FDI in Europe: are Member States prioritising investment over national security?

The European Commission (EC) FDI Report provides valuable insights in trends across the FDI regimes in the EU which remain national.  FDI framework for cooperation and information sharing between Member States and the EC. With contemplated reforms to the FDI Regulation on the horizon, the latest report comes at an important time.

Continued reticence of Member States to notify deals to the EC…

We noted last year that, despite the requirement under the FDI Regulation for the EC to be notified when a deal is being formally reviewed under domestic FDI laws, only c. 50% of FDI transactions were actually notified in this way in 2023. Moreover, of those Member States that did comply with this obligation, seven out of the EU27 were responsible for the vast majority of these notifications (i.e. Austria, Denmark, France, Germany, Italy, Romania and Spain).

The 2024 report shows a decrease of notifications to the EC, i.e. only for 37.1% of deals which were formally reviewed by Member States under their applicable FDI laws did the EC receive a notification form Member States. As with 2023, seven Member States continued to shoulder the brunt of this obligation, with Lithuania, and The Netherlands replacing Denmark and Romania in the list above.

It is notable too that, of the total number of FDI notifications made in 2024, only 41% were formally screened. This reflects continued differences between the national screening mechanisms in Member States as to what constitutes a “formal review”, which is one factor fuelling the drive to reform the existing FDI Regulation (see further below).

…despite a significant increase in number of transactions reviewed

2024 saw a substantial uptick in the number of notifications which were submitted to Member States’ FDI screening authorities: 3,136 compared to 1,808 in 2023 (a 73% increase). This partly reflects the increase in foreign investment activity into the EU, where the number of foreign M&A deals in particular has increased by 10% since 2023.

Interestingly, this increase in the number of reviewed transactions did not correspond to a higher number of transactions being prohibited or subjected to remedies. In fact, the figures have remained remarkably consistent. In 2024, 86% of transactions were unconditionally cleared (compared to 85% in 2023), whilst 9% of deals saw the imposition of remedies (compared to 10% in 2023). The proportion of deals which were prohibited by Member States remained the same in 2024 as it was in 2023: only 1%.

The data from 2024 shows that the EC has continued to rarely use its powers to issue an opinion in cases which have been notified to it. In most cases (92%, identical to 2023) the EC takes no action and closes its examination after a preliminary review. When the EC continues with a more in-depth review, similarly to 2023, this only resulted in the EC issuing an opinion in 2% of those cases. 

Will we see FDI regimes across all the EU27 in 2026?

Whilst the FDI Regulation does not force Member States to introduce any FDI laws, the report makes a point of listing those which have FDI regimes in place. The position in 2024 remains as it was in 2023: Croatia, Cyprus and Greece remain the outliers. Draft proposals for national FDI laws have been actively considered by these countries for a number of years now, and time will tell whether 2026 will finally see a clean sweep of FDI regimes across the EU which is the ambition of the proposed reformed FDI Regulation under discussion.

The 2024 report is accompanied by a Staff Working Document (SWD) which shows that half of the Member States with existing FDI regimes (12) have updated their applicable FDI laws in 2024. This suggests that, while there has been no increase in the number of deals prohibited or subjected to remedies since 2023, Member States remain actively engaged in keeping their FDI regimes up to date. Whether the scope of national FDI regimes across the EU will be expanded further remains uncertain, but the proposed reforms to the FDI Regulation could drive such developments, especially in the areas of greenfield investments and acquisitions by EU vehicles (see below).  

The manufacturing sector continues to be the most scrutinised from an FDI perspective

In 2024, the two sectors which saw the highest proportion of notifications to Member States and the highest proportion of Phase 2 reviews by the EC were: (i) manufacturing; and (ii) information and communication technologies (“ICT”). Indeed, the year-on-year statistics have, again, been remarkably consistent, where manufacturing and ICT accounted for 25% and 22% of all notified deals in 2024 compared to 23% and 21% in 2023.

