From economic security to legal uncertainty: exploring the impact of the FDI screening regulation and foreign subsidies regulation on mergers and acquisitions in the EU
Year: 2025
Type: article
Abstract: FDI and Economic Growth vs. Security Concerns: Foreign Direct Investment (FDI) plays a significant role in economic growth, but it also raises security concerns for host countries, particularly regarding the public security of strategic sectors like defense, technology, and energy. EU’s Strategic Autonomy and Chinese FDI: the European Union’s concern over China’s increasing outward FDI, particularly from State-Owned Enterprises, has heightened fears of market distortions and security risks in key sectors, fueling the EU’s push for protective regulations. Introduction of FDI Screening and Foreign Subsidies Regulations: in response to these concerns, the EU introduced the FDI Screening Regulation and the Foreign Subsidies Regulation to address security risks and competitive distortions, complementing the pre-existing Merger Regulation. Negative Impact on Legal Certainty: although these new regulations strengthen the EU’s ability to control foreign investment and to limit distortions to the internal market, they also create additional legal uncertainty for firms pursuing mergers and acquisitions in the EU, potentially deterring future FDI. International investment is recognised to be one of the main factors promoting economic growth, alongside international trade.1 It predominantly takes the form of Foreign Direct Investment (FDI), namely when residents of one country (source) acquire ownership of a firm’s assets in another country (host), for the purposes of controlling the firm’s production, distribution, or other activities.2 FDI is generally associated with economic growth: the increase in industrial productivity, capital liquidity, social welfare, as well as other positive externalities stemming from FDI are widely recognised in literature, and that is why countries attempt setting up an attractive environment for foreign investors.3 However, in recent years, several states have increasingly been wary of the potential drawbacks of FDI, specifically in relation to the public security of strategic sectors. In fact, foreign control of firms in critical sectors, such as defence, technology, and energy, may undermine essential interests of host countries. In particular, many host states have established regulatory mechanisms aimed at preventing the security threats of inbound FDI.4 Within such a landscape, the tension between attracting FDI and protecting national security can be identified within the European Union (EU), as part of the larger policy of ‘strategic autonomy’.5 While the discussion on strategic autonomy is broad and entangled between geopolitics and economics, a paramount factor in the EU’s protective attitude can be found in China’s assertive external economic policy. In fact, especially in the aftermath of the financial crisis, China’s outward FDI to the EU has dramatically increased. The EU is not only concerned with the security of its strategic sectors due to China’s ownership, but it is also worried about the distortions of the competitive landscape in the internal market: in fact, Chinese companies engaged in FDI are often State-Owned or Controlled Enterprises (SOEs), thereby enjoying large state funding.6 Such state aid allows Chinese companies seeking for a merger or acquisition in the EU to have a competitive advantage vis-à-vis other EU or third State companies in making that investment, thereby risking distorting competition in the internal market. The concerns for public security of strategic sectors and distortions of competition following FDI in the form of mergers and acquisitions are what led the EU to adopt, respectively, the FDI Screening Regulation in 20197 and the Foreign Subsidies Regulation in 2022.8 Such legislative acts add further controls and procedures to conclude a merger or acquisition in the EU, in addition to the pre-existing Merger Control Regulation.9 The present paper will investigate how do the Foreign Subsidies Regulation and FDI Screening Regulation change the existing Merger control regime of the EU. It will argue that the Foreign Subsidies Regulation and the FDI Screening Regulation, although positively complementing the Merger are to increase legal uncertainty for firms pursuing a merger or acquisition in the EU. the Foreign Subsidies Regulation up for the Merger of of of when a the FDI Regulation concerns for public security that are not the Merger Regulation. However, regulatory the legal for companies pursuing an investment in the EU, may FDI to the EU. such a the present paper will the tension between economic security and market with to the EU and it will the Merger of and its and will respectively, the Foreign Subsidies Regulation and FDI Screening to the Merger Regulation. and will the and how the Foreign Subsidies Regulation and FDI Regulation up for the Merger in mergers and and will the legal for companies from the respectively, the Foreign Subsidies Regulation and Merger and between the FDI Regulation and Merger In economic literature, FDI is as investment