POSITION | EXTERNAL ECONOMIC POLICY
Screening Foreign Direct Investment? EU Regulation Establishing a Framework for Screening of Foreign Direct Investments into the European Union
12.12.2017 BDI Position at a Glance
Foreign direct investment (FDI) is an important source of economic growth, jobs, and innovation 23. Oktober 2017 in the European Union. It is indispensable for the future economic and social development in the EU. The EU thus needs to retain an open investment regime.
BDI welcomes that the EU is fulfilling its responsibility in defining a balanced European approach towards FDI. A common approach across the EU, while not requiring EU Member States to establish screening mechanisms, is welcomed.
If investments from third countries have an impact on public order and security of the European Union as a whole, it is justifiable for the European Commission to assess the possible detriment of such investments. However, these cases must be clearly and definitively delineated.
The proposed EU Regulation Establishing a Framework for Screening of Foreign Direct Investments into the European Union identifies a number of industries concerned. This list is too broad. A transparent and precise definition of what is to be understood by national order and security could improve the legal certainty for investors and benefit the EU as attractive destination for foreign investments.
A general and evaluative differentiation between state and private agents with reference to foreign direct investment faces serious difficulties. The regulation should suggest meaningful and applicable criteria on how national legislations can make such a distinction.
In a monitoring process, the European Commission could gather reliable data on investment activity in Europe. This monitoring should lead to an open-ended process of evaluation to identify possible adequate political measures. In particular, it would be important to know if investors are operating in their home market in a transparent, competitive environment. The regulation must ensure that commercially sensitive information does not fall into the hands of unauthorised persons.
BDI welcomes political initiatives to dismantle investment restrictions and combat protectionism. By concluding free trade agreements and international investment treaties, investment conditions in third countries can be improved. The European Commission should use its influence in the WTO and the G20 to drive open third markets for European companies.
Dr. Stormy-Annika Mildner | Dr. Christoph Sprich | External Economic Policy | www.bdi.eu
Screening Foreign Direct Investment?
Background In recent years, there has been a significant increase in the number of European companies being taken over by foreign investors from emerging economies. Total FDI flows into the EU have increased by 22 percent in 2016, against a decrease of global FDI flows of 7 percent. In 2016, foreign investors invested mainly in the sectors of computers, electronics, real estate, finance, healthcare, and utility/energy (together 59 percent of total inward FDI flows into the EU).1 In some cases, these takeovers were met with great media interest, in Germany for example in the cases of Kuka and Aixtron. Nevertheless, taking China as an example, the amount of the country’s direct investment in Europe is still at a relatively low level. Currently, only 0.6 percent of FDI stocks in the EU (2015: 34.9 billion Euros) comes from China. The FDI stocks of EU investors in China, on the other hand, exceed this amount fivefold (2015: 167.9 billion Euros, 2.4 percent of the EU investment stocks abroad). However, the growth rates for Chinese investment in the EU have risen substantially in recent years (2015: 9.9 percent as against 2014: 51.8 percent).2
Largest Investors into the EU Share of inward FDI stocks (percent, 2015)
Other 28,3%
United States 41,4% China incl. Hong Kong 2,0% Brazil 2,2% Japan 2,9% Canada 3,8% Bermuda 8,6%
Switzerland 10,8%
Source: Eurostat, <http://ec.europa.eu/eurostat/statistics-explained/index.php/File: Top_10_countries_as_extra_EU28_partners_for_FDI_stocks,_EU-28,_end_2012%E2%80%932015 _(billion_EUR)_YB17.png> (accessed on November 15th
While the EU is an attractive destination for FDI, the increasing inflows of investment should not hide the fact that Europe is falling behind vis-ĂĄ-vis other regions. Dynamic economic growth, young and growing populations, and an increasingly skilled labour force have turned emerging economies into magnets for FDI. In 1990, 40.2 percent of global cross-border direct investment were received by EU27 countries. In 2016, it was only 28.8 percent.
1The
official FDI figures for 2016 are not available yet, the EU Commission refers to OECD figures. European Commission, Commission Working Staff Document SWD(2017) 297 final, <https://ec.europa.eu/info/law/betterregulation/initiatives/com-2017-487_de>, (accessed on November 16th, 2017), p. 10. 2 Eurostat, <http://ec.europa.eu/eurostat/statistics-explained/index.php/File:Top_10_countries_as_extra_EU28_partners_for_FDI_stocks,_EU-28,_end_2012%E2%80%932015_(billion_EUR)_YB17.png> (accessed on November 15th 2017).
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Screening Foreign Direct Investment?
Magnet for Foreign Direct Investments? In Globalization, the EU Tends to Fall Back Inward FDI Stocks (percent of world total) 45 40 35 30 25 20 15 10
China United States European Union
5 0
Source: UNCTAD Statistics, Inward FDI Stocks, percentage of total world <http://unctadstat.unctad.org/>, (accessed on November 15th 2017).