However, a noticeable difference in the 2024 data is that the manufacturing sector has been responsible for 50% of the EC’s Phase 2 assessments, compared to 39% in 2023. In reflection of the significant attention given to deals in this area, the EC has included in the report a breakdown of the most salient issues which led it to undertake a Phase 2 assessment of manufacturing transactions under the Regulation in 2024. The factors the EC considered most relevant to these deals from an FDI perspective were: (i) the acquirer’s access to critical technologies; (ii) whether the deal related to critical infrastructure; (iii) if the deal involved the supply of critical inputs; and (iv) the acquirer’s potential access to sensitive information.

Of these factors, the issue of critical technologies was, according to the EC, by far the most decisive in prompting a Phase 2 assessment (accounting for 49% of all Phase 2 reviews of manufacturing deals). Within critical technologies, the most prevalent areas which triggered an FDI review – i.e. defence, semiconductors and other critical technologies (including AI and biotechnologies) – reflect some of the most common areas of national security concern across the Member States.

Origin of investors

According to the report, acquirers from the U.S. and UK continue to account for the most number of FDI transactions reviewed in the EU, as was the case in 2023. Other key jurisdictions of origin include China (including Hong Kong), Japan, Canada and the United Arab Emirates.

Interestingly, the total number of FDI transactions involving Chinese acquirers increased by 50% in 2024. The report does not indicate whether the transactions which were blocked or subjected to remedies by Member States involved a Chinese acquirer, but the fact that the statistics in 2024 remained consistent with 2023 despite the increase in transaction volume perhaps suggests that the scrutiny over Chinese investments into the EU is not as severe as might previously have been thought.

Indeed, it is interesting to note that the 2023 SWD included sections on the level of public and private shareholdings in the EU held by Russian and Chinese acquirers, whereas the 2024 SWD does not. Potentially, where Chinese investors are concerned, this may be reflective of a greater degree of familiarity and comfort in reviewing these types of deals on the part of Member States and the EC.

Looking ahead: potential reforms to the Regulation

In January 2024, the EC proposed amendments to the existing FDI Regulation to address what it sees as potential shortcomings in the FDI screening framework across the Member States. Indeed, there are a number of areas which the EC is keen to tackle with respect to FDI in the EU, including:

• Not all Member States have FDI regimes in place: As noted above, there are still three Member States which have not enacted FDI regimes (though they are actively considering doing so). Although the Regulation did not compel Member States to do this, there have been increasing calls for all Member States to have FDI laws in place. The overriding concern is that, without FDI regimes in place across the EU27, transactions which could pose a risk to the EU’s overall security interests might slip beneath the net. The proposed reforms would officially mandate that all Member States have FDI laws in place.

• A lack of harmonisation: As the 2024 report notes, there are still noticeable differences between the national FDI laws in place across the EU. These range from more basic issues, such as the applicable acquisition thresholds, to more substantive factors, such as whether EU-based acquirers with non-EU ultimate owners should be subject to FDI scrutiny and the particular sectors/industries which should be considered as “sensitive”. The reforms seek, at least, to introduce a harmonised list of sectors which should be subject to FDI scrutiny (e.g. defence, dual-use technologies, semiconductors and generative AI).

• Greater alignment of national review procedures: Member States have different timeframes in place for initial and in-depth reviews. The current reforms seek to partially address this, albeit there is currently no proposal to introduce a consistent deadline across Member States for the conclusion of an in-depth review. Nonetheless, ensuring more consistent review timetables would be a boon to deal parties, where the differences across Member States can lead to complications for deal planning where more than one Member State is undertaking an FDI review.

Currently, there are discussions taking place between the EC, the European Parliament and the Council of the European Union on these proposals. Time will tell what reforms are ultimately implemented. The outcome of these trilogue negotiations is presently expected to be announced by December 2025, with the agreed amendments likely to come into force by the end of 2026 (at the earliest).

For additional perspective on the evolving regulatory landscape

Our 2024 M&A report, “Navigating a complex global regulatory environment to deliver successful transactions”, draws on insights from over 170 lawyers in 26 countries. It explores how increasing regulation is shaping deal making, the practical impact on transactions, and strategies for navigating regulatory challenges.

For further context, you can read last year’s M&A report below.

M&A Report 2024

Further reading on EU FDI Regulation: 

• European Commission reinforces FDI screening regulation
• FDI in Europe: New report reveals increasing number of notifications and sectors screened but the unconditional approval rate remains high