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*Columbia FDI Perspectives*
Perspectives on topical foreign direct investment issues
No. 284  August 10, 2020
Editor-in-Chief: Karl P. Sauvant ([log in to unmask])
Managing Editor: Alexa Busser ([log in to unmask])
*FDI screening regulation and the recent EU guidance: *
*What options do member states have?*
* <#m_-8974812497401609554__edn1>
Jens Velten** <#m_-8974812497401609554__edn2>

FDI screening is on the rise, and the EU has joined in. A major step was
the adoption of the FDI Screening Regulation
(Regulation) in March 2019.[1] <#m_-8974812497401609554__edn3> Applicable
as of October 11, 2020, the Regulation seeks to harmonize member states’
approaches to FDI screening by providing certain substantial and procedural
cornerstones for national screening mechanisms.[2]
<#m_-8974812497401609554__edn4> Its most important element is the proposal
of a common screening criterion: FDI “likely to affect security or public
order.” However, the decision on whether to set up an FDI screening
mechanism and on what grounds remains the sole responsibility of member

In light of the COVID-19 crisis, the EU Commission is intensifying
political pressure. In its guidance on the protection of Europe’s strategic
assets dated March 25, 2020 (Guidance
the Commission warns member states of possible hostile takeovers of
“Europe's strategic assets”—facilitated by the current economic shock, not
only in health, but all sectors. The Guidance urges member states to
address these risks by adopting and applying FDI screening mechanisms in
accordance with the Regulation’s framework.

If member states want to set up screening mechanisms, the most important
question is what screening criterion to choose. The meaning of “security or
public order” oscillates between two poles. One pole constitutes a narrow
concept of security. It protects countries’ military sectors, possibly
enlarged by fundamental interests of society, such as the need for
electricity, water and food supply. The other pole represents a broader,
more economic notion of security, comprising industrial policy as well as
geopolitical and economic considerations. Another crucial element is the
degree of risk the screening mechanism requires for an investment to affect
“security or public order.” Is an abstract possibility of harm enough, or
must an FDI project pose an immediate threat? The former would constitute a
low threshold and, thus, result in a more restrictive screening mechanism.

The Regulation provides a fairly broad understanding of “security” for two
reasons. First, it does not replicate the well-known ground of exception to
the EU Fundamental Freedoms “public policy or public security.”[3]
<#m_-8974812497401609554__edn5> That notion would have ensured a narrow
scope, since the European Court of Justice (ECJ) defines it as “a genuine
and sufficiently serious threat to a fundamental interest of society.”[4]
<#m_-8974812497401609554__edn6> Instead, the Regulation seems to reference
the broader exceptions of public international law.[5]
<#m_-8974812497401609554__edn7> Second, the notion of “likely to affect”
sets a significantly lower threshold of risk than the ECJ’s definition.

The term “strategic assets” indicates an even broader security
understanding. The Regulation only lists “critical infrastructure and
technologies” as potentially relevant to “security or public order.”[6]
<#m_-8974812497401609554__edn8> That notion is closely related to the ECJ’s
narrow understanding of “public policy or public security.” The term
“strategic assets,” in contrast, also includes geopolitical and industrial
policy considerations, such as building and keeping future technology
capacities. This is why the EU Parliament’s proposal to add the word
“strategic” to the above-mentioned list was rejected. The Regulation, thus,
clearly chooses a narrower security understanding.[7]
<#m_-8974812497401609554__edn9> Against that background, the Guidance’s
repeated use of the term “strategic assets” and the Commission’s call on
member states to use the Regulation to “prevent a sell-off of strategic EU
assets” may be misleading.[8] <#m_-8974812497401609554__edn10>

Member states now have the opportunity to take a stance and determine how
the EU’s FDI screening landscape will look. They can decide whether to
adopt FDI screening mechanisms and, if so, how far-reaching these
mechanisms will be. Without prejudice to constraints deriving from
pre-existing national legislation, member states have four options:

   - No screening mechanism.
   - Mechanisms with a narrower scope, by explicitly limiting the
   mechanism’s scope to the notion of “public policy or public security”
   and/or its narrow interpretation by the ECJ (“Fundamental Freedom Option”).
   - Mechanisms with a broader scope, by implementing the Regulation’s
   notion of “likely to affect security or public order,” while emphasizing
   its limitations to “critical assets” (“EU Regulation Option”).
   - Screening with an even broader scope: in addition to the EU Regulation
   Option, endorsing an understanding that includes “strategic assets”
   (“Strategic Asset Option”).