The increase in investment in particular from China fuelled the political debate whether the EU and its members possess sufficient political instruments to protect European interests and to control FDI. The “Made in China 2025” strategy adopted by the Chinese government gives grounds for expecting an increase in strategically motivated FDI from China. The EU’s major trading partners already have FDI screening mechanism in place, for example Australia, Canada, China, India, Japan, and the United States. Twelve EU Member States have FDI screening mechanisms. In February 2017, three EU Member States – namely France, Germany, and Italy – addressed a request to the European Commission to work on a European instrument to “prevent any damage to the economy through onesided, strategic direct investment made by foreign buyers in areas sensitive to security or industrial policy, and to ensure reciprocity”.3 Existing Legal Instruments to Deal with Foreign Investments In Germany, existing laws already offer opportunities for dealing with possibly harmful investments. In the course of a sector-specific investment screening (§ 5 paragraph 3 AWG in conjunction with §§ 60ff AWV) the state can intervene, such as in the case of investment in the field of weapons of war. Moreover, the Foreign Trade Act (§§ 4 para. 1 subsection 4 AWG in conjunction with § 55 ff. AWV) permits the Federal Government to prohibit or to restrict holdings in German enterprises by investors from outside the EU, if, as a result of the acquisition, a threat could be posed to the public order and security of the Federal Republic of Germany. This presupposes that an actual and sufficiently serious danger exists which affects a basic interest of society (§ 5 para. 2 p. 2 AWG). In this case the Federal Government must arrive at a decision within three months after the takeover. During the initial stages of the proposed investment the business partners have the opportunity to obtain a certificate of non-objection (§ 58 AWV) from the Federal Ministry of Economics (BMWi). It is thus possible to avoid damages to the reputation of the involved companies.
3
Federal Ministry of Economic Affairs and Energy, Letter from the Government of the Governments of France, Germany and Italy, <https://www.bmwi.de/Redaktion/DE/Downloads/S-T/schreiben-de-fr-it-anmalmstroem.pdf?__blob=publicationFile&v=5>, (accessed on 4 December 2017).
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Screening Foreign Direct Investment?
Proponents of stricter investment screening see the European interest at risk. They fear that the innovative capacity and future viability of the European business sector is jeopardized by strategic and frequently state-promoted investment from abroad in firms providing top technology. However, investment screening would not only protect strategic industries in the EU. Proponents also hope that this would increase the leverage of the EU to open up third markets for EU companies (reciprocity). However, experience to date with foreign investment in the EU gives little cause for concern. On the contrary, openness in Europe is an important factor in the success of European industry. The EU’s credibility as a champion of open and free markets should not be jeopardized by political measures which could be interpreted as protectionism.
A Quick Glance at the EU Proposal As a consequence of the political debate, in September 2017 the EU Commission published the “Proposal for a regulation establishing a framework for screening of foreign direct investments into the European Union” (COM(2017) 487 final). 4
The regulation aims to establish a framework for screening of foreign direct investments in the Union by the Member States and the Commission on the grounds of security or public order (Art. 1). It would allow Member States to maintain, amend, or adopt mechanisms of FDI screening (Art. 3).
The regulation describes factors that may be taken into account in the process of screening, including the consideration of potential effects on critical infrastructure (energy, transport, telecommunications, data storage, space, or financial infrastructure) as well as sensitive facilities, critical technologies (artificial intelligence, robotics, semiconductors, technologies with potential dual-use applications, cybersecurity, space, or nuclear technology), security of supply of critical inputs or the access to sensitive information, or ability to control sensitive information. Member States may also take into account whether an investor is controlled by a state (Art. 4), they may prevent circumvention of the screening mechanisms (Art. 5), and they can consider whether the foreign investor is controlled by a government of a third country.
Various criteria are set for rules on investment controls. For instance they have to be transparent and non-discriminatory, timeframes for the issuing of decisions must be clear, confidential business information has to be protected, and investors must have the possibility to seek judicial redress against screening decisions (Art. 6).
Member States have to report to the Commission regularly on FDI that took place in their territory as well as on the application of their national investment screening mechanisms (Art. 7).
Furthermore, the proposal gives the European Commission the right to screen FDI, if projects in the EU’s interest are concerned. A list of such projects or programs is provided in an Annex accompanying the proposal (Art. 3 and Annex 1). The Annexes contain the following projects: European GNSS programmes (Galileo and EGNOS), Copernicus, Horizon
4
European Commission, Proposal for a Regulation of the European Parliament and of the Council Establishing a Framework for Screening of Foreign Direct Investments into the European Union (SWD(2017) 847 final), <https://ec.europa.eu/info/law/better-regulation/initiatives/com-2017-487_en >, (accessed on November 14th, 2017).
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Screening Foreign Direct Investment?
2020, Trans-European Networks for Transport (TEN-T), Trans-European Networks for Energy (TEN-E), Trans-European Networks for Telecommunications.
