European Affairs

As Chinese Investment Rises in Europe, Brussels Proposes Greater Scrutiny of Foreign Purchases of EU-Based Companies     Print
By James D. Spellman, Washington, DC

Spellman 1The European Union recently proposed a framework for scrutinizing incoming foreign investments that may affect “public order” or “security,” a veiled initiative to address Europeans’ rising concerns over China’s state-owned companies acquiring EU-based businesses that are seen as key for Europe’s competitiveness in the global technology tsunami.[1]

In introducing the proposal in his state of the union address (September 13), the EU President Jean-Claude Juncker said it "strikes a smart balance between strengthening the EU's role where appropriate, a more coordinated approach and the preservation of member states' decision-making authority. The proposal promises to tackle potential national security issues.”[2] He assured Europeans he is not “a naive advocate of free trade,” a signal to those arguing that there is little reciprocity from China and other countries for accessing EU’s open markets.


Juncker left another EU official, Jyrki Katainen, the European Commission Vice-President for Jobs, Growth, Investment and Competitiveness, to address the difficulties ahead in balancing state sovereignty, job creation, and other competing interests when vetting foreign investments. "The EU is and will remain one of the most open investment regimes in the world,” he said. “Foreign direct investment is an important source of growth, jobs and innovation. However, we cannot turn a blind eye to the fact that in certain cases foreign take-overs can be detrimental to our interests."[3]

That balancing is reflected in what has been publicly released about the framework’s details.[4] In broad terms, the draft proposal includes:

EU-wide coordination: The new framework would enhance coordination between Brussels and EU members, with the review adhering to the principles of transparency, equal treatment, and adequate redress (according to member states’ legal systems). For those investments concerning substantial EU funds or investments covered by EU legislation, the EU would be required to undertake a review and issue a non-binding opinion, which members must take “utmost account of” and explain those decisions contrary to the Commission’s views.

Members have the last word: EU countries would continue as the lead decision-makers, and could maintain, modify, or adopt (around half of the EU members operate screening mechanisms) vetting procedures in such areas as critical infrastructure (including energy, transport, communications, data storage, space or financial infrastructure, and sensitive facilities), critical technologies (including artificial intelligence, robotics, semiconductors, technologies with potential dual use applications, cybersecurity, space or nuclear technology), security of supply of critical inputs (e.g., oil, raw materials), and access to and/or control of sensitive information.

Broader review: When assessing a foreign direct investment (FDI), the proposed draft regulation states that members and the Commission “may take into account whether the foreign investor is controlled by the government of a third country, including through significant funding.” Observers say this is likely to create the greatest controversy in the energy sector.

Cooperation and reporting obligations: Members must inform the commission and other EU countries of any FDI reviews and offer those countries who may be affected by the FDI under review the opportunity to provide comments.

After the public comment period ends November 8, the Commission may revise the proposal or present it unchanged to the European Parliament and EU members. To gain approval in Parliament, officials will need to build a coalition that includes Italy, Germany, and France, all of whom have been complaining about Chinese inroads into their markets. In their joint letter to the Commission in February, these three largest eurozone countries expressed fears that Europe’s “key” technological know-how was leaking overseas.[5] As a consequence, they wrote, “we are worried about the lack of reciprocity and about a possible sell-out of European expertise, which we are currently unable to combat with effective instruments.” They called for “more scope to investigate individual takeovers and, where applicable, block them.”

Over the past three years, there has been a sharp growth in Chinese investment in Europe, notes Michael F. DeFranco, global chair of mergers and acquisitions at the law firm Baker McKenzie. "Well over half of all Chinese investment in Europe...since 2000 took place in the last three years, marking the continued influence of globalization and the rapid development of China’s economy."

A study released in May by the consulting firm EY found that there were 5,845 FDI projects into Europe in 2016, a 15-percent year-on-year increase, with the United Kingdom, Germany and France attracting just over half of Europe’s FDI last year. Of those three countries, Germany is the most favored; Chinese investment in Germany soared from $530 million in 2015 to $12.6 billion a year later.[6] State-owned Chinese companies have been at the vanguard; a Deutsche Bank study showed that state-owned businesses accounted for 78 percent of investments in Europe between 2008 and 2013.[7] U.S. companies were Europe’s biggest investors, accounting for 22 percent of all European FDI projects in 2016, according to EY.

The software sector attracting the largest percent of FDI, followed by businesses services. Combined, both represented 25 percent of FDI in 2016, EY said.

