It’s that time of year again: The European Commission’s Third Annual Report on FDI Screening is out!

By Sophie Bohnert, Vienna University of Economics and Business/College of Europe



On 19 October 2023, the European Commission (“EC”) published its Annual Report on the screening of foreign direct investments into the Union (“Report”), covering the year 2022. This Report is accompanied by the usual Staff Working Document. This is the third report on the application of the Regulation (EU) 2019/452of 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 has been fully applicable since October 2020. The EC reports having analysed more than 420 foreign investments made in the EU in 2022. The press release accompanying the Report states that this level of activity demonstrates that the EU and its Member States are committed to protect “European security and public order in times of increased geopolitical tensions”.

In keeping with the previous reports issued in 2021 and 2022, this year’s release has four chapters. The first chapter features data on FDI into the European Union (“EU”). The second chapter gives an overview of legislative measures taken at Member State level and the third chapter offers insights into Member States’ FDI screening activities. The final chapter provides information on the functioning of the cooperation mechanism under the FDI Screening Regulation.


Preliminary Observations

A key observation is that the trend of increasing use of screening mechanisms over the last two years has continued in 2022. This is hardly surprising given that the number of Member States with screening mechanisms has increased from just over one third to around two thirds since the entry into force of the FDI Screening Regulation. The proliferation of national screening mechanisms seems to go hand in hand with a clear trend towards more cases being subject to formal review, despite a decrease in inward FDI flows compared to 2021 (see below). More than half of all authorisation requests and ex officio cases resulted in formal screening, in comparison to 20% in 2020 and 29% in 2021.

It is also noteworthy that the EC “firmly expects” all Member States to jump on the bandwagon and to adopt comprehensive national FDI screening mechanisms, as opposed to just a “strong expectation” in 2021. There is a clear evolution of the EC’s rhetoric. Over time, it has come to convey a greater sense of urgency. Indeed, the EC’s casual “call” upon Member States to put in place comprehensive screening mechanisms in its 2020 Guidance has become an “urgent” one in its 2022 Guidance against the background of a proliferation of instances of polycrisis.


In-Depth Analysis

A Slowdown in Inward FDI Flows

The report indicates a slowdown in foreign investment flowing into the EU27 in 2021, in line with the global trend. Nevertheless, the overall number of foreign transactions (i.e., greenfield and brownfield investments) shows a continuous increase between 2015 and 2022. This is seen by the EC as confirming the (continuing) openness of Member States to foreign investment. The economic slowdown, a decline in investor confidence, and measures to curb inflation are among the factors identified as contributing to a decrease in dealmaking.

There has been no significant change in the top countries of origin of foreign investors compared to 2021. The United States (“US”) remains in first place, being the top country of origin of foreign investors when it comes to both greenfield and brownfield investment. Although both brownfield and greenfield investment originating in the United Kingdom (“UK”) fell by 17.1% and 8.9% respectively, the UK still ranks second. In 2022, major Offshore Financial Centres (“OFCs”), namely Bermuda, the British Virgins Islands, the Cayman Islands, Mauritius and the United Kingdom Channel Islands, took third place for greenfield investment, with an increase of 8.5% compared to the previous year. These OFCs even overtook China as the third largest source of greenfield investment. China’s greenfield investment actually decreased by 2% compared to 2021.

Due to the slowdown in total FDI inflows, the number of foreign transactions by target Member State has also fallen compared to 2021. Germany remains the top destination for brownfield investment, accounting for 17.2% of all acquisitions in 2022. With regard to greenfield investment, Spain is still in first place with a share of 17.2% of the total number of greenfield investments in 2022.


More of the Same: Divergence as a Leitmotif

As the OECD noted earlier this year, the FDI Screening Regulation “has contributed to the broader availability and application of investment screening mechanisms, has improved co-operation and co-ordination among Member States in this area, and has allowed for better informed screening decisions”. However, the regulatory landscape remains highly fragmented. Echoing the findings of its 2022 report, the EC observes that some Member States have not (yet) adopted national screening mechanisms. In addition, the EC finds that existing national screening mechanisms differ considerably in terms of design. Notable differences relate to the notification requirements, trigger criteria for formal screening, timelines, and the scope of application.

