On 19 October 2023, the European Commission (“Commission”) published the Third Annual Report on the screening of foreign direct investments (“FDI”) into the European Union (available  here), and the accompanying Commission Staff Working Document, pursuant to the annual reporting obligation under Article 5 of Regulation (EU) 2019/452 (“FDI Regulation”).

This is the third annual report on FDI screening since the FDI Regulation establishing the EU cooperation mechanism on FDI became fully operational on 11 October 2020. The first and second annual reports, published on 23 November 2021 and 1 September 2022 (available  here) showed that Member States and the Commission remain eager to review deals with an FDI element and which may have an impact on the national or the EU's security and public order.

The first and second annual reports also showed that whilst most transactions were cleared swiftly and without an in-depth investigation, foreign investors should expect increased scrutiny in the future with more EU countries adopting national FDI screening mechanisms and tighter rules for such deals on grounds of security and public order.

This trend of increased FDI scrutiny by the Member States and at EU level is confirmed by the third annual report, which provides the following key highlights:

  • Global FDI flows reached €1.2 trillion in 2022, which constitutes a decrease of -14.3% compared to 2021. The EU contributed to this global decrease with -€140 billion less of inward FDI, compared to the +€142 billion recorded for 2021.
  • There was a fall in dealmaking, especially in the second half of 2022, as a result of the economic slowdown and rising cost of financing due to higher interest rates, worsened by Russia's invasion against Ukraine.
  • Most of the inward FDI into the EU originated in the US and the UK, as in 2021. In 2022, China was replaced as the third most important jurisdiction of origin of greenfield investments by the so-called “Offshore Financial Centres” (“OFCs”), which include Bermuda, British Virgins Islands, Cayman Islands, Mauritius and the United Kingdom Channel Islands.
  • Germany, Spain, Italy, France and the Netherlands were the EU countries that received the most inward FDI in 2022. The sectors receiving the highest share of investment in acquisitions in 2022 (28%) was the information and communication (“ICT”) sector. The second most important sector in terms of acquisitions was the manufacturing sector. However, both sectors experienced a general declined in the overall number of acquisitions in 2022.
  • The EU Member States received a total of 1,444 notifications for FDI clearance in 2022 (including ex officio cases), which constitutes a slight decrease from the 1,563 notifications in 2021. Of all notified cases, 55% were formally screened, which is a significant increase compared to 2021, when only 29% of cases notified resulted in formal screening.
  • At the EU level, 17 Member States submitted a total of 423 notifications to the Commission, which is a small increase from the 414 notifications made in 2021. The four sectors with the highest number of transactions in 2022 were manufacturing, ICT, professional activities, wholesale and retail, thus following the same trends than in 2021.
  • Of the 423 cases notified in 2022, 81% (343 cases) were closed in Phase 1 (i.e. within the initial 15 calendar days), with the remaining 11% (47 cases) proceeding to Phase 2 with additional information being requested from the notifying Member State. 8 % (34 cases) of those cases were still ongoing on the cut-off date of the Report (i.e., not yet closed in Phases 1 or 2).
  • In 2022, 17 Member States either adopted a new screening mechanism, amended their existing ones or had a consultative or legislative process in place expected to result in the adoption of a new mechanism. As of 13 October 2023, 21 of the 27 Member States had FDI screening mechanisms in place.

A more detailed analysis of these key highlights is provided below. For more information on the Commission's Third Annual Report and the EU screening mechanism more generally, please also visit the Competition Review (GCR) Guide to Foreign Direct Investment Regulation edited by Veronica Roberts, competition and foreign investments partner at Herbert Smith Freehills, with contributions from Kyriakos Fountoukakos and Daniel Barrio, amongst others. The full online version of the guide is available  here.

A general decrease of FDI flows globally and in the EU

According to the Report, global FDI flows decreased in 2022, reaching €1.2 trillion, which constitutes a -14.3% decrease compared to 2021. The EU contributed to this global decrease with -€140 billion less of inward FDI, compared to the +€142 billion recorded for 2021. This result is primarily driven by decreases of inward FDI in Luxembourg. There was also a fall in deal making, especially in the second half of 2022, resulting from the economic slowdown and rising cost of financing due to higher interest rates.

