Foreign direct investment screening: A debate in light of China-EU FDI flows

Briefing 17-05-2017

In 2016, the flow of Chinese foreign direct investment (FDI) into the EU hit record levels, in sharp contrast to the continued decline in EU FDI flows to China. Chinese FDI was mainly driven by market-seeking and strategic asset-seeking motives and focused on big EU economies, targeting cutting-edge technologies in particular. In 2016, a number of Chinese proposals for transactions in strategic sectors came under scrutiny during security reviews at EU Member-State level. Some were delayed, and some were ultimately withdrawn by the Chinese investors. In this context, new challenges going beyond national security have emerged in terms of economic security. Such challenges may arise from alleged 'unfair competition' from China, which the current regulatory framework seems unable to address. This has sparked a debate about whether the patchwork of different mechanisms for screening FDI on national security grounds currently in place in nearly half of the EU Member States, coupled with the scrutiny of mergers and acquisitions under EU competition rules, are adequate regulatory tools for tackling the perceived new challenges. It also raises the question of whether the Member States' diverging approaches should be upgraded, better coordinated or even replaced by a new consistent FDI screening mechanism at EU level. Australia, Canada, Japan and the USA operate FDI screening mechanisms, which the EU could use as sources of reference but not emulate entirely. The use of these screening mechanisms for, and their deterrence effect on, Chinese investors in a growing protectionist climate is, however, likely to have an impact on the EU.