Against this background, the EC “firmly expects” all Member States to take legislative action to introduce screening mechanisms. As the 2022 Report shows, the institutionalised cooperation framework established by the FDI Screening Regulation has already raised awareness among the Member States. This is evidenced by the fact that the number of Member States with screening mechanisms has increased from 11 to 21 since the entry into force of the FDI Screening Regulation. By the end of 2023, 23 Member States are expected to have screening mechanisms in place. Sweden’s investment control regime is expected to enter into force on 1 December 2023. In Ireland, the legislative process is currently underway with the bill having completed report stage in the Irish Parliament on 4 October 2023. Pursuant to the 2023 Report, Croatia, Cyprus, Greece, and Bulgaria are working on draft legislation to implement FDI control mechanisms. Moreover, the partially optional basic consensus established by the FDI Screening Regulation has already contributed to a gradual substantive convergence from within, with some Member States having incorporated the Regulation’s screening factors into their national screening mechanisms.


Inflationary FDI Screening Activity?

The EC analysed more than 420 instances of inward FDI into the EU in 2022. The Member States reported a total of 1,444 requests for approval by foreign investors (including “consultations” on the eligibility of cases) and ex officio cases in 2022 under their screening legislation. This level of activity is seen by the EC as an indication of a clear commitment by the EU and its Member States to protect European security and public order. Importantly, there has been a “significant increase” in the number of transactions formally screened in comparison to 2021. 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. According to the EC, this suggests that the Member States have identified a greater number of authorisation requests as sensitive.

86% of the formally screened cases for which the screening Member State(s) reported a decision resulted in an unconditional clearance. About one tenth of the clearance decisions were subject to conditions or mitigating measures. This is a decrease of about 13% compared to 2021. Only 1% of all cases decided resulted in a prohibition. 4% of transactions were abandoned and thus withdrawn by the parties. The EC concludes that the low number of prohibition decisions shows that the EU remains open to FDI and that the Member States only block transactions that “pose very serious threats to security and public order”. However, as some commentators have pointed out, the low number of prohibition decision may also reflect the fact that a large number of reviews are in fact superfluous and that the scope of application of many screening regimes is overbroad. Given that 45% of authorisation requests do not lead to formal screening, these commentators suggest that the fact that the scope of application is either too broad or unclear may result in precautionary notifications by investors. Over-inclusiveness and lack of clarity are problematic from the point of view of legal certainty and lead to an accumulation of costs not only for the parties but also for the competent authorities.


The Cooperation Mechanism in Action: Same Old, Same Old

Three years on, and the Member States’ participation in the cooperation mechanism has increased: In 2022, 17 Member States submitted a total of 423 notifications, whereas in 2021 only 13 Member States had participated. The usual suspects, namely Austria, Denmark, France, Germany, Italy, and Spain, were responsible for most of the notifications. They submitted 90% of all notifications in 2022, an increase of 5% relative to 2021. The ECJ’s ruling of 13 July 2023 in the Xella case, discussed in the CELIS Blog, could have a significant impact on Austria’s participation in the cooperation mechanism. The ruling clarifies the scope of the FDI Screening Regulation. Under the Austrian Investment Control Act (“ICA”), the cooperation mechanism features prominently in virtually all investment control proceedings. As some commentators have suggested, the number of notifications by the Austrian authorities may decrease, as they “must not forward foreign direct investments that fall within the scope of the [ICA] but are not subject to the scope of the FDI Screening Regulation to the EU cooperation mechanism”.

The sectors that attracted the most deals in 2022 were almost the same as in 2021, namely manufacturing, Information and Communication Technology (“ICT”), professional activities, wholesale and retail. Manufacturing overtook ICT in 2022, accounting for 27% of FDI inflows. Professional activities, which include activities by law and accounting firms as well as consultancy and engineering activities, ranked third, replacing financial activities. This is followed by wholesale and retail. Interestingly, the share of multi-jurisdiction FDI fell from 28% of all notified cases in 2021 to 20% in 2022.

The EC reports that it has rapidly completed the assessment of FDI transactions notified by the Member States. The EC concluded 81% of the 423 cases notified in 2022 in Phase 1 (i.e., within 15 calendar days). 11% of the cases notified resulted in Phase 2 proceedings, with the EC requesting additional information from the notifying Member State. The duration of Phase 2 proceedings varies considerably. On average, the Member States take 24 calendar days to respond to requests for additional information. This is an increase of 2 calendar days compared to the year 2021. The duration can vary from 1 to 126 calendar days in comparison to 3 to 101 calendar days in 2021. This lack of predictability may have a serious impact on parties’ transaction timelines.

The sectors with the highest number of Phase 2 investigations were manufacturing and ICT, accounting for 82% of all Phase 2 cases. 59% of all Phase 2 cases concern the manufacturing sector, which represents an increase of 15% compared to 2021. This is significant given that only 27% of all notified cases concerned the manufacturing sector. However, as has been noted elsewhere, this is not particularly surprising because manufacturing includes critical infrastructures and/or technologies, such as energy and aerospace, defence, semiconductors, health, data processing and storage, transport, and cybersecurity.

