign investors as non-EU nationals or entities, this is not necessarily the case at the domestic level. In fact, investment screening might take place even between the member states due to the legal differences in their legislations. Third, the diverse screening practices in place have given rise to prolonged negotiations, multi-jurisdictions, and complex administrative procedures. The resultant ambiguity concerning the enforceability of legal rights and obligations has intensified concerns about legal uncertainty and corruption. This becomes particularly important in countries where governments have illiberal tendencies, which could potentially exploit screening requirements to secure personal economic or potential gains.
Conclusion
The FDI screening regulatory environment is complex because the elements that shape the member states’ policy designs intersect with various spheres ranging from economy, security, and law to sustainability. Moreover, the concepts of national security and/or public interest leave room for interpretation; they generally allow recipient governments to restrict foreign investment in certain situations. That’s why this broad discretion might also be misused for protectionist purposes. In other words, they might be weaponised. Therefore, how member states design their FDI policies might serve as a footprint on how they use the ambiguity of “national security” to balance their economic interest. Thus, screening mechanisms from a critical perspective might be a valuable attempt to demonstrate how political and economic choices operate, often implicitly.
This article is based on research presented at the UACES Graduate Forum Research Conference 2023 (8-9 June, at IBEI, Barcelona).
Written by Elif Cemre Beşgür, PhD Student, University of Trento