The regulation establishes a cooperation mechanism at the EU level. Member States are obliged to inform the Commission as well as other Member States of FDI projects. Other Member States may then provide comments in cases where these projects could affect their security or public order. The Commission may also issue an opinion in cases where it considers that this FDI is likely to affect security or public order in one or more Member States (Art. 8 and 9). The Member States where the FDI is planned shall give due consideration to the comments by other Member States and by the European Commission. Should the Member State decide not to follow the Commission’s opinion it is required to provide an explanation to the Commission (Art. 8 and 9).
Information received in the context of investment screenings shall be used only for the purpose for which it was requested (Art. 11).
To facilitate the cooperation process, contact points for the screening of FDI shall be established in all Member States (Art. 12).
BDI Position in Detail We welcome that the regulatory proposal clearly acknowledges that foreign investment is welcomed in the EU. Foreign direct investment (FDI) is an important source of economic growth, jobs, and innovation. Through FDI, foreign companies operate production facilities and strengthen their business relationships with European partners. These investments create and secure jobs. The Commission has clearly stated that the EU maintains an open investment environment. The draft regulation is a framework and does not oblige a Member State to establish a domestic screening mechanism. The proposal largely focuses on investment screening on the grounds of security and public order. Overall, German industry welcomes the general direction of the regulatory proposal.
However, German industry has doubts regarding some elements of the Commission’s proposal:
Foreign direct investment (FDI) is an important source of economic growth, jobs, and innovation in the European Union. It is indispensable for the future economic and social development in the EU. The EU thus needs to retain an open investment regime.
BDI welcomes that the EU is fulfilling its responsibility in developing a balanced European approach towards FDI in cases where such investment threatens to negatively impact national security and order. A more common approach across the EU, while regarding the competencies of the EU Member States, is welcomed by German industry. Thus, the final decision on whether an investment is prohibited, should remain in the hands of Member States.
German industry acknowledges that investments from third countries in certain projects can impact the public order and security of the European Union as a whole. In such cases, it is justifiable for the European Commission to assess the possible detriment of such investments. However, these cases must be clearly and definitively delineated. The list of industries, projects and programmes of interest to the EU (Annex) is too broad and gives reason for concern on the type of projects that could potentially be affected. This list must be
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Screening Foreign Direct Investment?
exhaustive and must not be expanded in the future. Terms such as “significant share of EU funding” (Art. 3 § 3) need further clarification.
The protection of public order and security has worldwide acceptance as a motive for investment screenings by governments. A fundamental broadening of the screening criterion “protection of public order and security” could send the wrong signal to Member States. German industry strongly rejects economic viability as criteria in investment screening. Vague language in the Commission’s proposal could open the door for Member States to go in this direction. A transparent and precise understanding of what is to be understood by national order and security could improve the legal certainty for investors and benefit the EU as an attractive destination for foreign investments. It would also prevent new forms of hidden protectionism. The list of economic sectors (Art. 4), which can also be understood as limiting the concept of public safety and order, is too broad.
A general and evaluative differentiation between state and private agents with reference to foreign direct investment faces serious difficulties (Art. 4). The fact that an investment is backed by subsidies or is in line with the economic policy objectives of the country of origin does not in itself constitute proof of its harmfulness for the recipient country’s own economy. The regulation should suggest meaningful and applicable criteria on how national legislation can make such a distinction. A criterion could possibly be whether the investment leads to market distortions. The European Commission should work to ensure, as far as possible, that state subsidies or other support measures do not distort competition.
The draft regulation contains some rules for obtaining valuable information on activities of foreign investors in the EU (Art. 8). This information would be necessary before further political steps are taken. In a monitoring process, the European Commission could gather reliable data on investment activity in Europe (flows, funding, conduct of investors after the takeover, how close investors are to the state, etc.). In particular, it would be important to know if investors are operating in their home market in a transparent, competitive environment. This monitoring should lead to an open-ended process of evaluation and review to identify possible adequate political measures in cases when undesirable developments are detected. The monitoring itself could possibly have a disciplinary effect.
The assurances on the confidentiality of information offered (Art. 11) may not be considered sufficient by investors. The regulation must ensure that commercially sensitive information does not fall into the hands of unauthorised persons, e.g. competitors.
German industry welcomes political initiatives that dismantle restrictions on investment and combat protectionism at home and abroad. The EU Commission must work towards more market access in countries in which protectionism prevails. This is all the more essential in view of rising protectionism worldwide. By concluding free trade agreements (FTAs) and bilateral investment treaties (BITs), investment conditions for EU companies in third countries can be improved. At the same time, such treaties can be used to promote the transparency of foreign investment. In addition, the European Commission should leverage its influence in the WTO and the G20 to open up markets for European companies.
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Screening Foreign Direct Investment?
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Imprint Federation of German Industries e.V. (BDI) Breite StraĂ&#x;e 29, 10178 Berlin www.bdi.eu T: +49 30 2028-0 Editors Dr. Stormy-Annika Mildner T: +493020281562 S.Mildner@bdi.eu Dr. Christoph Sprich T: +49 30 2028-1525 c.sprich@bdi.eu BDI document number: D 0902
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