FDI Screening Regulation as an Example of Integration by Stealth
Student: Marija Kovacic, firstname.lastname@example.org International Trade and Investment Law track
Supervisor: Jochem de Kok, LL. M.
Date of the submission: 17.08.2022.
Table of Contents
Abstract ... 3
Introduction ... 3
Chapter 1: Foundations for Regulation of Foreign Direct Investment in the European Union ... 5
1.1. Regulation of Foreign Direct Investment in the European Union - Past and Present ... 5
1.2. Background of the FDI Screening Regulation ... 7
1.3. The Competences of the Member States to Regulate FDI ... 10
1.4. Competences of the EU for the Creation of the FDI Screening Regulation ... 11
1.5. Reconciling Differences With the FDI Screening Regulation ... 13
Chapter 2: FDI Screening Regulation ... 16
2.1. Overview Of the Provisions Of the FDI Screening Regulation ... 16
2.2. Guidance to the Member States Concerning Foreign Direct Investment and Free Movement of Capital From Third Countries, and the Protection of Europe’s Strategic Assets Ahead of the Application of Regulation ... 20
2.3. The FDI Screening Regulation - A Year After ... 22
Chapter 3: Integration by Stealth and its consequences ... 25
3.1. Integration by Stealth ... 25
3.2. Consequences for the FDI Screening Regulation Resulting From Integration by Stealth . 26 3.3. The Report- An Insight into Integration ... 28
Conclusion ... 30
Bibliography ... 31
Legislation and Case Law ... 33
In this thesis there is an observance of the Regulation 2019/452 establishing a framework for FDI screening as an example of theory of integration by stealth and a brief evaluation of the Regulation as a result of it being an example of integration by stealth. This thesis aims to contribute to the literature by analysing the presence of integration by stealth through the development of the FDI Screening Regulation and its potential shortcomings.
Through laying down the background of the FDI Screening Regulation, the pre-existing Member States FDI screening mechanisms and the preparatory works of the FDI Screening Regulation, the thesis showcases the reasoning behind its creation and differences in the Member State’s preferences towards FDI Screening. Finally, after concluding that the FDI Screening Regulation is an example of integration by stealth, this argument is further strengthened by presenting the findings of the First Annual Report on the screening of foreign direct investments into the Union.
Keywords: FDI, EU, Integration, Competences, Screening
After the Treaty of Lisbon which brought the change in the competences, one more area of European Union (EU) competence had to be regulated on the EU level - the common commercial policy and with that, the foreign direct investment (FDI). The EU, mostly through the work of the European Commission and the new competences laid down by Article 207 of The Treaty on the Functioning of the European Union (TFEU), tried to strengthen the constitutional values and deepen the integration through regulating this new area of their new mandate.1 Integration by stealth is a theory explaining the method that the EU uses to widen their own competence by legislating certain policy area contrary to the preferences of the Member States, in a secretive way, even if it means that it has to accept defeat on some points as long as the outcome represents a move towards closer integration.2
This thesis will, through using various interdisciplinary sources ranging from black letter law analysis and legal history analysis to political and economic articles, contribute to
1 Stephan W Schill, ‘The European Union’s Foreign Direct Investment Screening Paradox: Tightening Inward Investment Control to Further External Investment Liberalization’ (2019) 46(2) Legal Issues of Economic Integration 110, 112.
2 Sophie Meunier, ‘Integration by Stealth: How the European Union Gained Competence over Foreign Direct Investment’ (2017) 55 JCMS: Journal of Common Market Studies 593, 594.
the literature on European integration by exposing the tendencies of the European Union to interfere in regulating a certain area of the EU law, in this case FDI, by subsuming it under the exclusive competences of the EU counter to the preferences of the Member States and in a covert manner through the analysis of Regulation (EU) 2019/452 establishing a framework for the screening of FDI into the Union (FDI Screening Regulation), its development, its articles and its impact on the integration of the EU.
This means that the main problem that this thesis will answer is the question of whether the FDI Screening Regulation is an example of the concept of integration by stealth. This main research question will be answered through multiple subquestions.
The first subquestion is what are the causes that have led to FDI being legally regulated in this manner and this will be answered in the first chapter of this thesis. This subquestion will be answered in four parts. In the first part, there will be an overview of the legislative history of the FDI in the European Union with focus on the pre-Lisbon regulation of FDI and the changes that the post-Lisbon regime brought. This part will be based on the legal-doctrinal research method in the parts of the literature explored when laying down the history of the legal framework and its development through sources such as the previous primary sources of the European law and through legal articles dedicated to this development. The second part will focus on the legal history, background and the development of the FDI Screening Regulation.
This part will be researched through analysis of various economic articles, European Commission Reports and Communications which provide insight into the beginnings of the creation of the FDI Screening Regulation and the growing scepticism towards the FDI. The third part will provide an explanation on the legal basis of the competences to create the FDI Screening Regulation. This will be done by using both legal-doctrinal method in conjunction with using legal and economic articles to explain different choices of legal basis both from the side of the Member States as well as the side of the EU when choosing to regulate FDI while bearing in mind EU constitutional balance. Finally, in the fourth part, there will be a further discussion about the importance of safekeeping institutional balance whilst laying down the different Member States views on the regulation of FDI screening in the process of negotiation of FDI Screening Regulation. This will be analysed through political and legal articles that are able to show the differences between Member States wishes regarding FDI regulation during this period.
The second chapter of the thesis will answer the question of how is the FDI Screening regulated today within the EU. Here, the legal-doctrinal method will be used to lay down the provisions of the FDI Screening Regulation in the first part of this chapter. This method will
be used in conjunction with First Annual Report on the screening of foreign direct investments into the Union and Report on the implementation of Regulation as well as the legal and economic articles which will be the basis for a short evaluation of the FDI Screening Regulation in its first year. In this part, there will also be a brief analysis on the constitutional balance coming visible in the FDI Screening Regulation by using the framework stemming from the Dawson and de Witte article on the constitutional balance in the EU after the Euro-Crisis.
