EU report backs investment screening framework

Growing inflows of FDI in the EU, their ever-evolving nature, as well as the rise of new investors from emerging markets and offshore financial centres, all support the ongoing policy reflection around investment screening, a report by the European Commission published on March 13 concludes.

“Europe benefits a lot from an open investment policy but we must be ready to act where our security and public interest are at risk,” said European commissioner for trade Cecilia Malmström. “Together with the new framework on the screening of FDI, we are now better equipped and better informed to deal with these types of scenarios in the future.”

The report, ‘Foreign Direct Investment in the EU’, found that while just 3% of European companies were owned or controlled by non-EU investors, these represented more than 35% of total assets and around 16 million jobs, according to a 2016 sample from a new company-level database. Foreign ownership has been increasing at an alarming rate in particular key sectors, such as oil refining (67% of total assets are foreign owned), pharmaceuticals (56%), electronic and optical products (54%), insurance (45%) and electrical equipment (39%).

While traditional non-EU investors, such as the US, Canada, Switzerland, Norway, Japan and Australia, still dominate, accounting for 80% of all foreign-owned assets across all sectors of the EU, there has been an emergence of new investors from “developing or emerging countries”, with a surge in the number of deals over recent years, for example by China in aircraft manufacturing and specialised machinery, or by India in pharmaceuticals, the report says.

While state-owned companies represent only a small proportion of foreign acquisitions, their share in the number of acquisitions and their assets have grown rapidly over recent years. Russia, China and the United Arab Emirates stand out in this respect, with a total of 18 acquisitions in 2017, three times more than in 2007.

The report also found the “financialisation” of FDI as foreign investment funds and private equity firms accounted for a rise in acquisitions, from 102 in 2007 to 194 in 2017. This segment was heavily dominated by the US, followed by the Cayman Islands and Switzerland.

The first EU-wide framework to screen FDI was first proposed by European Commission president Jean-Claude Juncker in his 2017 State of Union address, and will come into force in April 2019, following a positive vote by the European Parliament on February 14 and approval by member states on the council on March 5.