Monitoring the impact of the EU’s new foreign investment screening mechanism

The policy challenge: Since 2020, the European Union (EU) has maintained a framework for foreign investment screening. It sets the parameters for Member State mechanisms to review foreign direct investment (FDI) on national security grounds and gives the European Commission a coordinating role. The adoption of the EU screening framework is part of Europe’s response to the rise of geoeconomic competition for critical resources and strategic assets.

The EU has realised that to be able to pursue autonomous policy goals, it needs tools to manage the risk of undue foreign state influence and coercion that may result from FDI.

No later than the 12 October 2023, the European Commission must present to the European Parliament and the Council a report evaluating the functioning and effectiveness of the EU investment screening framework and, if appropriate, a legislative amendment proposal. Less than a year before that deadline is set to expire, the Commission is faced with a pressing problem: how to conduct an appropriate ex-post impact assessment of the EU investment screening framework without comprehensive Member State reporting of relevant data and reliable measures of the impact of the new framework on the volume and composition of FDI. However, since the Regulation does not go into any detail to specify what type of information needs to be reported on FDI, the Member States must decide what items of information to report, resulting in differing levels of reporting across the block.

The policy response: When the investment screening framework was proposed, concerns about protectionism fuelled a debate about whether EU-wide investment screening would increase European businesses’ funding costs and perhaps would result in negative repercussions for European investors abroad, notably in China. Such concerns strengthened the hand of those who advocated for a cautious approach to a field traditionally reserved for the Member States. A compromise was found that included a requirement for Member States to report unspecified annual aggregate statistics on their activities to the Commission and tasking the Commission with evaluating and proposing further legislation within three years.  

As the deadline approaches, it has become clear that the Commission’s monitoring tools are insufficient. It is reliant on Member States being forthcoming with statistics that could support the case for a legislative expansion of the Commission’s competences. The Commission’s first annual report on the implementation of the framework was striking in its absence of key metrics that would allow an ex-post assessment of the framework’s impact on investment flows. Notably, it included no 1information on the breakdown of screened investments and screening decisions by countries of origin of inbound FDI. It presented aggregate data on the number of screening cases but not on the value of investments screened, which would allow for pricing of the security externalities identified in the screening process. 

This policy brief outlines the Commission’s monitoring mandate over investment screening activity. It then proposes a set of parameters for measuring the impact of screening on investment flows, investment destinations, and funding cost, and for mapping the potential transformative effect of the EU investment screening framework on the European investment landscape.

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Jens Hillebrand Pohl is a Research Scientist in the Faculty of Management and Business at Tampere University, Finland.