a foreign that in ownership and control the foreign of the assets in it has in the host from investment, in and not in the of the host The of FDI, is is of generally a is as the foreign to significant to further is between and and as of FDI. The to in new assets in the host such as the of a new mergers or existing assets or with an existing in the host form the main of the host country FDI has been found to of increase productivity, and as well as and has also found a between FDI and the that foreign investment to economic national While is on a positive between FDI and economic growth, is a that FDI is positively with economic growth, at in industrial Economic literature, is on the that economic stemming from FDI have on the argue that the of the environment is economic stemming from that an of environment is firms of recent has found that FDI in countries is associated with a in FDI countries is with an increase in the of the of economic from FDI may have The security of FDI are another concern that has in the recent states have wary of the potentially of FDI on national from the that foreign ownership to a of and on security is on the that foreign control over companies in sectors may the security of the In such a may on the of critical or is especially the the foreign is or a third as it may the to the assets not only the host but also its public particularly due to the and as well as for the distortions of state the in the market, competitive The increasing regulatory control over FDI has also been such as a to a of the of and concerns on as well as the and the to firms from in the aftermath of the of the EU and the of Chinese FDI has been as In fact, it has from in to in to in it is predominantly on mergers and acquisitions the Chinese FDI is in the of FDI to the and it is in the and for a large of China’s FDI to the EU, namely in with the and sectors the main in of the Chinese and of particularly critical mergers and acquisitions in the are the of the of in the in and the acquisition of the in sectors, the acquisition of the in and several in the and have public security Such have a policy in the EU, to the of the of FDI is an of the EU the as the of of the European Union in its the of on the Union’s external namely to the of on international and foreign to and international and investment has and at the of the EU’s external of the EU’s to are its in the the EU’s attempt to up a investment and its to protective of other several economic and have led the EU to its strategic Within the discussion on strategic the EU has a new of economic and a of its policy The policy from market and of to economic security and is several new to the the EU its and it an International to for EU companies in other public and it established the to In such a the FDI Screening Regulation and the Foreign Subsidies Regulation The legal is and it to the procedures for and FDI on of public and in critical and as well as in the It not it for to up a but it that have one to with and with the of and on the to a with the that public security is Regulation to FDI, also to companies from the EU’s main such as the and and not only The Foreign Subsidies Regulation, has its legal in and its not only to but also to distortions in the internal market. It to in the EU, and for to distortions in the internal it an the of foreign in a as the Merger Regulation, is to the the and or the on the distortions the is and not the the Merger Regulation. to companies third of to companies established in the EU or third The EU’s to and from a to and investment may be as potentially not with the of to foreign the EU is not the only up its FDI but it is in In fact, the FDI Screening Regulation as a between the investment or established the of Chinese FDI in the the and also FDI has been for at in that a FDI the regulatory for a pursuing a in the EU has to be they on the and in the of the Merger Regulation, FDI Screening Regulation, and Foreign Subsidies Regulation. The following will on how the the Merger Chinese companies one or or companies a on a the European and or such that the EU the The EU merger on the of that and the to the legal of economic a is as an for the purposes of merger control it an economic with of a pursuing a merger is a economic is to the and the of the the a is of other the of the companies is not for the purposes of merger the the of as other are for the Merger the the the also the of the Such can from from the and the market that may from the to the and to can to In such the of autonomy of the is also to the market following the Such market be the is part of a economic with other firms from the the of a firm’s is for and the Merger Regulation. an is a economic or in with other the the public controlling is to on the the on financial technology, and be that the Merger Regulation not how the is and such have been The increasing investment of Chinese firms in the EU market led the to further the economic as a However, the of have been In the the to that the Chinese the economic as the Chinese public controlling The of on the between and the controlling not the to conclude or not the public and thereby an of However, the due to EU market In the