In the third and the main chapter of the thesis, the aforementioned chapters will culminate into answering the main research question of whether the FDI Screening Regulation is an example of integration by stealth. The article “When Integration by Stealth Meets Public Security: The EU Foreign Direct Investment Screening Regulation” will be used as a framework for deciding whether the FDI Screening Regulation is an example of integration by stealth. Furthermore, it will serve as a framework for evaluation of the acceptability of FDI screening being regulated in this manner. This article will be further developed in the thesis by including the findings of the First Annual Report on the Screening of Foreign Direct Investments into the Union leading to strengthening the argument that FDI Screening Regulation is an example of integration by stealth.
Therefore, from the introduction and the aforementioned sources and research methods, it can be seen that this thesis is one bordering interdisciplinary research with its entry into the spheres of political, legal and economical science. Hence, this thesis has the deeper purpose when explaining whether FDI Screening Regulation is an example of integration by stealth and that is to showcase that there is a visible want of the EU to further advance the integration of the EU by any regulation necessary.3
Chapter 1: Foundations for Regulation of Foreign Direct Investment in the European Union
1.1. Regulation of Foreign Direct Investment in the European Union - Past and Present This part will provide a short overview of the differences in the regulation of FDI in the EU from pre-Lisbon Treaty times with the purpose of understanding the differences in competences and changes in the FDI regulation in the EU over the years.
3 ibid “the competence shift, which ran counter to the preferences of all Member States and was not initiated by pressure groups, occurred by stealth as a result of Commission entrepreneurship and historical serendipity (or
‘fortunate astuteness’ as the opening quote from The Prince suggests)”
The competences of the EU to act on a certain matter are found in the Treaties4, and in the case at hand, the competences for the regulation of FDI changed hands with the coming into force of the Lisbon Treaty, evolving from being under the competences of the Member States to becoming the competences of the European Union. In this pre-Lisbon times5 - the times of the exclusive competences of the Member States over the foreign direct investment regulation - there was a vast body of Bilateral Investment Treaties guiding FDI. These Bilateral Investment Treaties were signed between the Member States and between Member States and third countries as well.6 The Bilateral Investment Treaties, although sometimes very detailed, did not cover the entirety of the foreign investment regulation. That is why the EU added another level to the regulation of FDI. Under the shared competences laid down in the pre- Lisbon Treaties and according to the principles of proportionality and subsidiarity found in the Article 5 of the Treaty on the European Union, the EU concluded numerous International Investment Agreements which in their provisions included forms of FDI regulation. 7
Today, after the Lisbon Treaty, it is impossible to think of the investment regulation in the European Union without thinking of: a) the Bilateral Investment Treaties, b) International Investment Treaties and, c) after the introduction of the new EU investment screening mechanism, without the FDI Screening Regulation. It is important to note that with the Lisbon Treaty, the common commercial policy extended to the FDI according to its article 207 which exchanged the previous Article 133 of the Treaty Establishing the European Community. With the obligation of eliminating restrictions and liberalising the EU market towards the foreign investors, stemming from the wording of the Article 207 of the TFEU8, the FDI policy in the first years followed just that.9
In conclusion, it is visible that the body of law regulating FDI in the EU grew in number over the years and there was a competence change regarding its regulation after the Lisbon Treaty coming into force. This new competence meant there is a new area of law to regulate and to understand the process of doing that, it is important to see the different approaches towards regulating FDI screening, from the perspective of Member States as well as from the perspective of the EU. Therefore, this will be discussed further in the following paragraphs.
4 Consolidated Version of the Treaty on the Functioning of the European Union  OJ C 326, art 5.
5 Angelos Dimopoulos, EU Foreign Investment Law (OUP 2011), 197, e.g. Article 49 Treaty on the functioning of the European Union.
6 ibid 18.
7 ibid 19.
8Andea Biondi, Piet Eeckhout and Stephanie Ripley, EU law after Lisbon (OUP 2012), 295, “Article 207(1) TFEU uses the word ‘shall’, which denotes an obligatory character of the liberalization objective”
9 ibid 294.
1.2. Background of the FDI Screening Regulation
As aforementioned, the Lisbon Treaty gave exclusive powers to the EU institutions to guide and regulate a new area of its competences - the common commercial policy. Guided by this and bearing in mind that the EU has a long growing scepticism towards FDI , especially the ones coming from China,10 and with the goal of protection of the important resources and industries from foreign control, the EU decided to address this issue by announcing the need for the creation of a FDI Screening Regulation that would restrict FDI flows incoming into the European Union.11
This proposed FDI Screening Regulation is an attempt to coordinate between restrictions that the Member States impose on the FDI and the protective measures on the EU level geared towards restricting incoming FDI in the EU.
These restrictive measures that Member State impose on FDI can be divided into two different approaches. First, the Member States approach which affects market entry, and the second one which is more focused on the affecting the post-entry operations.12 The screening method in the FDI Screening shows the legislators preference towards the market entry regulation approach.13 The reasoning behind this approach is that by “reducing infant domestic entrepreneurship, by deterring local technological deepening, or by transferring and exploiting new technology outside of the recipient countries. Furthermore, foreign investors could also be less involved in spillovers than domestic firms and more prone to footloose activity. Finally, the presence of foreign firms in a domestic economy could lead to the loss of economic control by the recipient countries since foreign investors are responsive to signals from international markets and pressures from home country economies.”14
In the times when proposal of FDI Screening Regulation was in statu nascendi, only 11 Member States had a form of FDI screening mechanism in place.15 The screening mechanisms of the Member States differentiated in both scope and design. Some of them focused mostly on the screening of investments in certain sectors, namely, electricity or gas structures that the Member States found important in securing the supply, preventing the loss of economic control
10 Sophie Meunier, ‘A Faustian bargain or just a good bargain? Chinese foreign direct investment and politics in Europe’ (2014) 12 Asia Europe Journal 143, 144.
11 Janina Witkowska, ‘The European Union’s Screening Framework for Foreign Direct Investment:
Consequences for External Relations’ (2020) 23 Comparative Economic Research Central and Eastern Europe 19, 21.
12 ibid E.g. certain notification procedures and investment screening, limitations on foreign ownership, managerial and operational restrictions.
13 ibid 30.
14 ibid 28.
