Analysis: Will new EU law cause a chilling effect on future FDI into Ireland?

Last year, a new EU law entered into force that provides for screening of inward foreign direct investment (FDI) into the EU from non-EU investors. This development is significant for Ireland, given the state’s successful approach, over many decades, in cultivating and attracting inward FDI from outside the EU.

This is the first time that the EU has exercised regulatory competence with regard to FDI “screening” – a procedure to assess, investigate, authorise, condition, prohibit, or unwind FDI – on the grounds of public policy and public security.

Three aspects of this new EU law are of particular consequence for Ireland. Firstly, it demands that member states more rigorously analyse and record inward FDI flows coming from non-EU investors. At present, Ireland collects some information on inward FDI, but the state has no legal tools at its disposal to scrutinise, screen, approve, and/or prevent any form of inward FDI from non-EU investors.

Secondly, it mandates that Ireland share collected information with the European Commission and other Member States about proposed inward FDI from non-EU investors, so all can comment on the public policy and public security implications of such investments. Such shared information includes details about who is investing, in what sectors or industries they are investing, and the value of such investment.

The final part of the new EU law is the real kicker however. Thirdly, it affords a role for the European Commission and other Member States to comment on proposed inward-FDI from non-EU investors, before such investments are made in Ireland, which in turn necessitates an FDI screening mechanism. This in itself represents a ground breaking change in the way FDI is regulated within Member States, which until now, has largely been a matter for the individual countries to handle. Indirectly therefore, the new EU law demands the creation of a new FDI screening mechanism to be introduced by Ireland, whereby non-EU investors will have to be subject to an approval mechanism before such investments are made.

The treaty change

The Treaty of Lisbon in 2009 turned over the competence to decide on the laws relating to FDI from non-EU investors over to the EU (exclusive EU competence), in which Ireland participates in such decision-making within the Council of Ministers. With this change, Member States like Ireland have no longer been able to unilaterally regulate inward FDI from non-EU investors, but rather, must be given authorisation to do so. This 2009 treaty change was not in itself material, since up until this new 2020 EU law on FDI screening, Ireland never exercised any powers it had anyway.

What has changed, globally, but particularly in Europe, is the attitude towards inward FDI from certain third countries. While Ireland has historically welcomed inward FDI with open arms, whatever its source, mainly from North America, that has not been the picture across the rest of the EU. Increasingly, inward FDI into Europe from non-EU investors is no longer predominantly coming from North America, but is increasingly originating in Asia, and in particular, China.

While North American investment into the EU, and Ireland in particular, has largely been welcomed, and with the intent of furthering the economic – and tax– aims of private investors, investment into the EU from Chinese investors has not always been for economic gain.

Chinese investors, which in some cases are state-owned enterprises or state-supported private firms, have invested into the EU with the aim of acquiring particular assets in certain sectors and industries, including energy, transport, and telecommunications – all sectors which could be quite sensitive as regards their ownership, and in some cases, are considered essential to the functioning of the modern state.

It is against this backdrop that the EU and its member states have taken it upon themselves that a coordinated approach, at EU level, would be necessary to better regulate the flow of inward FDI into the EU.

A chilling effect

Ireland has for decades flaunted itself as a destination of inward FDI. It is, after all, the economic model for the state, and there are no signs of this abating, or slowing down. But now Ireland is faced with demands under EU law to establish a national FDI screening mechanism, which must account for more than just the selfish economic interests of the state, but the wider geopolitical role that the EU is seeking to play vis-à-vis other regions of the world.

The question is, therefore: will this new EU law on FDI screening cause a chilling effect on future inward FDI into Ireland from non-EU investors, threatening the state’s economic model?

North America is still the largest source of inward FDI from non-EU investors into Ireland, but this might not always be the case. The recent attempted takeover of Goodbody Stockbrokers in Dublin by the Bank of China is a case in point. Albeit small-scale compared to other forms of Chinese investment into the EU in recent years, this could indeed be a sign of things to come, unless inward FDI from non-EU investors is properly screened, ensuring no public order or public security issues later arise.

Soon, the Investment Screening Bill 2021 will be presented to the houses of the Oireachtas by Leo Varadkar, the Tánaiste and Minister of Enterprise, Trade and Employment. Collectively, deputies and senators would be advised to carefully scrutinise the proposed legislation on the creation of an Irish FDI screening mechanism, to see how the government proposes to proceed. In particular will be the balancing act of, on the one hand, protecting the national interest in attracting extensive non-EU investment, versus on the other hand, ensuring that such non-EU investment does not fall foul of wider EU interests.

Graham Butler is an associate professor of law at Aarhus University, Denmark.