Key takeaways from the Fourth Annual Report on the screening of FDI into the EU

On 17 October 2024, the European Commission ("Commission") published its latest Annual Report on the screening of foreign direct investments ("FDI") into the EU, accompanied by a Staff Working Document containing additional data and detail on legislative developments in EU Member States.

This is the fourth annual report on FDI screening since the EU FDI Regulation establishing the EU cooperation mechanism on FDI became fully operational on 11 October 2020 (see our previous briefing). The previous annual reports (available here) showed that Member States and the Commission are vigilant in reviewing FDI transactions that may pose risks to national or EU security and public order.

The focus on security and public order grounds, combined with geopolitical and economic developments, continues to shape the EU’s approach to foreign investments. The latest data shows that whilst most transactions continue to be swiftly cleared without in-depth scrutiny, foreign investors should be prepared for increased oversight as more EU countries adopt or amend their national FDI screening mechanisms.

Key takeaways from the Fourth Annual Report include:

• In contrast to the global trend of decreasing net FDI inflows in 2023, the EU recorded an improvement in net inward FDI flows, albeit still negative (-€50 billion in 2023 vs -€135bn in 2022). However, the number of foreign acquisitions and greenfield investments fell by 13% and 33%, respectively, in 2023 compared to 2022.
• The United States and United Kingdom remained the largest sources of FDI into the EU in 2023, contributing 30% and 25% of all acquisitions, respectively. The third largest source of FDI into the EU was Offshore Financial Centres, which saw a notable 26% increase in acquisitions of equity stakes compared to 2022, accounting for 8% of all acquisitions.
• Germany and Spain were the top EU destinations for FDI in 2023, accounting for 19% and 17% of all acquisitions, although both saw a 9% decline in activity compared to 2022. Poland, and Finland experienced significant growth in foreign acquisitions.
• Manufacturing became the most prominent sector for foreign acquisitions in the EU in 2023, surpassing Information and Communications Technology (ICT), which saw a 25% drop in FDI compared to a 6.8% drop for manufacturing in 2022. The professional, scientific, and technical sector was the only sector with positive growth in foreign acquisitions, increasing by 12%.
• In 2023, EU Member States actively enhanced their FDI screening mechanisms, with 17 adopting new or updated frameworks to address emerging risks in sectors like advanced technologies and critical infrastructure, reflecting a strong commitment to security and public order. New screening mechanisms were established in countries such as Belgium, Bulgaria, Ireland, and others, reflecting a broader commitment to safeguarding security and public order.
• In 2023, 56% of the 1,808 FDI notifications received by Member States were formally screened, a slight increase from 2022. Of these cases, 85% were approved without conditions, while 10% required mitigating measures. Only 1% of transactions were blocked, with the remaining 4% withdrawn following notification.
• A total of 488 notifications were made under the EU cooperation mechanism in 2023, a 16% increase compared to 2022. 92% of these cases were closed in Phase 1, while 8% proceeded to Phase 2, where more detailed security risk assessments were conducted. The manufacturing and ICT sectors were the most scrutinized in Phase 2 under the cooperation mechanism.

We consider the main elements of the report in more detail below.

Global and EU-wide FDI trends in 2023

Global net FDI flows continued their downward trajectory in 2023, falling by 15% to just over €1 trillion, down from €1.2 trillion in 2022. The EU, however, saw a slight recovery in inward FDI flows. After recording negative net inflows of -€135 billion in 2022, the figure improved to -€50 billion in 2023. This shift was largely driven by changes in Luxembourg and the Netherlands, which experienced disinvestment due to multinational corporations relocating to other jurisdictions. This continues a broader trend of cautious FDI investment in response to economic uncertainties, particularly from high inflation and rising interest rates, worsened by Russia’s ongoing invasion of Ukraine.

The stock of foreign transactions into the EU remained strong, with the cumulative number of FDI transactions growing steadily since 2015, reaching 48,231 by the end of 2023. Despite this, there was a marked decline in both foreign acquisitions and greenfield investments in 2023, which fell by 13% and 33%, respectively, compared to 2022.

Top investor countries: the US and UK lead FDI into the EU

The United States continued to be the largest foreign investor in the EU in 2023, contributing 30% of all acquisitions (557 deals) and 36% of greenfield investments (687 projects). However, both categories saw sharp declines from the previous year, with acquisitions down 20% and greenfield projects down 45%. The United Kingdom followed as the second-largest investor, accounting for 25% of acquisitions (465 deals) and 21% of greenfield investments (407 projects), though it too experienced declines in both areas compared to 2022.

The third largest source of FDI into the EU was Offshore Financial Centres (such as Bermuda, British Virgin Islands, and the Cayman Islands), which saw a notable 26% increase in acquisitions of equity stakes compared to 2022, accounting for 8% of all acquisitions. Other key investors included Japan, which grew by 5.1%, and India, which rose by 6.1%, reflecting stronger FDI activity from the Asia-Pacific region

Top destinations: Germany and Spain remain most popular, with notable growth in Poland and Finland

Germany and Spain continued to attract the most FDI activity within the EU in 2023, accounting for 19% (349 deals) and 17% (323 deals) of all acquisitions in 2023, respectively. However, both countries saw a decline of around 9% compared to 2022. France and Italy followed with shares of 13% and 7.9%, respectively, although Italy experienced a 29% drop in FDI. Notably, Poland and Finland recorded significant growth of 70% and 33% respectively. Ireland was the only other EU Member State which saw an increase in FDI activity in 2023, recording growth of 4.4%.

