Foreign Direct Investments: Commission Proposes EU Strategy Welcoming FDI while Protecting Interests

The European Commission President, Jean Claude Juncker, presented the European Commission’s Strategy for screening foreign direct investments (FDIs) during the State of the Union speech on 13 September 2017. In parallel to the Communication “Welcoming foreign direct investments while protecting essential interests”, which lays down the European Commission’s general approach on FDIs, the Strategy includes a legislative proposal that would establish a framework for screening FDIs into the European Union (EU).

In particular, the proposal aims to establish an EU framework for screening FDIs into the EU on the grounds of public order or security, as well as a cooperation mechanism among Member States and between them and the Commission. It also sets out key principles that would frame Member States’ screening mechanisms. The Communication explains the rationale behind the Commission’s decision to come forward with an EU Strategy on FDIs as well as measures to be undertaken at the EU level concerning FDIs. For this purpose, the Communication briefly introduces the proposal and sets out two actions to be undertaken immediately: a coordination group on inward FDIs and an in-depth analysis of FDIs into the EU by 2018.

These two initiatives follow on from the European Commission’s Reflection Paper on Harnessing Globalisation that was launched on 10 May 2017. This Reflection Paper was meant to open a debate on how to shape globalisation. It concluded that despite the commitment of the European Union to build an open, fair, sustainable and rule-based global trade order through international cooperation, the EU would not hesitate to act in order to protect its citizens and its industry when foreign countries or companies engage in unfair practices or raise concerns for security and public order. The European Council and the European Parliament subsequently called on the Commission to come forward with a proposal through, respectively, the June 2017 Council’s Conclusions and the European Parliament’s Resolution of 5 July 2017. An EU-wide Strategy on FDIs was then announced in Juncker’s State of the Union speech on 13 September 2017. 

This briefing presents the reasons that led the European Commission to propose a package on FDIs. It subsequently explains the key elements of the Communication and the Proposal on FDIs, as well as the next steps that can be expected. 

Rationale behind the EU Strategy on FDI

As set out in the Commission’s Proposal on FDIs, the term covers a broad range of investments which establish or maintain lasting and direct links between investors from third countries and commercial enterprises in order to carry out an economic activity in the Member States. This includes investments which enable effective participation in the management or control of a company carrying out an economic activity, but does not cover portfolio investments.  

At the end of 2015, the main foreign investors in the EU remained the United States, despite its decline over the last decade, while Chinese and Brazilian investments had increased significantly. This allowed the emergence of new investment trends, with emerging economies starting to possess an increasing share of FDIs.

EU Inward and outward foreign direct investment

The Commission considers the EU, as Commissioner Malmström stated during a press conference held on 14 September 2017, to be: “at the forefront in looking outwards in trade and [gathering]countries that continue to champion in free trade, multilateral system and good rules”. Further, the Commission explains in its Communication on FDIs that the EU welcomes such investments as they are considered as a source of growth, jobs and innovation.

However, the Communication also indicates that although only 0.4 per cent of EU companies are controlled by third countries’ investors, these companies are on average much larger than those owned by EU investors. According to Eurostat, companies owned by non-EU investors represent 13 per cent of total turnover, 11 per cent of value added and six per cent of total employment in the EU.

As a consequence, the Commission considers that there is a risk that foreign investors may seek to acquire, control or influence European enterprises whose activities have repercussions for critical technologies, infrastructure, inputs, or sensitive information.

There are already sectoral initiatives at the EU level addressing the security of critical infrastructures and essential services or projects, such as the European gas and electricity transmission networks.  In addition, twelve Member States already have screening mechanisms for FDIs, including France, Denmark, Germany, and Italy, though those mechanisms differ significantly in their design and scope. However, there is neither a systematic cooperation among Member States nor an EU-wide approach to FDIs.

Therefore, the Commission proposes such an approach to FDIs that may raise security or public order concerns through the adoption of a Communication and a Proposal. 

Key elements of the Communication and Proposal on FDI

The Commission’s Communication sets out the following objectives to be achieved at the EU level with regard to FDIs:

  • Set out framework to screen FDIs in the EU on grounds of security or public order;
  • Establish cooperation among Member States and between them and the Commission when screening FDIs if they raise any security or public order concerns;
  • Increase transparency of FDIs raising security or public order concerns;
  • Effectively address cases of foreign direct investment if they raise security or public order concerns;
  • Prevent any circumvention of national FDIs screening mechanisms.

With a view to achieving these objectives, the Communication subsequently announces that the Commission has put forward a Proposal for a Regulation establishing a framework for screening FDIs into the EU on the grounds of public order or security.

Key elements of this Proposal include:

1. An EU Framework for investment screening:

The Proposal sets out an EU framework for investment screening. In this regard, it provides that the Commission would be able to screen FDIs that are likely to affect projects or programmes of EU interest on the grounds of security or public order.