15 ibid 32.
and transferring and exploiting of technology. In the majority of the Member States screening regimes prior to coming into the force of the FDI Screening Regulation, the screening was, and still remains, based on the nationality of the investor. Six of the member States back then applied the screening procedures only to non-EU entities as investors, with the exception of the investor coming from the EFTA and EEA countries. In two of the Member States screening procedures, the screening is applied towards all the investors.16 This small number of FDI screening mechanisms throughout the Member States stemmed from the long-standing policy of European Union’s openness to FDI. 17
As the wariness about FDI coming from third countries (and especially China), back in 2017 preoccupied the bigger economies and the power imbalance between European Union and China was lingering in the air,18 the European Commission started proposing a newer, more cautious approach to FDI originating from non-OECD countries. Before 2017, the Commission’s focus was on the outward EU FDI and its liberalisation, however, in the year 2017, this liberal approach grew into a concern.19 This can be seen from the Commission’s communication titled “Welcoming Foreign Direct Investment while Protecting Essential Interests” in September of that year. In the Communication, the Commission reiterated the long standing welcome approach to FDI and announced that this is not going to change. The Communication also emphasized the importance of protection of assets in the EU against takeovers that could lead to adverse effects to the essential interests of the EU or its Member States.20 The Communication restated the need for strengthening European trade policy that would stem from unifying the existing Member State legislation as well as the existing policies and instruments regarding the FDI on the EU level.21 That is why, in the paragraph named “The Case for Action” the Commission encapsulates its wish for creating an EU-wide regulation whose objectives would be to “provide a coherent framework to screen foreign direct investment in the EU on grounds of security or public order, without impinging on Member
16 Commission, ‘Review of national rules for the protection of infrastructure relevant for security of supply’,
<https://ec.europa.eu/energy/sites/default/files/documents/final_report_on_study_on_national_rules_for_protect ioth n_of_infrastructure_relevant_for_security_of_supply.pdf > accessed 1 May 2022.
17 Jacob Lundqvist, ‘Screening Foreign Direct Investment in the European Union: Prospects for a “Multispeed”
Framework’ (2018) European Union Law Working Papers 36(2)< https://law.stanford.edu/wp- content/uploads/2018/09/lundqvist_eulawwp36.pdf > accessed 1 May 2022.
18 ibid 4.
19 Steffen Hindelang and Andreas Moberg, ‘The art of casting political dissent in law: The EU’S framework for the screening of foreign direct investment’ (2020) 57 Common Market Law Review 57(5) 1427, 1436.
20 Commission, ‘Communication From The Commission To The European Parliament, The European Council, The 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, para 4.
21 ibid para 5(2).
States national prerogatives, facilitate close and systematic cooperation among Member States and between Member States and the Commission with regard to the screening of certain foreign direct investment when these raise security or public order concerns, including strengthened exchange of information, increase transparency of foreign direct investment that may have an impact on security or public order, effectively address cases of foreign direct investment raising security or public order concerns in relation to projects or programmes of Union interest and prevent circumvention of national foreign direct investment screening mechanisms”22 Finally, in the Communication, the proposal for a Regulation establishing a framework for screening FDI in the EU is revealed.
In the recent years, there has been a steep rise in the FDI flows in the EU. This rise in FDI targeted both “strategic and critical assets”, as they are named in the FDI Screening Regulation as well as other industrial sectors. However, in the FDI Screening Regulation, the newly established framework can be seen to target protection of the industries producing dual use technologies or strategic value. One of the most important goals of the FDI Screening Regulation was protection of the important European businesses that supply the EU with critical technologies, build infrastructure or have an access to sensitive information. Because of the definition of the FDI, namely, the possibility of the exercise of the control over the acquired business, there is a possibility that this control could cause harm to public policy or public order. This risk grows if the investor is a state-owned or controlled company, as it is the case with the publicly owned and, through exercise of indirect control, some privately owned Chinese companies. With this in mind, it is important to ensure “that while remaining open to investment, the EU is equipped to protect its essential interests.“23 Therefore, the changes towards FDI restrictions and the driving forces behind the creation of the FDI Screening Regulation are, according to some authors, based on the two main processes - the transfer of competence of FDI with the introduction of Lisbon Treaty and the rapid surge of Chinese FDI into Europe in the 2010s.24
Furthermore, the proposal for the FDI Screening Regulation goes hand in hand with the speech of the president of the European Commission that stated that the EU is not a naïve trader and emphasized the proposal for „a new EU framework for investment screening. If a foreign,
22 ibid para 6.
23 Commission, ‘Frequently asked questions on Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union’,
<https://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157945.pdf > accessed 1 May 2022.
24 Zenobia Chan and Sophie Meunier, ‘Behind the screen: Understanding national support for a foreign investment screening mechanism in the European Union’ (2022) 17 The Review of International Organizations 513, 515
state-owned, company wants to purchase a European harbour, part of our energy infrastructure or a defence technology firm, this should only happen in transparency, with scrutiny and debate. It is a political responsibility to know what is going on in our own backyard so that we can protect our collective security if needed.“25
From this part, the two main motives for the creation of the FDI Screening Regulation can be deduced. Firstly, the proposed FDI Screening Regulation was meant to coordinate between restrictions that the Member States impose on the FDI and the protective measures of the EU and secondly, it aimed to prevent FDI from causing harm to a host state economy.26 The initiation of the creation of the FDI Screening Regulation would not be possible without the competences given to the EU for its creation stemming from the Treaties and the legal basis for the creation of national FDI screening mechanisms. These legal basis connected to the competences will be further discussed in the following paragraphs.
1.3. The Competences of the Member States to Regulate FDI
The FDI Screening Regulation in itself is not establishing a new screening mechanism but allows freedom for Member States to adopt their own internal screening mechanisms that will best compliment their national interests while bearing in mind the competences laid down in the Treaties. This can be seen from the preamble of the Regulation. In its Recital 8, the FDI Screening Regulation provides that “The framework for the screening of foreign direct investments and for cooperation should provide Member States and the Commission with the means to address risks to security or public order in a comprehensive manner, and to adapt to changing circumstances, while maintaining the necessary flexibility for Member States to screen foreign direct investments on grounds of security and public order taking into account their individual situations and national specificities. The decision on whether to set up a screening mechanism or to screen a particular foreign direct investment remains the sole responsibility of the Member State concerned.”27 This is in line with the provisions of the primary EU legislation - TFEU and its Article 346(1)(b) which recognizes each Member State's right to “take such measures as it considers necessary for the protection of the essential interests
25Jean-Claude Juncker, State of the Union Address (Brussels, Belgium, 13 September 2017) <
https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_17_3165> accessed 20 April 2022
26Loïc Carcy, ‘The new EU screening mechanism for foreign direct investments-When the EU takes back control’ (2021) Bruges Political Research Papers 84 < http://aei.pitt.edu/103426/1/wp84_carcy.pdf> accessed 12 May 2022.