China’s not a on of due to the of Chinese However, that the it that setting up the not significant competition concerns, of or not market with other Chinese The to conclude a Chinese has and a economic further in the In the the control of the that to national security and competition further the not a economic with the Chinese controlling or other as the The also further the and of the and the in fact, firms the to competitive The of the over the of Chinese firms a in with the in However, the Chinese not have to the Merger the the the firm’s autonomy from in its and and the for the controlling to it found that the not have and its with other firms for While it can be for other industrial have as of the of a However, critical of it broad and not in with the of the or of the Chinese that the of a economic in to over the have not an EU to be the further in the from a economic as such a not have an on the competitive the the and the it competitive concerns in the as one economic with other Chinese The can be as to in setting in merger control of Chinese with the on market distortions in the of control over the The economic is due to the in the of the between Chinese and thereby to address the concerns from the the of the The and to companies engaged in mergers and legal uncertainty the of the economic The of Chinese However, such has been especially due to the of the between Chinese state and an of Chinese from Chinese to be additional from the that and between firms and the Chinese the of control what is may to an the economic The to the of control over when with the Merger the of only the Merger Regulation not the of the as a but it also not for how the as a potentially However, economic has found that Chinese outward FDI: not only are Chinese firms in a merger or but the also the in of and of the of may the at a advantage of firms in mergers and these it can be that the Merger Regulation not competitive namely the a with to state ownership, or in the The Merger to address the of a merger or acquisition and the of a competitive In fact, firms are to firms on the market for control or market for mergers and Such competitive firms in mergers and acquisitions firms that do not from state is the although the merger the it further in the of in found state in of the Chinese to the While the Merger Regulation the in competitive the of the are not the Foreign Subsidies Regulation the Merger to address In fact, the Foreign Subsidies Regulation an of that the to the Merger Regulation, the in merger as the the at the of financial from a a broad of allows the to the of advantage to the or vis-à-vis firms on the market for only and firms that but it also the advantage of the of Chinese other third legal and of control over the at the financial In such a in will be and it will be to the of on a financial competitive within the internal market: from will be firms when in a merger or the of Chinese firms in the market for However, the Foreign Subsidies Regulation not the between it to be the Merger Regulation. While the Foreign Subsidies Regulation positively the Merger in a discussion is in on the additional the new for companies pursuing mergers and particularly concerns the and the legal the new is to merger the to the of the may the merger as the Foreign Subsidies Regulation may be to the Merger However, the of the an is the of the present a that the Foreign Subsidies Regulation has a the Merger The of can also be at national the Merger Regulation the for to to the a pursuing a merger or acquisition may be to the Foreign Subsidies Regulation the and the Merger Regulation the or one or national an additional on a to mergers and acquisitions in the EU, a factor that will be in the firm’s only can the additional the the merger is but it can also increase Such from legal from the of with and from the firm’s internal in fact, will have to the the to be the Foreign Subsidies Regulation, and on other also its of the EU’s of a between the of the internal market and the to limit the on the the EU in the firms are the uncertainty the of the Foreign Subsidies Regulation. In fact, the Foreign Subsidies Regulation to the of competition in the internal Such legal to be from the EU state aid The on the EU state aid a an advantage is generally the Foreign Subsidies Regulation the will such as and of the market of the economic and of the In a a be found to the internal The has that the internal market be the foreign the also from the of as also the of the has not on the and of the In fact, been at the of the European only one the Regulation, the acquisition of a a The on the of foreign on the to competitive and to the a of the the of the present on the of the Foreign Subsidies Regulation can be In the identified of state from the an to of the from and a from a The found that to and that the thereby an within the of the from the not a to in to thereby not it within the of the that a a with to market The of a is that the main is that of the In the it to be found a between the foreign and the of the in the internal and it is the is to the internal the in the acquisition and in the found in the market for control other the acquisition market and not state