EU to ask member states to to screen foreign direct investments

The European Commission will next week propose new rules requiring EU member states to screen foreign direct investments (FDIs) into the bloc’s sensitive industries to determine if they pose a security risk, according to a draft regulation, seen by Euractiv.

The draft regulation comes as part of the bloc’s efforts to boost its economic security and is one of five new components of the EU’s new economic security package, obtained by Euractiv, to be presented on January 24.

It is part of a broader EU plan to shield critical technologies such as semiconductors, artificial intelligence, quantum computing, and biotech from malign actors.

Harmonized rules

The EU executive’s proposal aims to set out a common set of minimum criteria for all EU member states to follow, to establish a joined-up system across the bloc.

While the bloc’s current rules do reinforce cooperation among all member states, its phrasing provides for the actual application of the regulation to be conditional – and down to national governments.
EU member states are currently not required to put such a system in place if they do not already have one.

According to the draft proposal, the European Commission will ask the member states to put in place screening mechanisms and will widen the scope of existing rules to include investments made by companies that are either directly or indirectly controlled by foreign entities and could impact public order and security.

“A significant share of FDIs in the EU still goes to member states that do not have a screening mechanism and this leaves vulnerabilities because potentially critical FDIs remain undetected,” the draft proposal states.

The regulation would make it mandatory for EU countries to screen not only inbound investments but also intra-EU investments when these are made by EU subsidiaries of non-EU entities.

More scope

According to the draft proposal, the European Commission aims to enhance information-sharing between member states and improve the mechanisms for nations to notify one another of relevant investments.

The revised regulation draft introduces the possibility for EU member states to conduct “Own Initiative Procedures” (OIP) regarding FDI planned in another EU member state when they consider it could affect its own security and public order.

This means that even if, for instance, one member state clears a particular foreign direct investment, another one would be able to scrutinise it via EU coordination.

Such procedures would have a 15-month deadline and could be initiated by EU member states after the FDI has been completed.

The EU’s executive would also be able to open such procedures when it considers that non-notified FDI could affect the security and public order in more than one member state, or affect EU programmes, or when it gains information about the FDI.

This would be a significant step up from the current regulation, whereby other EU member states and the Commission could only address comments to the FDI-receiving member state.

The draft proposal also aims to increase information exchange between member states to detect when FDI targets an EU entity across several member states.

The newly proposed rules would expand the scope of investments deemed sensitive to include transportation, energy and communication networks, as well as other technologies, materials and research programs relevant to security.

Greenfield investments

The draft proposal would also introduce the novelty of screening greenfield investments.

Greenfield foreign investments occur where the foreign investor or a foreign investor’s subsidiary in the EU sets up new facilities or a new undertaking inside the bloc, essentially building production facilities from scratch.

According to the draft proposal, this should be included as “they create lasting and direct links between a foreign investor and such facilities or such undertakings”.

“In addition, by setting up new facilities, a foreign investor can impact on security and public order, including when that risk concerns essential economic inputs”, the document states.

EU countries should therefore include them in the screening mechanisms, “in particular when such investments occur in sectors relevant to their security or public order or when they present characteristics such as size or essential nature to be relevant to their security or public order”.

This is expected to have a major impact on solar and wind technologies and electric vehicles (EV), as well as semiconductor investments made by non-EU investors. Those are often linked especially to concerns about Chinese investment in those sectors.