US and EU outbound investment – where are we?

To date, foreign investment regimes have focussed exclusively on inbound investments by foreign companies into a country's respective domestic businesses. However, there is growing concern at a political level on both sides of the Atlantic as regards the creation of geopolitical dependencies because of domestic companies, investing abroad, which are active in high- and future-tech areas. From a business perspective, these investments are usually made to get closer to relevant customers, to adapt products and offerings to local needs, and to tap relevant talent pools. From a political perspective, however, there is a concern around the leakage of technology (in areas not sufficiently captured by export control rules), potential military use, as well as the creation of new geopolitical dependencies.

US - Outbound Investment Regime Is Delayed Further

As has been widely reported, the anticipated outbound investment regime focused primarily on U.S. investments in China—often described as “reverse CFIUS”— has been delayed, as the United States seeks to secure buy-in from U.S. allies, addresses concerns raised by the U.S. business community, and possibly wants to avoid further escalating tensions with China. 

The regime, which will initially be created via executive order, is expected to have a narrow initial scope, focusing on investments in artificial intelligence, quantum computing, and semiconductors. There appears to be an appetite among members of Congress, however, for a more expansive regime, meaning that any regime created by the Biden Administration could ultimately be reshaped through congressional legislation. 

Most of the commentary on the new regime (including ours) has been pretty speculative, when this is a clear case of the devil being in the details, but watch this space. Once the executive order comes out, we’ll provide a summary of how it addresses key questions concerning the new regime, including:

• Which investors will be covered? Will the regime apply to corporate, fund, and/or individual investments?
• Which investments will be covered? Will the regime apply just to direct investments in China, or will it also apply to indirect investments? Will an investment in a non-Chinese company (including U.S. businesses) be covered by the regime if the company has (or plans to have) covered operations in China?
• How will the process work? Will it be more akin to CFIUS, export licenses, or sanctions regimes?
• Which agency will lead the process? Current thinking is that it will be the Departments of the Treasury or Commerce. The decision will determine which Congressional committees have oversight responsibility and the lead on future legislation. 

• How soon will it take effect? The executive order is likely to establish an initial framework for the regime, but implementing regulations could take a while, with the timeline possibly depending on which agency is responsible (as we saw following the enactment in 2018 of the Foreign Investment Risk Review Modernization Act and the Export Control Reform Act).

Meanwhile, in the EU……

On 20 June, the European Commission published its Joint Communication on a European Economic Strategy. The Communication sets out the strategy for developing a framework for the assessment and management of security risks raised by certain economic activities. Of particular interest is the proposed holistic approach to investment screening in the Communication, with commitments made by the EC to both strengthen the existing FDI Screening Regulation and develop an outbound investment review mechanism. The European Council will consider the European Economic Strategy during its meeting of 29-30 June.

Background

We have been waiting to see what the EC would say on outbound investment screening, and now the next steps in this area - as well as others - have been set out. It is perhaps unsurprising that the Communication laid the groundwork for the EC’s proposals by highlighting the considerable threats to peace and stability that the EU and Member States have faced in recent years. The COVID-19 pandemic, the war in Ukraine, the age of disinformation, and geopolitical tensions have, they state, exposed weaknesses and risks in economies, supply chains, and companies. As tensions mount and with global economic integration deeper than ever before, certain economic flows and activities can present risks to economic security at the EU, national and business levels. This includes foreign investment, especially into critical and sensitive sectors such as semiconductors, military and dual-use industries, and energy.

The inception of EU outbound investment screening

The Communication suggests that a holistic approach to protecting the EU’s security interests raises the question of also subjecting certain outbound investments to control – to counter the risk of technology and knowhow leaking as part of that investment.

As a result, the Commission, in liaison with the Member States, will now examine what security risks can result from such outbound investments. In particular:

• It will set up a dedicated group of Member States’ experts, building a new structured, confidential cooperation mechanism;
• With input from this new group, it will conduct outreach and consultations with business and other stakeholders, and partner countries, as appropriate; and
• It will aim to propose an initiative by the end of 2023 – likely alongside the recast FDI Screening Regulation which is currently under review (see below).

Finally, the Communication emphasises the need for unity at EU level to achieve a more assertive approach to enforcement and protect security interests. We will have to wait until the end of the year to see exactly what this new approach will look like in practice. There are a number of interesting questions to be answered by the Commission:

• Will the Commission claim competence over an outbound investment screening tool, i.e. establishing its own genuine enforcement (something the Commission currently lacks as regards inbound investment control) or will Member States retain jurisdiction on the back of national security interests.
• Will there be a clear delineation between export control and outbound foreign investment rules (noting that the former are less aligned with foreign investment control rules than e.g. in the US and often do not fully capture more modern technologies, resulting in certain perceived enforcement gaps).
• Will there be a focus on what the US calls “countries of concern”, which could result in a more targeted approach compared to many FDI regimes but may be in conflict with WTO and other foreign trade principles.
• To what extent will the US and EU align on sectors to be covered by the regime. Despite the extraterritorial application of many US laws, there is a certain concern about “circumvention” if the scope of outbound foreign investment regimes is not aligned.

Finally, it will be interesting to see whether there may be a broader alliance among Western countries and whether others also follow suit as regards the enactment of an outbound regime. The UK is already reported to be considering its stance in this area.

Further developments expected to EU inbound foreign investment screening

Although the Communication highlights the success of the EU FDI Screening Regulation, with the Commission and Member States reviewing more than 1,000 foreign investments since 2020, the EC is not resting on its laurels. It announced recently that it is in the process of evaluating the current regime and will propose revisions before the end of 2023. To this end, it has opened a consultation on the FDI Screening Regulation, with interested stakeholders able to submit their views by 14 July 2023.

In parallel, the EC has (again) urged Member States who have not yet implemented national screening mechanisms to do so “without further delay”. 18 EU Member States now have new or revised regimes in place (including most recently The Netherlands), and at least 5 new regimes are expected in the coming year (Belgium, Luxembourg, Sweden, Ireland, and Estonia). Croatia, Cyprus, and Greece are all reported to be in the process of developing their own FDI regimes. This leaves Bulgaria as the only Member State with neither an existing nor a proposed FI screening regime.