to the While the of the acquisition the foreign be are other it is how be when are have a on an at can be on the control market due to the of foreign In fact, a may have to conclude the at due several such as the of of control or in its ability to a other the of other the of may to other it will to be further the the that the financial and of thereby it an advantage over EU and a The further are positive that can the of the foreign While investment and the that be a between such positive and the foreign to the the such positive not the in the and the from to address such competitive will be to and will to the on market to the EU market form the of foreign While several to the Foreign Subsidies Regulation, further is to the as well as the of public on are to be in on the it can be an additional or the financial of mergers and acquisitions have also been within the Merger of another an additional on the Merger Regulation have a to the internal market and for the in the the that the Chinese state as a factor in the competitive The in the on Foreign that a new be the Merger Regulation the to competition the However, it is that a firm’s competitive advantage in the market for control due to a to the is also to further a of on the market the Foreign Subsidies Regulation competitive and a of the Regulation and on companies engaged in mergers and increasing legal the broad for firms will have to to the in to mergers and acquisitions in the EU, the of the it the of a new the to address the Merger The Merger are from of the FDI Screening Merger legal is competition it is aimed at that competition in the internal market is not as a of a the to the of the merger or acquisition on the market on The FDI Screening Regulation, has its legal in the and it is aimed at between and the for and legal in the from it can be how the of in merger on the not to the FDI In fact, a market often not of economic but pursuing national may the host public the of the Merger Regulation not to address public security concerns, the in Chinese economic a firm’s with national the firm’s country of is a factor for a public with the Merger The of the to address also recognised the Such concern in fact, in FDI Regulation, that allows to or not the foreign is a third as a factor in the of a to public a of fact, a State may be concerned an investment stemming from a from the it can be that the firm’s or in the FDI Regulation up for the Merger However, the Merger Regulation a to interests the allows to additional or but it not to a that the that are as a to namely public of the and these interests do not to be to the in they are in with the of and can also public as a for or a to of the The following will attempt to between and as the Merger Regulation, and how they are the FDI Regulation. on mergers to the of the in the Merger Regulation. public security the of and are of national interests in strategic and of In the and in the merger the not further on the of protecting the national in strategic sectors as part of public the of in the on and on the of protecting national in the strategic not the as security can be on only is a and to a of the and in of in as a for to additional merger to that a critical to a threats as to its due to foreign ownership, to is to future in the recognised the public security in that a of present in in the the security of recognised as the but not in the as to the in the has been found to potentially that with or merger in the not on as a in it the concern on the of the as a for economic as a to mergers in the as the regulatory have national of the the that of It that the and of and as to a merger or further Merger Regulation is particularly is when the of public security in the FDI the in the is While a discussion on the of public security in of EU is the of the of a to to a foreign investment public and However, FDI a within the of the Merger for of the FDI Regulation and the of in be in a the as to the and of the of and when FDI. the ownership in public security threats with the of the Merger Regulation, it to a between the it is the on Merger Regulation be to FDI be particularly to or a the of of such the In such a be to on a of public security to or a merger it be the Merger Regulation, for that the of and do not a of the merger the the as it its public to The between the Merger Regulation and FDI Regulation as to legal uncertainty for the of it is to how have the of in investment particularly with to Chinese be due to the of the it is not to the to will be In the the Chinese from an The on the of public security namely of many to is of strategic to the that the can be as a within the of FDI Regulation, the the of the Merger While the on the market to be the of public security in the to be that the Merger Regulation. In fact, as to the of of vis-à-vis the to up of in an to China’s in the The of it to a economic from the merger further the is the the acquisition of a of a Chinese in The states that is a that will to from to and in the as can be in with the EU’s strategic it not to be a and to a of in the is an essential national economic it may be to it a of to be of the of as in the Merger Regulation, the in the FDI Regulation