27Regulation (EU) 2019/452 of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union  OJ L79I; hereinafter: FDI Screening Regulation.
of its security that relate to the production of or trade in arms, munitions and war material“ and that “such measures shall not adversely affect the conditions of competition in the internal market regarding products which are not intended for specifically military purposes.”
Moreover, the EU's focus on one of the four main freedoms - free movement of capital - can be seen from the Article 63 of the TFEU which „prohibits all restrictions on the freedom of movement of capital and payments between Member States or between Member States and third countries“28 However, the TFEU prescribes a derogation to the aforementioned in its Article 65. This Article, in a way, prescribes a certain leeway for Member States to be able to adopt measures restricting free movement of capital while relying on public policy and public security reasons, in this case, deciding on matters regarding FDI, as long as they do not constitute means of arbitrary discrimination that are contrary to the Article 63 of the TFEU. 29
1.4. Competences of the EU for the Creation of the FDI Screening Regulation
To begin the analysis of the competences of the European Union for creating the FDI Screening Regulation it is necessary to bear in mind the importance of the free movement of capital as one of the four freedoms. This freedom is the only freedom existing outside of the boundaries of the EU’s internal market. Capital flows from the EU countries and in this case, FDI flows are included as a part of this freedom. For that reason, any regulation on the matter would have effect beyond the borders of the EU. From this, the need for protection and regulation also arises. The Member States and the EU can take precautions to ensure that foreign investment does not expose them to public security threats. In these cases, the EU itself can act either in the emergencies or in the normal economic circumstances to restrict this freedom.30 When introducing new measures, it is important to bear in mind the restrictions arising from the primary legislation - its resolute desire towards protecting the four freedoms - combined with the European Court of Justice’s narrow interpretation of the restriction of the freedoms. This careful approach towards freedom limitation can be seen from the preamble of the FDI Screening Regulation. In the Recital 8 of the FDI Screening Regulation, there is a visible nod towards the TFEU provisions regulating the restrictions of the free movement of capital by stating that “This Regulation is without prejudice to the right of Member States to
28Jan Oplotnik, Noemia Bessa Vilela and Natacha De Jesus Silva, ‘EU Foreign Investment Policy – FDI Screening Mechanism to Advert Genuine Threats or Introducing Hidden Protectionism’  Lex Localis:
Institute for Local Self-Government Maribor 51, 53.
30Consolidated Version of the Treaty on the Functioning of the European Union  OJ C 326, art 63-66
derogate from the free movement of capital as provided for in point (b) of Article 65(1) TFEU.
Several Member States have put in place measures according to which they may restrict such movement on grounds of public policy or public security.” 31
This is one of the reasons why several authors believe that the bases for the competences for the creation of the FDI Screening Regulation arise from the Article 64 TFEU. The article 63 TFEU is the only one explicitly including the third country context of capital movement as an EU competence, thus including FDI. 32
The EU used the Article 207 of TFEU as a basis for establishing their competences for creating the FDI Screening Regulation. However, this can be problematic primarily because portfolio investments are not covered by the Article 207 TFEU even though it has been argued that this can be covered by the previously mentioned provisions of the free movement of capital encapsulated in Articles 63-66 TFEU.33 The EU decided to leave out portfolio investments from the scope of the FDI Screening Regulation, possibly for this reason.
There are further debates regarding the substantive scope of the Article 207 TFEU. The wording of that article is found to be problematic as it does not refer to investment protection.
There are two approaches possible when analysing this problem. In a more restrictive approach, the Article 207 TFEU is found not to offer exclusive competences to the EU in investment protection. Other approach is the one claiming that the coverage of this article gives both investment protection and liberalisation competences to the EU.34 From the FDI Screening Regulation is can be seen that the EU sided with the more extensive approach to the competences of the Article 207 TFEU finding that the extension to common commercial policy to FDI, when read in conjunction with article 206 TFEU, allows for the exclusive competence of the EU to both regulate and liberalise FDI. 35 Moreover, regarding the Article 207 TFEU, it relates to certain measure of coordination between the different Member State actions and a need for not putting individual interest above the common interest.36 The individual approach to FDI screening when deciding on the screening measures varies from one Member State to the other and the FDI Screening Regulation is staying mute on this issue and just facilitates cooperation between Member States when screening FDI. This will be discussed at greater length in the following chapters.
31 FDI Screening Regulation, Recital 8.
32 Hindelang and Moberg (n 19) 1440.
33 Biondi, Eeckhout and Ripley (n 8) 303.
34 ibid 304.
35 ibid 305.
36 Hindelang and Moberg (n 19) 1436.
Currently, it is still unclear why the EU, when creating the FDI Screening Regulation, used the Article 207 TFEU as the sole base for its competences. It would certainly strengthen the EU’s competences if it decided to base the competences for the creation of the FDI Screening Regulation on both the TFEU articles guiding free movement of capital as well as the Article 207 TFEU. 37
From the previous two parts, it is visible that the legal base for the competence for regulating FDI screening and the creation of a screening mechanism is ambiguous and that the basis for the regulation of FDI exists both on the Member State and on the EU level. This will certainly play part in the ability of the EU to foster integration by stealth with the creation of the FDI Screening Regulation. In this creation, for it to be integration by stealth, there must be a certain disregard towards the Member States wishes in its creation. The different wants and proposed approaches of the Member States will therefore be discussed in the following paragraphs.