CHART ONE: China’s OFDI, 1992 – 2015 (US$ billions)
spellman201710chart1
Source: Dorothy Guerrero, “Chinese Investment in Europe in the Age of Brexit and Trump.” Transnational Institute.
https://www.tni.org/files/publication-downloads/tni-china-investment-working-paper.pdf .


CHART TWO: Chinese FDI in the EU-28 2000-2014
spellman201710chart2
Source: Dorothy Guerrero, “Chinese Investment in Europe in the Age of Brexit and Trump.” Transnational Institute. https://www.tni.org/files/publication-downloads/tni-china-investment-working-paper.pdf .


CHART THREE: Chinese FDI in Europe, EU FDI in China
spellman201710chart3
Source: Mercator Institute for Chinese Studies (MERICS and Rhodium Group. “Preparing for a new era of Chinese capital.” https://www.merics.org/en/merics-analysis/papers-on-china/cofdi/cofdi2017/ .


Partly in response to public concerns, 20 deals involving Chinese ownership of European enterprises, worth $16.3 billion, were scrapped last year, according to the Rhodium Group. This group included the proposed Chinese takeover of German chip equipment maker Aixtron for $794.32 million (€670 million). The more critical review of FDI reflects, too, the strengthening of Europe’s economy; in the depth of the global financial crisis, the EU was actively campaigning to attract FDI to fuel job creation and growth.

One key conflict ahead is the extent to which these reviews would also include threats to competitiveness and contradict existing EU merger control laws. Competition Commissioner Margrethe Vestager sees her division’s reviews of foreign corporate takeovers as “complementary” to assessing the impact, for example, on national security.[8] The EU Merger Regulation prevents members from solely applying national competition rules to block mergers but allows for some flexibility when “legitimate interests” are involved. For Vestager, too, the issue is non-EU state subsidies of the suitors for EU companies, an advantage that undermines competitiveness. It’s unclear how the two frameworks and their timetables would operate alongside one another. To address these issues, she is establishing a group of representatives from EU members to identify those strategically important assets and sectors and to share best practices for FDI screening.


James Spellman is an independent economic consultant with Strategic Communications LLC
 


[1]See: “Communication from the Commission to the European Parliament, the European Council, the European Economic and Social Committee and the Committee of the Regions, Welcoming Foreign Direct Investment while Protecting Essential Interests, COM(2017) 494 final, Brussels, September 13, 2017. http://ec.europa.eu/transparency/regdoc/rep/1/2017/EN/COM-2017-494-F1-EN-MAIN-PART-1.PDF .
Also: “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,” COM(2017) 487 final, Brussels, September 13, 2017.
http://ec.europa.eu/transparency/regdoc/rep/1/2017/EN/COM-2017-487-F1-EN-MAIN-PART-1.PDF .
[2]For general information about screening mechanisms in EU members, see Parliament Research Service Briefing, Foreign Direct Investment Screening, May 2017. http://www.europarl.europa.eu/RegData/etudes/BRIE/2017/603941/EPRS_ BRI(2017)603941_EN.pdf .
[3]M. Apelblat, “European Commission proposes non-binding screening of foreign investments.” Brussels Times, September 17, 2017. http://www.brusselstimes.com/eu-affairs/9152/european-commission-proposes-non-binding-screening-of-foreign-investments .
[4]See references in “i.”
[5]Yann Le Guernigou and Leigh Thomas, “France, Germany, Italy urge rethink of foreign investment in EU.” Reuters, February 14, 2017.
http://uk.reuters.com/article/uk-eu-trade-france/france-germany-italy-urge-rethink-of-foreign-investment-in-eu-idUKKBN15T1ND .
[6]EY, “Record foreign direct investment in Europe sparks job creation boom.” May 23, 2017.
http://www.ey.com/gl/en/newsroom/news-releases/news-ey-record-foreign-direct-investment-in-europe-sparks-job-creation-boom .
[7]S. Hansakul and H. Levinger, “China-EU Relations: Gearing Up for Growth.” Deutsche Bank Research, July 31, 2014.
[8]Slaughter and May, “Foreign investment in the EU: a tale of competing tensions.” July 26, 2017.
http://www.slaughterandmay.com/what-we-do/publications-and-seminars/publications/newsletters-and-briefings/2017/competition-regulatory-newsletter-12-25-july-2017// .