and national is further the of acquisition in the a Chinese in the market. While of the companies to the at a to the of the market the of State in the on the of also in of the FDI Regulation. It that such is and of the an of to to the of the in the not of a to the of public from the it how the of in the FDI Regulation is that in Merger Regulation. to be to the to public security the Merger Regulation, and in in of a public security national in critical sectors. the FDI Screening Regulation in with the national investment for the Merger for to national interests in merger due to the broad of public The of control the Merger Regulation and the FDI Regulation are to legal uncertainty for companies pursuing a merger or acquisition in the to legal uncertainty for in the FDI of its public security the Merger Regulation, the of merger and FDI and the of the FDI Regulation not an of investment in fact, the it for the namely are that also not to the critical sectors identified the or not the may be national investment companies may not the of the the the public security the investment the FDI Regulation, and the Merger Regulation not it for companies to a be will be on they the and to conclude the further the the of the Merger Regulation and national investment may be in a at but not at national it for companies to the regulatory with and an for In particular, companies not only to be wary of the public security between the EU but also between the merger controls and investment In fact, when do not the EU for they may be to merger in one State and to investment in as Such a in the of public and the of uncertainty and regulatory especially the when are to national interests in economic sectors with to In fact, on investment in at what may as for public security may from country to on national and may over In fact, the of a may be or investment from countries the main of a State to Chinese the attempt to the national investment and the Merger Regulation the of is to significant in the of a and in the for the companies when a not a other may and on it up to following the merger or national to thereby firms to future as the FDI Regulation FDI as a and in the While a discussion on the is the of the the national when an investment is and are to legal The over the of FDI Screening in in is the of many not In in fact, only of the such an it that the FDI Regulation positively the Merger Regulation in ownership and the to However, the between the FDI Regulation and the Merger Regulation, in the of public security and the of public security between to create legal uncertainty for companies pursuing a merger or acquisition in the EU. may the of FDI, particularly as mergers and in the EU. paper has the between the Merger Regulation, Foreign Subsidies Regulation, and FDI Screening Regulation, especially on mergers and The of the new in a of increasing regulatory on FDI, due to concerns on foreign control of strategic sectors. for the EU, the of Chinese FDI and the of its firms have been a for While FDI is generally associated with economic growth, are increasingly wary of the security of Chinese firms controlling particularly critical sectors, and the of such the Merger Regulation not to address the concerns for the internal market of mergers and In fact, the of Chinese firms the Merger Regulation on they are a economic for and However, due to the Merger the has been in the of control that on its it has to the advantage that Chinese firms have due to The Foreign Subsidies Regulation, the from a economic to the as part of a change positively the Merger in Chinese firms due to its However, the of the Foreign Subsidies Regulation is also to increase legal uncertainty for companies pursuing mergers or acquisition in the the of and the of on the to in and of EU in the merger is also for public security In fact, the Merger Regulation has to public Such with the FDI in strategic sectors, not to a firm’s ownership as a in merger is in the FDI Regulation, ownership of the pursuing FDI as a to a the FDI Regulation allows to an of public security in is public security of the Merger Regulation. While the FDI Regulation positively the Merger to national it may be to increase legal uncertainty for In fact, the of public the between national merger and investment and the of public security do not companies to a will be The regulatory over mergers and acquisitions with is part of a up of FDI and as a response to China’s assertive economic policy. While the Foreign Subsidies Regulation and the FDI Regulation address and are not the Merger increase regulatory and legal uncertainty for It to be such of will a in FDI to the EU, especially from However, the will also from countries, pursuing a merger or acquisition in the EU. and will the legal of the between the Merger Regulation, Foreign Subsidies Regulation, and FDI Regulation. In the the EU be wary to and how regulatory change in the EU, and economic further how to positive and and security
Author: Enrico Zonta
Institution: London School of Economics and Political Science
Language: English
Subfield: Strategy and Management
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $4,850
OpenAlex ID: W4410638154