1.5. Reconciling Differences With the FDI Screening Regulation
During the negotiations between the Commission, European Council and the European Parliament, there were multiple schools of thought regarding content of the future FDI Screening Regulation. The proposed goals of the FDI Screening Regulation as discussed in the part on explaining the background of the FDI Screening Regulation of this thesis and in the State of the Union speech had the majority support in the European Parliament, with some of the big Member States proposing even more restrictive investment screening rules.38 The FDI Screening Regulation was adopted in November of 2018 promising to keep an open investment regime for FDI in the EU while simultaneously protecting the essential interests of the Member States, seemingly respecting the majority of the member States wishes. 39
When legislating it is important to take into account the complex way of reconciliating differences in the Member States opinions and preferences when it comes FDI screening. One of the leading rules when legislating on the EU level is to ensure the relative neutrality of the Union’s policies. 40 With Lisbon Treaty and the changes in the exclusive competences of the
37 ibid 1445.
38 Chan and Meunier (n 24) 515.
40 Mark Dawson and Floris de Witte, ‘Constitutional Balance in the EU after the Euro-Crisis’ (2013) 76(5) The Modern Law Review 817, 828.
EU, it can be visible that the Commission took control over the regulation of the Common Commercial Policy and in this case, over the FDI screening.41
To understand the meaning of keeping the balance and providing for a forum for protection and communication of different interests and finally for successful neutrality of the policies, it is important to observe Member States preferences for national screening during the procedure of bringing into force the new screening Regulation.
Back in 2017, as aforementioned, almost half of the Member States had a certain mechanism for screening FDI. This mechanisms differentiated in scope, nature of the procedures and the specific sectors that they were reaching. 42 When the large Member States (France, Germany and Italy) proposed the creation of investment screening mechanism at the European Council Summit in 2017, other Member States reacted negatively. The initiating countries experienced a big influx of FDI, especially from China in the years before the initiation for a EU-wide FDI screening regime, and were actively imposing measures on the national level to keep the FDI at bay while focusing on the protection of the essential interests of their states.43 Scared of a possibility of a greater Chinese influence on their industries, from banking sector, auto manufacturing or the energy sector, 44 the German, French and Italian government’s need for the EU wide investment screening mechanism was apparent.
Other 25 Member States were, at the time, expressing a “lukewarm support”45 or even
“initial rejection” 46 towards the proposal for an FDI screening mechanism. Therefore, it was hard to find consensus among the Member States on the scope, actors and, basically, every other aspect of the new Regulation.47 One group of countries, led by Greece and Portugal opposed the development of screening mechanism because they found that their economy heavily relied on Chinese investment, Another group of countries initially rejected the investment screening quoting ideological grounds for that decision, such as the fear of it enabling anti-liberal and protectionist policy. This group consisted of Belgium, Estonia, Finland, Netherlands, and Sweden. The third group which consisted of Ireland, Luxembourg,
41 ibid. 830.
42 ibid. 833.
43 Chan and Meunier (n 24), E.g. Germany blocking the foreign direct investment from a Chinese company that wanted to acquire Kuka, a German company producing industrial robots.
44Chan and Meunier (n 24) “Chinese HNA Group took a 9.9% share in Deutsche Bank, becoming the bank’s largest shareholder. In February 2018 Chinese auto-maker Geely (owner of Volvo) made a US$9 billion acquisition of 10% of Daimler, the parent company of Mercedes-Benz, becoming its largest shareholder… the German government barred China’s energy grid from buying 20% ownership of 50Hertz, an operator of high voltage electricity network in Germany”.
45 Chan and Meunier (n 24) 520.
46 ibid 521.
47 Hindelang and Moberg (n 19) 1429.
and Malta initially opposed the creation of a FDI screening mechanism because of their economic dependence on being intermediaries of foreign investment. There was also the fourth group of countries, such as Bulgaria and Croatia which did not take any position towards the proposal, simply because of their own lack of interest towards FDI in general. 48
To better explain the reasons behind the aforementioned stances of the Member States towards creation of a EU-wide FDI screening mechanism, it is important to establish what are the determinants of the national preferences for FDI screening. According to Z. T. Chan and S.
Meunier “the Member States with higher technological levels were more supportive of the European Union wide screening mechanism.”49 This is also in line with their willingness to protect their high level technology from foreign control, especially Chinese, and to stop the unreciprocated transfer of technologies. 50
Apart from the differences in the Member States opinions towards the creation of an FDI screening mechanism, the sheer speed of the policy process also took a toll on the vagueness and a “quite barebones”51 framework adopted in the end. This policy is a clear example of a complex and diverse EU policy making process. This new screening policy is a clear example of a lowest common denominator of differentiating preferences of the Member States which also reflects in the concept of integration by stealth. Even the possibility of a
“falling forward”52 way of development of the screening mechanism fell through. The resulting FDI Screening Regulation certainly tried to mitigate the different approaches to the FDI screening and tried to include a wide range of interests into the consideration, which ended up with a constitutionally non-threatening, but vague and a bit too neutral provisions, again reflecting the theory of integration by stealth which will be further discussed in the third chapter of the thesis.53
This as a result lead to the Member States having full authority to enact even more restrictive international direct investment screening mechanism.54 Furthermore, the European
48 ibid 1430.
49 ibid 1432.
50 ibid 1438.
51 ibid 1437.
52 Erik Jones, Daniel Kelemen and Sophie Meunier, ‘Failing forward? Crises and patterns of European integration’ (2021) 28 Journal of European Public Policy 1519, 1524.
53 Dawson and de Witte (n 39) 830.
54 Bas De Jong, ‘The EU Foreign Direct Investment Screening Regulation: in Search of a Clear Concept of FDI’
 Radboud Economic Law Conference Book: The Rise of Public Security Interests in Corporate Mergers and Acquisitions < https://ssrn.com/abstract=3981571> accessed 25 June 2022.
Commission in its Guidance55 only made clearer the need for further restrictions of FDI through screening, especially in regards to the healthcare sector, virtually negating the en face complete neutrality of the FDI Screening Regulation.56 As a result of the Guidance, some Member States have created screening mechanisms, some have made investment review more restrictive by broadening sectors covered and lowering threshold for review.57
All of the aforementioned leads to the conclusion that the EU, while trying to navigate the different positions on regulation of FDI screening once again was positioned “between a rock and a hard place ” 58 and that the result of this position and the wish for neutrality is the FDI Screening Regulation, as an example of integration by stealth and with its vague provisions and the final result of showing its face with the help from Commentaries and Guidance which favour the more mobile, richer and integrated interests. 59 In the next paragraphs the provisions of the FDI Screening Regulation will be laid down, showing the result of the competing interests laid down in this part.