Greenfield investments, typically associated with new projects or facilities, were concentrated in Spain, France, and Germany, which collectively accounted for nearly half of all projects. Spain led the way with 455 projects (24% share), followed by France with 217 projects (11%). Germany followed closely behind (also an 11% share), despite a steep 48% year-on-year decline.

Sectoral breakdown: manufacturing surpasses ICT

The manufacturing sector overtook ICT as the top sector for FDI acquisitions in 2023, with manufacturing accounting for 26% of all deals (albeit still dropping 6.8% in deal volume year-on-year). The ICT sector saw a significant 25% drop in deal volume. The professional, scientific, and technical sector was the only one to see growth, up by 12%, reflecting increased investment in high-tech and research-related fields.

In terms of greenfield projects, retail activities accounted for one-third of all foreign projects, followed by manufacturing. The ICT sector saw the largest decline in greenfield investments, down by 59% compared to 2022.

New and amended FDI screening mechanisms

In 2023, the EU saw significant legislative activity as Member States continued to enhance their national FDI screening mechanisms to safeguard security and public order. Following the Commission's call for all Member States to establish robust FDI screening systems, many countries introduced new measures or updated existing frameworks in response to emerging risks, particularly in sectors such as advanced technologies, critical infrastructure, and defence.

By way of overview of newly introduced regimes recently introduced in the EU, Belgium's new regime, adopted in November 2022, became operational in July 2023, while Bulgaria introduced its first screening mechanism in March 2024 after legislative approval in February. Estonia, Ireland, Luxembourg and Slovakia also implemented new FDI screening frameworks during 2023, marking a significant increase in the number of Member States with active screening mechanisms.

Updating of existing frameworks took place in France, which extended its temporary requirement for foreign investors to notify the acquisition of 10% or more voting rights in listed companies, and Germany, which introduced new fees for FDI screening cases and required online submissions of screening applications, effective from January 2024. Italy updated its rules to include provisions protecting critical technologies, while Denmark introduced a two-phase case handling process and expanded its screening scope to include tenders related to energy infrastructure, such as the "Energy Island" project in the Baltic Sea.

By the end of 2023, 23 of the 27 EU Member States had national FDI screening mechanisms in place, with Bulgaria joining as the 24^th Member State since the end-of-year cut-off date for the latest annual report. This is a marked increase from the 14 Member States with screening mechanisms when the EU cooperation mechanism first became operational in 2021.

The three Member States that do not yet have an FDI screening mechanism in place (Cyprus, Croatia and Greece) have all initiated consultative or legislative processes to implement new FDI screening laws. Cyprus is reviewing draft legislation, while Croatia formed a working group to draft its FDI screening proposal, and Greece amended its draft legislation to include new thresholds for triggering the screening process.

Member States' FDI screening activity

The report reveals that Member States received 1,808 requests for FDI authorisations in 2023, a slight increase from the previous year. Of these, 56% were formally screened, similar to the 55% figure reported in 2022. This confirms a continued trend of greater scrutiny at the national level. However, investors will welcome that 85% of these cases were cleared without conditions, with mitigating measures required in 10% of cases. Only 1% of FDI transactions were blocked, similar to previous years (the remaining 4% of cases were withdrawn following notification but prior to a final decision being issued).

Notifications under the EU FDI Regulation cooperation mechanism

In 2023, 18 Member States submitted a total of 488 notifications under the cooperation mechanism introduced by the EU FDI Regulation, a 16% increase over the previous year. Seven Member States (Austria, Denmark, France, Germany, Italy, Romania and Spain) were responsible for 85% of those notifications. The notified transactions varied greatly in terms of sectors, value of the transaction and origin of the ultimate investors.

From 2021 to 2023, the number of notifications made via the EU cooperation mechanism rose from 414 to 488, marking an 18% increase. Even when accounting for a consistent group of notifying countries, the rise in notifications was 8%, likely due to the expanded scope of national screening mechanisms.

The top five sectors for these notifications were Manufacturing (23%), ICT (21%), Wholesale and Retail (14%), Financial Activities (11%), and Professional Activities (11%). While the leading sectors remained consistent with the previous year, notifications related to Financial Activities gained importance, and the Energy sector accounted for 6% of total notifications, with other sectors making up 14%.

Looking at the origin of the investment, six jurisdictions accounted for around two-thirds of these cases: USA (33%), UK (11%), United Arab Emirates (UAE) (7%), China (including Hong Kong) (6%), Canada (5%), and Japan (4%). Notably, the UAE's share of transactions more than doubled from 3% in 2022, while the US and UK also saw slight increases. Compared to 2022, the concentration of investments from these top six jurisdictions increased, with investors coming from 43 different countries in 2023, down from 52 in 2022.

In terms of final outcomes, 92% of these cases were closed in Phase 1 (compared to 87% in 2022), while 8% proceeded to a more detailed Phase 2 assessment (with the manufacturing and ICT sectors featuring most prominently in Phase 2). The Commission issued an opinion in less than 2% of the notified transactions.

Looking ahead

The Commission is currently working on a proposal to revise the EU FDI Regulation, aiming to address certain gaps in the existing system. An evaluation of the current framework carried out last year was broadly positive, but highlighted several areas for improvement, such as addressing discrepancies in national screening mechanisms and expanding the regulation’s scope to include foreign-controlled EU subsidiaries (see our previous briefing).

The proposed revisions, which are part of the broader European Economic Security Strategy, include ensuring that all Member States have a screening mechanism in place and improving the coordination of multi-jurisdiction FDI transactions. For more detail on these proposals, please see our previous briefing.