Projects and programmes of EU interest would either involve a substantial EU funding or would be established by EU legislation regarding critical infrastructure, critical technologies or critical inputs. Further, an indicative list of projects and programmes of EU interest is included in the Annex to the Proposal.

The Proposal also provides a non-exhaustive list of factors that may be taken into consideration when screening FDI on the grounds of security or public order. In particular, Member States and the Commission would consider the potential effects on: (1) critical infrastructure and technologies; (2) the security of supply of critical inputs; (3) access to sensitive information or the ability to control sensitive information. In addition, Member States and the Commission should also take into account whether a foreign investor is controlled directly or indirectly by the government of a third country, including through significant funding.

2. A Framework for Member States’ screening:

The Proposal lays down the key elements of the procedural framework for the screening of FDIs by Member States. These elements would include: (a) the establishment of timeframes for the screening, which have to take into account the timelines for the screening at EU level; (b) the possibility for investors to seek judicial redress of screening decisions; (c) no discrimination between third countries; (d) the establishment of rules on circumstances triggering the screening, the grounds for screening and the applicable detailed procedural rules; (e) the protection of confidential information, including commercially-sensitive information, made available by foreign investors and the enterprise concerned.

Additionally, the Proposal provides that Member States that have already established a screening mechanism for FDI would: (1) notify the Commission of their existing screening mechanisms within 30 days of the entry into force of the Regulation; (2) provide the Commission with an annual report on the application of their screening mechanisms. Other Member States would provide the Commission with an annual report covering foreign direct investments that took place in their territory, on the basis of information available to them.

3. A Cooperation Mechanism:

The Proposal would establish a mechanism allowing Member States to assist each other and to cooperate with the Commission when a FDI is likely to affect their security or public order.

In this regard, the Commission proposes that Member States must inform the Commission and the other Member States of any FDI that is undergoing screening within five working days from the start of the screening.

In addition, if a Member State considers that a FDI planned or completed in another Member State is likely to affect its security or public order, it may provide comments to the Member State where the FDI is planned or has been completed. This comment would be forwarded to the Commission.

Similarly, if the Commission considers that a FDI is likely to affect security or public order in one or more Member States, it may issue an opinion addressed to the Member State in which the FDI is planned or has been completed.

Both the Commission and a Member State may request from the Member State where the FDI is planned or has been completed any information necessary to provide comments or to issue an opinion.

4. Provisions on confidentiality, contact points and evaluation:

 The Proposal specifies that the Commission and the Member States would ensure full confidentiality with regard to the information. It also suggests that each Member State would appoint a FDI screening contact which would be involved on all issues related to implementation of the proposed Regulation.

Finally, the Commission would conduct and present an evaluation of the proposed Regulation to the European Parliament and the Council three years after the application of the Proposal.

In addition to the Proposal for a Regulation on FDIs, the Communication outlines two actions to be undertaken immediately. First, the Commission aims to establish a coordination group on inward FDIs chaired by the Commission and composed of representatives of Member States. This coordination group would aim to identify assets and sectors that may have strategic implications when it comes to controlling critical assets, security and public order at all three levels: national, cross-border and European. Another goal would be to exchange best practices, analysis and information on FDIs by third countries. Secondly, the Commission aims to realise by the end of 2018 an in-depth analysis of foreign direct investment flows into the EU, on the one hand on strategic sectors (space, transport, energy) and on the other on strategic assets (critical infrastructure, sensitive data, key technologies). 

Next Steps

The European Parliament and the Council will now express their positions on the Commission’s Proposal before starting inter-institutional negotiations, with a view to reaching a first reading agreement.  In addition, the Commission may take immediate action to establish a coordination group on inward foreign direct investments and conduct an in-depth analysis of foreign direct investment flows into the EU by 2018.

However, European Press Reports already indicate that the proposed Regulation could encounter opposition among Member States. While some Member States want to bolster the bloc’s defences to protect strategic industries from foreign takeovers, others are concerned that it would be a step back from an open-market promise, leading to an escalation of trade disagreements.

French President Macron was one of the first leaders to push for screening of foreign direct investment as early as June 2017, fearing Chinese state-owned companies seizing high-tech enterprises in the EU.

In the same way, Spain and Germany fear the profitable positions third countries could acquire through their investments. On the other hand, Nordic countries such as the Netherlands, Finland and Denmark are cautious in taking any anti-free-trade measures while countries such as Greece, Portugal and Hungary are highly dependent on foreign investment to develop their economies.

China already expressed its concern in the press, as it reacted to the Commission’s Proposal by claiming that closing the door will not achieve lasting trade development.

Additional Facts

  • Communication from the Commission on the European Parliament, the European Council, the Council, the European Economic and Social Committee and the Committee of the Regions: Welcoming Foreign Direct Investment while Protecting Essential interests COM(2017)494;
  • Proposal for a Regulation of the European Parliament and the Council establishing a framework for screening of foreign direct investments into the EU COM(2017)487.