Protection or Protectionism? State-Driven Foreign Investment Risks and the EU’s New Investment Screening Measures

Abstract

Foreign direct investment (FDI) can be used by sovereign states for strategic goals, including as a mechanism for exploitation, technology transfers, espionage and political influence. The EU’s recently adopted foreign investment screening Regulation is a response to fears that state-led investment could exploit the openness of the common market. The Regulation applies the concepts of ‘security’ and ‘public order’ as guidance to Members restricting FDI. Yet these concepts have no clear definition, raising concerns they may be abused for protectionist purposes. The aim of this chapter is to contribute to the debate on whether these screening concepts are a reasonable response to state-based investment threats. It does so by taking a ‘threats-based’ approach to identifying relevant FDI risks for EU Member States’ economic and national security. China, the world’s second largest and heavily state-capitalist economy, is considered a key ‘justification and yardstick’ for the EU’s new investment screening measures. Hence, identifying risks arising in connection to Chinese FDI is a good starting point for assessing the Regulation. Drawing on institutional analysis of China’s economy, this chapter identifies unique threats arising from the country’s rule-by-law socialist system of governance, where traditional public-private distinctions are heavily blurred, if not obliterated. The nature of those risks suggests that undefined conceptus of ‘security’ and ‘public order’ are reasonable to achieve the goals of the Regulation. Furthermore, a threats-based approach to screening Chinese FDI leans towards a presumption of risk for sensitive sectors, for both SOEs and nominally private firms, due to deep institutional public-private linkages.

Keywords: FDI, state-capitalism, China, EU, geoeconomics, FDI screening, security, public order

JEL Classification: F5, F21, F52, P51