Chapter 2: FDI Screening Regulation
2.1. Overview Of the Provisions Of the FDI Screening Regulation
The FDI Screening Regulation was adopted in March 2019 and with its adoption it promised to become the first mechanism for coordination and screening of FDI on the EU level.
The application of the FDI Screening Regulation began in October 2020. As it can be seen from its provisions, the goals of coordination and screening were supposed to be reached based on the multi-level cooperation mechanisms-the obligation of exchange the information between member States and the Commission and the Commission’s power to issue opinions on specific investment transactions. After the application, both the EU institutions and the Member States are working on its implementation.
Although in the time before the FDI screening Regulation, a number of Member States already had in place certain mechanisms to control and screen foreign investments. The FDI Screening Regulation put the focus on identification and avoidance of security risks that could
55Commission, ‘Guidance to the Member States Concerning Foreign Direct Investment and Free Movement of Capital from Third Countries, and the Protection of Europe’s StrategicAssets, Ahead of the Application of Regulation (EU) 2019/452 (FDI Screening Regulation)’ COM(2020) 1981 final.
56 De Jong (n 53) 5.
57 Chan and Meunier (n 24) 518.
58 Dawson and de Witte (n 39) 832.
arise from unwanted investments and aimed to establish the cooperation and communication channels for the purpose of achieving these goals. The example of a company at risk can best be seen from the one of the answers in the Frequently asked questions on Regulation (EU) 2019/452 establishing a framework for the screening of foreign direct investments into the Union. In this document, the Commission says that: “if there is only one target company in a contemplated FDI but it is selling goods and/or providing services in several Member States whose security and/or public order might be affected by the contemplated FDI.” 60
It is clear that the FDI Screening Regulation aims to cover all forms of FDI, meaning that its scope of coverage ranges from the greenfield investment, mergers and acquisitions all the way to the investments leading towards the indirect change in ownership and control.61 There is also a strict anti-circumvention clause when defining a foreign investor. According to this clause, special attention is paid not only towards the investments made by entities established outside of the EU, but also to the entities established in the EU “by means of artificial arrangements that do not reflect economic reality and circumvent the screening mechanisms and screening decisions, where the investor is ultimately owned or controlled by a natural person or an undertaking of a third country”62 such as shell or letterbox companies.
The FDI Screening Regulations is broad in sectoral scope, however, it allows restrictions only if there is an assessment of the likeliness for the investment to affect public order and security. Article 4 of the FDI Screening Regulation reiterates this and lays down explicit factors to be taken into consideration for the Member States or the Commission to act with care when commencing the screening process. One of the examples for this is the effect on the critical infrastructure, technologies and inputs that are essential for maintaining public order and security. Furthermore, the importance of protection of information is also an important part of the FDI Screening Regulation. The potential effect of FDI on the protection of sensitive data and information also has to be taken into account when diligently approaching the screening in accordance with the FDI Screening Regulation. This protection of data includes the protection of the freedom of media and media pluralism because all of these are factors that can have an impact on public security.
60 Commission, ‘Frequently asked questions’ (n 23).
61 FDI Screening Regulation, art 2(1) “means an investment of any kind by a foreign investor aiming to establish or to maintain lasting and direct links between the foreign investor and the entrepreneur to whom or the
undertaking to which the capital is made available in order to carry on an economic activity in a Member State, including investments which enable effective participation in the management or control of a company carrying out an economic activity” .
62FDI Screening Regulation, Recital 10.
There is an obligation of the Member States and of the Commission, when deciding whether an investment poses threat to public policy or security, to take into account the context and circumstances of the FDI. In the process of screening, special consideration must be paid to the control of the foreign investor, especially if the foreign investor is in any way controlled by the third-country government or is pursuing third countries State projects. Member States may additionally pay attention to whether the investor was in the past involved in illegal or criminal activities and in activities that in any way affected public policy or security.63 Finally, in the FDI Screening Regulation, there is guidance for the Commission when deciding on the screening of FDI aimed towards EU led projects. These projects include Galileo, Horizon 2020, Trans-European Networks and the European Defence Industrial Development Programme and the list is still expanding.64
The Member States are obligated to notify the Commission of any new or existing screening mechanism, they have to submit annual reports that includes FDI's screened and the ones undergoing screening, screening decision that lead to prohibition of investment or submitted it to conditions, the sectors, origin and value of the investment and the probability of the investment that is currently under screening to be caught by the EU Merger Regulation.65 In the FDI Screening Regulation, there is a visible so-called hybrid enforcement - this FDI created a cooperation mechanism between Member States and the Commission.
With regards to the development of an effective cooperation regime, there is an obligation for the Member States recipients of the FDI to provide information on that investment upon the request of other Member States and Commission. As a part of the cooperation strategy of the Regulation, the Member States will have to notify cases which are currently in the process of screening and will be able to ask for opinions and comments about the undergoing investments from other Member States and the Commission.
However, their obligation towards those requested opinions and comments stops on the level of consideration. In this exchange of information, the information about the investment that needs to be included is the information about information about the investor and targeted company - who are they, which sectors do they operate in and where, what is the value of the investment, what is the origin of their funding as well as the information on the timing of the transaction. The Member States have the right to authorise, conditionally approve or prohibit
63 FDI Screening Regulation, art 4.
64 Annex of the FDI Screening Regulation.
65 Commission, ‘First Annual Report on the screening of foreign direct investments into the Union’, COM (2021) 714.
the investment. By improving the exchange of information, the Commission will also be able to issue opinions regarding the ongoing FDI in the Member States. However, this his opinion is in no way binding according to the FDI Screening Regulation.66
This non-binding opinions and the wording used in the FDI Screening Regulation for determining the factors that may be taken into consideration by Member States or the Commission leads to the provisions to be seen as vague and non-binding. This vagueness can also be seen from the necessity to provide the additional Guidance to Member States when applying the FDI Screening Regulation in the light of Covid-19 crisis.