Pursuant to Art 6 para 3 of the FDI Screening Regulation, the EC may issue opinions on FDI undergoing screening in a Member State. The Report shows that the EC issued opinions in less than 3% of the cases notified by the Member States. These opinions remain confidential in accordance with Art 10 of the Regulation. In addition, nine Member States reportedly provided comments in 7% of all notified cases to the notifying Member State pursuant to Art 6 para 4 of the Regulation. The 2023 Report also reveals 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 State in question has a review mechanism or not. Unfortunately, the Report does not provide any further information on the EC’s activity under Art 7 of the Regulation.


Zooming in on Russian Investments

The 2023 Report includes a section on FDI from Russia and Belarus in the context of Russia’s invasion of Ukraine. The EC issued a Guidance paper to the Member States on FDI from Russia and Belarus in April 2022, drawing particular attention to investment activity by entities or persons that are linked to the Russian or Belarusian governments targeting critical EU assets. The EC reports that Russia accounts for less than 1.4% of all notified cases and Belarus for 0.2%. The Staff Working Document accompanying the Report states that Russia influences or controls nearly 30,000 companies in the EU. The Czech Republic has the highest share of Russian-controlled companies, followed by Latvia and Germany. As already reported in 2022, Russian investment is concentrated in wholesale trade, real estate, professional scientific and technical activities, and finance and insurance. Moreover, Russia directly controls over 38 EU companies in the oil and gas sector and 36 electricity companies.


Featuring Semiconductors as a Special Guest

The Staff Working Document also contains a section on semiconductors. It states that foreign investment transactions involving EU target companies active in the semiconductor sector increased by 46% in 2022 when compared to 2021. Investments mainly came from the US, followed by the UK, and Developed Asian countries. It is noteworthy that investors from China accounted for around 6% of all deals in the sector.

The focus on semiconductors is unsurprising given the EU’s recent emphasis on semiconductors as “strategic assets for key industrial value chains”. The disruption of global value chains following the COVID-19 pandemic and the Russian invasion of Ukraine led to a global shortage of semiconductors, with negative consequences for key economic sectors such as automotives and healthcare. The European Chips Act alone, which entered into force on 21 September 2023 and aims to increase the EU’s competitiveness and resilience in semiconductor technologies and applications, will in all likelihood not be enough to allow the EU to join the global technology race. If the EU wants to build and maintain these technological capabilities, it will be well advised to also control foreign investment in the semiconductor sector.


Conclusion and Outlook

Overall, the 2023 Report presents findings similar to those of its two predecessors. The Report reiterates that the “EU cooperation mechanism continues to function very well”, although there are several areas where effectiveness and efficiency could be improved. The OECD’s assessment of the FDI Screening Framework shows, among other things, that there are delays, inefficient procedures, and tight deadlines. The FDI Screening Regulation has proven to be an important driver for the adoption of national screening mechanisms. Nevertheless, there are still Member States that are reluctant to implement screening mechanisms and the design choices of Member States vary considerably. These continuing divergences are somewhat unsatisfactory in light of the requirement for “uniform principles” under Art 207 para 1 TFEU and the integration imperative of the internal market.

The 2022 Report states that “the introduction of a national review mechanism is necessary in all 27 Member States”. Art 15 para 1 of the FDI Screening Regulation requires the EC is to evaluate the functioning and effectiveness of the Regulation and to submit a report to the European Parliament and the Council by 12 October 2023. Thereafter, the EC will only be subject to a quinquennial reporting obligation as to the functioning and effectiveness of the Regulation. If the report contains proposals for reform, the EC may make a legislative proposal, in accordance with Art 15 para 2 of the Regulation. Pursuant to its Work Programme 2023, the EC “is prepared to revise […] in light of two years experience, with a view to identifying […] necessary amendments that would strengthen its functioning and effectiveness”. The EC is expected to present a legislative proposal to amend the Regulation before the end of 2023 following a comprehensive evaluation, as indicated here and here.

An obligation on the Member States to introduce review mechanisms at a national level seems to be within the realms of possibility, as argued here. However, with regard to a substantive approximation of laws, which could, for example, involve making certain screening factors mandatory, advocates would perhaps be well advised to curb their expectations at this stage. The Member States’ room for manoeuvre in decision-making on grounds of security or public order must not be unduly restricted, as issues of national security remain a prerogative of the Member States under Art 4 para 2 of the TEU. This is not to suggest that it would not be possible at some point in the future for a Union act to impose certain minimum substantive requirements on the Member States, as suggested here.

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