Member states may choose between these options according to their
evaluation of three main interests: attracting incoming FDI, protecting
certain domestic assets and participating in EU-wide harmonization.
Adopting no screening mechanism promotes only the first interest and
neglects the other two. The Strategic Asset Option risks deterring FDI
inflows, undermines the Regulation’s focus on critical assets and disguises
industrial policy as security considerations.

Consequently, member states should, depending on their individual interest
constellation, opt for either the narrower Fundamental Freedom Option or
the broader EU Regulation Option.

* <#m_-8974812497401609554__ednref1> *The Columbia FDI Perspectives are a
forum for public debate. The views expressed by the author(s) do not
reflect the opinions of CCSI or Columbia University or our partners and
supporters. Columbia FDI Perspectives (ISSN 2158-3579) is a peer-reviewed
** <#m_-8974812497401609554__ednref2> Jens Velten ([log in to unmask]) is
a Doctoral Candidate at Leuphana University Lüneburg and currently Visiting
Fellow at the Centre for Trade and Economic Integration at the Graduate
Institute in Geneva. The author wishes to thank Carlos Esplugues, Giulio
Napolitano and Carlo Pettinato for their helpful peer reviews.
[1] <#m_-8974812497401609554__ednref3> FDI Screening Regulation, (EU)
2019/452, Mar. 19, 2019, Recital (2).
[2] <#m_-8974812497401609554__ednref4> See Carlos Esplugues, “A future
European FDI screening system: solution or problem?,” *Columbia FDI
Perspectives*, no. 245, Feb. 11, 2019
[3] <#m_-8974812497401609554__ednref5> See, *e.g.*, Treaty on the
Functioning of the European Union, Art. 65(1)(b).
[4] <#m_-8974812497401609554__ednref6> *Commission v Greece*, C-244/11
(Nov. 8, 2012), para. 67.
[5] <#m_-8974812497401609554__ednref7> Regulation, Recitals (3) and (35).
[6] <#m_-8974812497401609554__ednref8> Regulation, Art. 4(1).
[7] <#m_-8974812497401609554__ednref9> See Amendment 39 and 40 in Report
A8-0198/2018 on Regulation, Art. 4(1)
[8] <#m_-8974812497401609554__ednref10> See “Coronavirus: Commission issues
guidelines to protect critical European assets and technology in current
crisis,” *EU Commission press release*, Mar. 25, 2020
and the title of the Guidance.
*The material in this Perspective may be reprinted if accompanied by the
following acknowledgment: “Jens Velten, ‘FDI screening regulation and the
recent EU guidance: What options do member states have?,’ Columbia FDI
Perspectives, No. 284, August 10, 2020. Reprinted with permission from the
Columbia Center on Sustainable Investment (***
A copy should kindly be sent to the Columbia Center on Sustainable
Investment at **[log in to unmask]* <[log in to unmask]>*.*

For further information, including information regarding submission to the
*Perspectives*, please contact: Columbia Center on Sustainable Investment,
Riccardo Loschi, [log in to unmask]

*Most recent Columbia FDI Perspectives*

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*All previous FDI Perspectives are available at *
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*Other relevant CCSI news and announcements*

   - *September 8-11, 2020:* CCSI will host the Global Research Alliance
   for Sustainable Finance and Investment 3rd Annual Conference
   online. Registration
   is now open.
   - CCSI published a briefing note, "Government Briefing: Incorporating
   Free, Prior and Informed Consent (FPIC) into Investment Approval Processes
   that explains how governments can incorporate FPIC and meaningful
   consultation into each stage of the investment.
   - CCSI and partners call for ISDS moratorium during COVID-19 crisis and
   who are interested in adding their names to this sign-on can express their
   interest in doing so here

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Resident Senior Fellow
Columbia Center on Sustainable Investment
Columbia Law School - Earth Institute
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*Resident Senior Fellow*
*Columbia Center on Sustainable Investment*
Columbia Law School - The Earth Institute, Columbia University
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