This Guidance provided a helpful insight to defining the goals and sectors that are necessary to screen. In March 2020 it became clear that protection of certain sectors essential for the functioning of the Member States in adverse conditions was of the highest priority. The Guidance of the Commission addressed to the Member States concerning FDI and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (FDI Screening Regulation) after the commencement of the pandemic brought a certain explanation and precision into what was considered to be critical sector of the highest priority for protection with the help of the FDI Screening Regulation. The FDI Screening Regulation covers broad range of sectors, from aerospace, defence, electoral/financial infrastructure, energy, transport, water, health, communications, media, data processing/storage and the critical technologies included, but were not limited to, aerospace, defence, energy storage, quantum and nuclear technologies, nano- and biotechnology, artificial intelligence, robotics, semiconductors, and cybersecurity.
The FDI Screening Regulation also expressed the need for the protection of supply of critical inputs which include food, raw materials and energy.
From the overview of the provisions of the FDI Screening Regulation, it can be concluded that it covers a wide range of sectors that are meant to be regulated in a cooperative manner. However, within the wording of the FDI Screening Regulation, there is still certain precision lacking both when deciding on the sectors that have to be included in the protection of the FDI Screening Regulation and when deciding on the necessity of the development of the national screening mechanisms. This leads towards a need for further guidance regarding the provisions of the FDI Screening Regulation, especially in the times of crisis affecting critical sectors which will be discussed in the next paragraphs.
66 FDI Screening Regulation, art 9.
2.2. Guidance to the Member States Concerning Foreign Direct Investment and Free Movement of Capital From Third Countries, and the Protection of Europe’s Strategic Assets Ahead of the Application of Regulation
With the beginning of the pandemic, the new sector to safekeep crystallised. That is the reasoning behind the European Commission’s Guidance to the Member States Concerning Foreign Direct Investment and Free Movement of Capital From Third Countries, and the Protection of Europe’s Strategic Assets Ahead of the Application of Regulation (Guidance). In this Guidance, although there was a mention to the honourable goal of openness to FDI, there was a bigger emphasis put on the need to stay vigilant in the current situation to prevent the loss of critical assets and technology.67 The Guidance also reminded of the possibility of an increased risk threatening from the attempt to acquire healthcare capacities or related industries such as research establishment in the times of rush to the cure.68 The Guidance pleads for the Member States that do not have a screening mechanism or whose screening mechanisms do not cover all relevant transactions to create one and in the meantime to use all the available tools at their disposal to fight off the those risks. For the Member States that already have screening mechanisms the guidance advises to be extremely careful of risks to critical health infrastructure and other sectors as provided for in the Guidance.69
This Guidance is an example of the more restricting and growing protectionist approach towards FDI in the EU. The Communication goes as far to remind of the second line of defence when it comes to FDI screening. This is the situation in which there was no national screening in the case of a certain foreign investment. In that situation, the Commission can provide comments and opinions even 15 months after the completion of the foreign investment.
The Guidance examines possible measures that can be taken to restrict capital movement when they are justified. In the process of determining whether foreign investment is likely to affect security or public order, the member States and the Commission are allowed to “consider all relevant factors, including the effects on critical infrastructure, technologies (including key enabling technologies) and inputs which are essential for security or the maintenance of public order, the disruption, failure, loss or destruction of which would have a significant impact in a Member State or in the Union.”70 The Guidance adds on the justification the possibility to justify restriction on capital movement by the public health exception. It
67 Commission, ‘Guidance’ (n 54).
70 FDI Screening Regulation, Recital 13.
reiterates that this is a part of a well-established body of case law of the Court of Justice of the EU where public health is named to be an overriding reason in the general interest.71
It is reasonable to conclude that the Guidance, in the process of emphasizing the importance of protection of health in the times of the increased risk towards health infrastructure is also strengthening the screening mechanisms with its explanatory and more detailed approach that helps to streamline the protection that is missing from the vague provisions of the FDI Screening Regulation. It is still to be seen whether the stronger, more protectionist wave of regulations, even though still in line with the TFEU and the FDI Screening Regulation, will persist long after the end of the pandemic.
The FDI Screening Regulationdoes not oblige for any active process with regards its implementation into the national legal order. In the Article 288 of the Treaty on the Functioning of the EU, regulations are stated to be binding in their entirety and directly applicable in the Member States.72 This in turn means that the Member States are not obliged to adopt any national measures in order to fulfil their obligations that arise from the regulation. However, the “Member States may nonetheless need to modify their law in order to comply with a regulation, or they may need to pass consequential legal measures in order to give full effect to what is demanded by the regulation. This does not alter the fact that the regulation itself has legal effect in the Member States independently of any national law, and Member States should not pass measures that conceal the nature of the EU regulation.“73 All of this means that the Member States do not have the obligation to transpose the regulation in any way but are just obliged to apply its provisions.
From the aforementioned provisions of the FDI Screening Regulation and the Guidance it can be concluded that the new screening regulation is currently unable to fulfil the goal of complete unification towards common policy for FDI screening and it is not meant to substitute existing national mechanisms since final word regarding foreign investment screening rests on the Member States. However, it is possible through laid down mechanisms of cooperation and publishing more Communications74 to enrich and make the Articles of the FDI Screening
71 C-531/06, Commission v Italy  ECLI:EU:C:2009:66, para 51.
72 Consolidated Version of the Treaty on the Functioning of the European Union  OJ C 326, art 288.
73 Paul Craig and Grainne de Búrca, G., EU Law: Text, Cases, and Materials (7th edn, OUP 2020) 105.
74 Recently there was a new communication published guiding FDI screening-Communication from the Commission Guidance to the Member States concerning foreign direct investment from Russia and Belarus in view of the military aggression against Ukraine and the restrictive measures laid down in recent Council Regulations on sanctions (Council Regulation (EU) No 833/2014 concerning restrictive measures in view of Russia’s actions destabilising the situation in Ukraine (OJ L 229, 31.7.2014, p. 1) and its amendments and Council Regulation (EC) No 765/2006 of 18 May 2006 concerning restrictive measures concerning restrictive measures in view of the situation in Belarus (OJ L 134, 20.5.2006, p. 1) and its amendments.
Regulation more clear, which could in the future lead towards the reaching of the goals of the FDI Screening Regulation as discussed in the chapter on the background of the FDI Screening Regulation in the future. A way of seeing how the first year of application of the FDI Screening Regulation went will be discussed in the following part, with a special attention paid towards the growth in number and scope of the national screening mechanisms which can further show that the FDI Screening Regulation with its creation furthered integration in the area of investment leading towards a more restrictive approach to FDI on the EU level.
