Why Investors Can’t Dismiss Europe’s New FDI Agreement
By John Bostwick, Head of Content Management
- Facilitates communication between member states and the European Commission to raise FDI-related concerns.
- Allows the European Commission to issue opinions in cases concerning several member states or when an investment could affect the whole EU.
- Encourages international cooperation on investment screening policies, including sharing best practices and information regarding investment trends.
- Reaffirms that national security interests are the responsibility of member states. The agreement won’t affect each member state’s ability to maintain its existing FDI review mechanisms, adopt new ones or remain without mechanisms. (14 member states now have mechanisms.)
- Retains the right of each member state to ultimately determine whether a specific operation should be allowed in its territory.
- Takes into account the need to operate under short business-friendly deadlines and strong confidentiality requirements.
Perhaps the most important takeaway from these points is that individual EU countries will retain control over investments into their own jurisdictions. Put another way, the agreement doesn’t provide much central authority. The Wall Street Journal indicates the agreement is nonbinding, doesn’t require EU states to adopt FDI legislation and is generally “nowhere near as strong as its U.S. counterpart.”
EU member states, then, remain free to create their own rules related to FDI. While only 14 of the 28 members now have FDI legislation, some countries are in fact taking action in response to what they perceive as threats to their national security and precious intellectual property. These threats, it should be said, are not perceived to come solely from China. This summer, Reuters reported that France sought to implement takeover restrictions to prevent “its technology falling into the hands of foreign powers like China and the United States.”
Germany was the first EU country to pass new FDI restrictions. Reuters says it passed the measures in 2017 after being “spooked by the acquisition of robotics firm Kuka … by China’s Midea.” Interestingly, Italy passed similar restrictions in 2017 in response to hostile takeovers of local communications firms, not by a Chinese or American company, but by a French media group. Foreign Policy notes that the UK has also recently tightened FDI restrictions and “another half-dozen [European countries] are planning to do so this year.”
The relative toothlessness of the EU’s new FDI agreement — and the discord between EU member states over whether or not to even implement FDI restrictions — reveal the difficulties of developing screening regulations. The process requires achieving a balance between protecting national security and IP on the one hand and reaping the benefits of foreign investment on the other. The EC press release not only points out some of the benefits of FDI, it reminds us that an “openness to foreign direct investment is enshrined in the EU Treaties.”
This is good news for companies looking to invest in EU countries, but those organizations shouldn’t be lulled into dismissing recent FDI restrictions in Europe (or the U.S.). European Commission president Jean-Claude Juncker made clear that despite the bloc’s enshrined openness to FDI, it’s not a collection of “naïve free traders” and needs “scrutiny over purchases by foreign companies that target Europe's strategic assets.” French lawmaker Stanislas Guerini used similar language last summer when discussing a bill to implement FDI restrictions in France, saying that “free trade cannot tolerate naivety.”
Guerini is quoted in a Reuters article that points out he and President Emmanuel Macron are essentially proponents of free trade but are nevertheless intent on protecting French interests. The French FDI proposals, Reuters says, “could impose fines on investors who fail to seek prior approval to buy stakes in French companies deemed of strategic importance,” and that these fines “could be as high as 10 percent of the targeted company’s annual revenues.”
Some EU countries, then, are unquestionably tightening restrictions on investment, while central EU authorities are promoting the sharing of best practices and information related to foreign investment into the EU.
The broad lesson for multinationals in this case can be applied to virtually any situation involving investing or operating across borders. That is, organizations must understand the changing regulations of their target countries to accurately understand the risks.