These inflationary trends, worsened by Russia's invasion against Ukraine, and the resulting pressure on energy and commodity prices, together with generalised supply chain disruptions, led investors to adopt a prudent approach, waiting for more favourable economic conditions.

United States and the United Kingdom continue to be the largest originators of inward FDI into the EU

The majority of inward FDI into the EU in 2022 originated in the United States, accounting for 32.2% of all acquisitions and 46.5% of all greenfield investments, followed by the United Kingdom with 25.6% and 19%, respectively. The United Kingdom remained the second source of investment despite a decline in both the number of acquisitions (-17.1%) and greenfield investments (-8.9%) in 2022, compared to 2021.

In 2022, the OFCs, including Bermuda, British Virgins Islands, Cayman Islands, Mauritius and the United Kingdom Channel Islands, replaced China as the third most important jurisdiction of origin of greenfield investments. In fact, greenfield investments into the EU originating from China diminished and China was fifth, with a share of 3.9%, down from 5.9% in 2021.

Other origin jurisdictions which experienced a decline in the number of greenfield investments between 2021 and 2022 are Switzerland (-15.5%), Japan (-11.8%) and Canada (-2%). For acquisitions, OFCs (-43.2%) and Canada (-41.6%) experienced a sharp decrease in numbers in the same two years. Jurisdictions which experienced an increase in the number of greenfield investments are Norway (6.9%), India (9.1%) and South Africa (118.8%). For acquisitions, Japan (23.9%) and India (107.1%) registered a robust growth in investments into the European Union in 2022.

Germany, Spain, Italy, France and the Netherlands received the most FDI

In terms of target EU countries receiving the most inward FDI in 2022, Germany continued to be the top destination with a share of 17.2% of all acquisitions. Spain retained the second place with a share of 13.5%, despite a decrease in the number of acquisitions of -17.5% in 2022 compared to 2021. Italy, France and the Netherlands followed with shares of foreign transactions of 10.6%, 10.2% and 10%, respectively. Most destination countries experienced a decline in the number of acquisitions, ranging from -3.2% in Denmark to -20% in Belgium. The only two exceptions were Sweden and Portugal, with a 1.3 % and 30.6% growth in 2022, respectively.

The sector receiving the highest share of investment in acquisitions in 2022 (28%) was the ICT sector. However, the overall number of acquisitions in the ICT sector declined by -18.6% in 2022 compared to 2021. The second most important sector in 2022 in terms of share of acquisitions was the manufacturing sector, but it was only fifth in terms of share of greenfield investments (10.4%). Overall, this sector experienced a decline in the number of acquisitions (-17.9%) and greenfield investments (-13.1%) in 2022 compared to 2021.

A slight decrease in the number of notifications at the national level but greater scrutiny by national FDI screening authorities

In 2022, a total of 1,444 requests for FDI authorisations were made at the national level (including ex officio cases), which is a slight decrease from the 1,563 requests in 2021.

According to the Report, there is a clear trend towards screening more cases formally. Not all authorisation requests resulted in a decision to screen, as this largely depends on the Member States. However, out of all authorisation requests and ex officio cases, approximately 55% of the cases were formally screened. This is a significant increase in the proportion of formally screened cases compared to 2021 where only 29% of cases resulted in formal screening. About 45 % of the applications in 2022 were deemed ineligible or did not require formal screening (it was 71% in 2021).

Of all cases formally screened in 2022 by the Member States, the overwhelmingly majority (86%) were authorised without conditions. This is a slight increase from the 73% of cases authorised without conditions in 2021. Only 9% of cases involved an approval with conditions or mitigating measures, which is a significant decrease from the 23% of cases in 2021. Only 1% of all cases were blocked by the national authorities and 4% of transactions were ultimately abandoned by the parties.

A slight increase in FDI notifications by Member States at the EU level

At the EU level, 17 Member States submitted a total of 423 notifications pursuant to Article 6 of the FDI Regulation in 2022. This constitutes a slight increase from the 414 notifications made in 2021. Six Member States (Austria, Denmark, France, Germany, Italy and Spain) were responsible for more than 90% of those notifications. According to the Report, the Commission opened a number of ex officio cases concerning Member States with no national screening mechanism in place, which meant that in 2022 the Commission actually dealt with cases from 19 Member States.