2.3. The FDI Screening Regulation - A Year After
It can be debated whether the FDI Screening Regulation will reach the goals of unifying screening mechanism on the EU level and protecting EU business critical assets as set out in the communication from the Commission back in 2017. The FDI Screening Regulation is as a regulation defined by the Article 288 of the TFEU, defining the legal acts of the EU, it is stated that a regulation has a general application and it is in its entirety binding and directly applicable in all Member States. This, in translation posits the equivalence of the status between regulation and law or statute of a national legal order of a Member State.75 This does not mean that the Member State cannot „pass consequential legal measures in order to give full effect to what is demanded by the regulation“76 or „modify their law in order to comply with a regulation.“77
The FDI Screening Regulation leaves a „substantial margin of appreciation to Member States regarding both the adoption of screening mechanisms in the national legislation and the procedural aspects of the screening itself.“78 This could lead to legal uncertainty in the future, the ununified approach to FDI screening in the EU and diminishing FDI flow in the EU. 79
At the moment of writing of this thesis, according to the First Annual Report on the screening of FDI into the EU, the number of Member States with a national FDI screening mechanism stand at 18. In addition to its growing number, the screening mechanisms are getting broader in scope, „reflecting the key elements of the Regulation.“80
The reasoning behind this growth in scope and number of Member States screening mechanisms is complex.
75Consolidated version of the Treaty on the Functioning of the European Union OJ C 326, 26.10.2012, art 288.
76 Craig and de Búrca (n 72) 105.
77Oplotnik, Vilela and Silva (n 27) 63.
78 ibid 64.
80 Commission, ‘First Annual Report’ (n 64).
According to the authors of the article “Behind the screen: Understanding national support for a foreign investment screening mechanism in the European Union” the reasoning is layered. First the policymakers reduce restrictions on FDI and promote openness to foreign investment. This leads to liberalisation of FDI. This in turn leads to an apparently contradictory conclusion as to why that same policymakers decided to adopt a new regulation, which just by existing, leads to a more restrictive approach to FDI. The explanations for this phenomenon can be found in the reasons ranging from the situation in which “politically powerful indigenous businesses face substantial and rising financing constraints, they tend to support openness to FDI because foreign investors are a source of scarce financing. If, however, local credit conditions are relatively loose, domestic firms may prefer to limit FDI because inward investment generates increased competition in product and labour markets.”81 This, again, confirms the contradiction of regulation of FDI and its simultaneous restriction and liberalisation and views it as a double edged sword – on the one hand, it can be beneficial for
“technological transfer, economic growth, higher wages, and development under certain conditions”82 but on the other hand, it can also have adverse consequences on the country. The freedom to decide on the screening mechanisms and on the consequential choice about restriction and liberalisation leads towards the need for the Member States to internally balance the economic and security sector needs by raising the threshold for screening the FDI. This balancing could, in a certain way, lead to restrictions of the freedom of movement of capital and development of protectionism under the excuse of following the screening mechanism provisions and the aforementioned provisions of the TFEU.
One of the examples of this internal balancing of restriction and liberalisation and an example of the Member State screening mechanism is the Italian regime of “golden power”.
This regime is based on the attribution of the power to the governmental body to exercise it when certain preconditions are met, for instance to carry out activities that are believed to be of strategic importance.83 This power also extends to oppose the acquisition of shareholdings.
In one of its cases, concerning the equity investments in companies that hold assets identified as strategic in the energy, transportation, and communications sectors, as well as assets and relationships of strategic importance identified in the sectors referred to in Art. 4 para. 1 of the FDI Screening Regulation it raises the threshold for acquisition in regards to non-EU entities
83Francesca Prenestini, ‘Golden Power and Anti-Takeover Corporate Mechanisms’ (2022) Bocconi Legal Studies Research Paper No. 4075962 <https://ssrn.com/abstract=4075962 > accessed 1 May 2022.
considerably higher than the ones coming from the EU entities. 84 This caution towards FDI became even more visible during the Covid-19 pandemic. Following the Guidance to the Member States concerning FDI and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452, this emergency legislation aimed to protect the companies that were part of the strategic sectors.
However, Italy utilised the “golden power” to introduce more protectionist aimed legislation.
The new - at the time considered temporary - measures, extended the notification obligation that was already the part of the previous legislation to the purchases done by non-EU entity.
However, the “golden power” legislation was limited in accordance to the Regulation. This opened up the discussion on the reasoning of the “golden power” regime. In the beginning,
“golden power” served as a guard of national interests in protecting critical assets. Nowadays, it seems there is a discrepancy between the interests of the Italian government and the aims and goals of the EU when regulating the area of the FDI screening. One of the arguments leading towards this conclusion is that the Italian government is just introducing protectionism through the “golden power” regime 85 and all under the guise of FDI screening being geared towards the protection of critical assets and national interests.86
It is visible from this chapter that the Member States have freedom to decide on their own national screening mechanisms as long as they are in accordance with the EU legislation.
Nowadays, with the coming into force of the FDI Screening Regulation, the Member States, need to balance the approach towards FDI screening by themselves. This could lead to them not adopting any mechanisms except the ones mandatory for cooperation (e.g. Croatia87) or lead towards the adoption of even more protectionist mechanisms, as it can be seen from the example of Italian “golden power” regime. Through further analysis of the provisions of the FDI Screening Regulation using the framework laid down in the article “When Integration by Stealth Meets Public Security: The EU Foreign Direct Investment Screening Regulation”, it will become clear that the opposing approaches to FDI screening will be guided towards further integration of the EU with the help of the FDI Screening Regulation.
85 “Protectionism occurs when a government implements trade restrictions or policies to shield its domestic economy from foreign competition”, Karl Sauvant, ‘FDI Protectionism Is on the Rise’ (2016) World Bank Policy Research Working Paper No. 5052 < https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1476694>
accessed 13 May 2022.
87 Uredba o provedbi Uredbe (EU) 2019/452 Europskog parlamenta i Vijeća od 19. ožujka 2019. o uspostavi okvira za provjeru izravnih stranih ulaganja u Uniji, NN 105/2020 (25.9.2020.)