The world is witnessing a phase of increased protectionism in the global economy. For this reason, it is important to monitor the implementation of foreign direct investment (FDI) screening mechanisms. Interestingly, both the US and EU have recently released comprehensive reports covering the data for 2021. The 2022 annual report of the Committee on Foreign Investment in the United States (CFIUS) includes a record of all the deals that the agency scrutinised in 2021.
Between 2020 and 2021 there was a significant rise in the number of written notices, jumping from 187 to 272. About 48% of these 2021 notices (130 notices) triggered a 45-day investigation, which is in line with the previous two years, but less than the peaks of 2018 and 2017, when the investigated notices reached about 70%. CFIUS also received 164 declarations (where investors fast-track the screening mechanism through a lighter procedure), which were dealt with in 30 days on average, which demonstrates that declarations can be used by transaction parties as an efficient tool.
In Europe, an EU-wide framework for the screening of foreign investment, where member countries report to the European Commission their national screening activities, was only adopted in March 2019. Its second annual report reveals that the Commission received 1563 requests for authorisation. Around 71% of all the applications were deemed to not require a formal screening because of an evident lack of impact on public order and security, while the remaining 29% (453 cases) were formally screened. Of those, only 1%, or five projects, were prohibited; 3% were withdrawn by the parties and 23% were approved with mitigating conditions.
These numbers seem to suggest that the EU regulation lacks teeth, as only five of the 1563 initially notified projects eventually got blocked. More interestingly, among the five rejected transactions, there was not a single investment project from China, which also stands in contrast with the kind of political rhetoric that inspired this reform.
These numbers seem to suggest that the EU [FDI screening] regulation lacks teeth.
What may be true for 2021 could be different this year, though — in November, Germany blocked two Chinese investments in two local chip producers. Foreign investors should anticipate heightened scrutiny in the future as more EU countries adopt national FDI screening mechanisms and stricter rules on the grounds of security and public order.
However, because of challenging economic reasons, it might not be the time for Europe to be too picky. The elephant in the room is whether they want to look at the screening of outward investment. There are many European investors in Russia for example, and the EU cannot do anything if they decide to stay put — something that could change with an outward FDI screening regulation. Economically, it would make more sense for the EU to be stricter on capital flowing out of the bloc than on capital flowing in.
On the other hand, CFIUS remains the benchmark with regards to FDI screening regulations. It’s more mature and faster than the EU’s, and has reached cruise speed. It has a good balance of purely legal rules and a clear political dimension. The increasing effectiveness and efficiency of CFIUS while investigating appears to exhibit two things – good resources and a better understanding of the kinds of transactions which are suited most for declaration. However, some improvement for CFIUS also is still possible, particularly in the direction of screening outward investment.
Julien Chaisse is professor of Law, City University of Hong Kong and president, Asia Pacific FDI Network. Twitter: @JChaisse
Julien's previous columns:
- Is the US going to screen outbound FDI?
- Is an eNato the right solution for a bipolar economic world?
- Data regulation is more important to digital FDI than you think
This article first appeared in the December 2022/January 2023 print edition of fDi Intelligence. View a digital edition of the magazine here.