The notified transactions varied greatly in terms of sectors of the target company, the value of the transaction and origin of the ultimate investor. However, the four sectors with the highest number of transactions in 2022 were manufacturing, ICT, professional activities, wholesale and retail, thus following the same trends than in 2021.

Of the 423 cases notified in 2022, 81% (343 cases) were closed in Phase 1 (i.e. within the initial 15 calendar days), with the remaining 11% (47 cases) proceeding to Phase 2 with additional information being requested from the notifying Member State. 8% (34 cases) of those cases were still ongoing on the cut-off date of the Report (i.e., not yet closed in Phases 1 or 2). The main sectors subject to Phase 2 were manufacturing (59%) and ICT (23%). Also compared to 2021, transport and storage is now the third most examined sector by the Commission (it was financial activities in the previous report).

According to the Report, in 2022 a total of 11 Member States accounted for 56 Phase 2 cases (it was 9 Member States In the second report for 47 Phase 2 cases). For all Phase 2 cases, the average period of time it took for Member States to provide the requested information was 24 calendar days (compared to 22 in 2021), with a range from 1 to 126 days (compared to 3 to 101 calendar days in 2021).

More EU Member States are putting screening mechanisms in place

According to the report, in 2022, Slovakia adopted a new screening mechanism, and eight Member States (Austria, France, Hungary, Italy, Latvia, Lithuania, Poland and Spain) amended their existing ones. In addition, by the end of 2022, eight Member States (Belgium, Croatia, Cyprus, Estonia, Greece, Ireland, Luxembourg and Sweden) had a consultative or legislative process expected to result in the adoption of a new mechanism.

Most national legislative developments revolved around three main topics: (1) starting a legislative process to introduce a national FDI screening mechanism, (2) upgrading national screening procedures and expanding covered sectors, and (3) prolonging the validity of national screening mechanisms.

In the Report, the Commission reiterates its expectation that all 27 Member States should establish a comprehensive national FDI screening mechanism to safeguard the Union against potentially risky foreign investments from third countries.

The Report also indicates that despite the Commission assisting Member States with technical and policy guidance, meetings and information exchange on best practices, there are still noticeable divergences between national screening mechanisms. These discrepancies relate to what constitutes a formal screening of FDI, timelines, sectoral coverage, and notification requirements.

As of 13 October 2023, 21 of the 27 Member States had FDI screening mechanisms in place (the full list is available  here).

FDI from Russia and Belarus

Since the beginning of Russia's military aggression against Ukraine, the European Union adopted a range of sanctions against Russia aimed at significantly weakening its economic base, depriving it of critical technologies and markets and undermining its ability to finance the war. In parallel, the existing EU sanctions regime against Belarus has been expanded in response to its involvement in Russia's aggression against Ukraine.

On 6 April 2022, the Commission issued Guidance to Member States on how to screen foreign direct investment from Russia and Belarus into the European Union (see  here and our previous note on this  here). In the Report, the Commission indicates that in 2022, Russia accounted for less than 1.4% of cases notified to the Commission and Belarus for 0.2%.

Next steps

In terms of next steps, on 14 June 2023 the Commission launched a targeted  consultation inviting all stakeholders with first-hand experience of investment screening (e.g., businesses, trade associations, law firms, consultants and Member States' public authorities) to provide comments on whether the FDI Regulation remains fit for purpose in a changing global context.

Based on the outcome of the evaluation, which closed on 21 July 2023, the Commission may propose a revision of the rules while keeping the focus of the framework exclusively on security and public order.

The Commission must present a report to the European Parliament and the European Council evaluating the functioning and effectiveness of the FDI Regulation by 12 October 2023, as mandated by Article 15 of the FDI Regulation.

The report is not yet publicly available (the consultation page on the Commission's website indicates that it intends to do so by the end of 2023) so we will have to wait and see whether the Commission sees a need to make any changes to the FDI Regulation.

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