EU Tightens Foreign Investment Rules in Key Sectors with New Security Plan

EU Tightens Controls on Foreign Investment in Key Industries

The European Union’s executive branch has deepened its commitment to national security by introducing a set of new regulations aimed at scrutinizing, evaluating, and potentially halting foreign capital inflows into vital sectors such as Artificial Intelligence, semiconductor manufacturing, and biotechnology.

Strategic Sectors under Review

• Artificial Intelligence (AI)
• Microchip and Semiconductor Production
• Biotechnology

European Commission Unveils New Foreign‑Investment Scrutiny Framework

The European Commission announced on Wednesday a comprehensive proposal aimed at tightening oversight of foreign direct investment (FDI) that poses significant security and public‑order risks. The initiative is part of the Economic Security Strategy introduced by President Ursula von der Leyen in June.

Scope of the Proposed Rules

• Technology sectors such as quantum computing, cloud services, robotics, drone systems, virtual reality, advanced sensors, 6‑G telecommunications, nuclear fusion, hydrogen production, battery manufacturing, and space‑surveillance networks.
• Military equipment and related defense technologies.

Investments will be evaluated on their potential impact on:

• Critical infrastructure
• Supply chains
• Sensitive data and information
• Media pluralism

All money flows originating from authoritarian regimes—including China, Russia, Belarus—and from individuals or entities under EU sanctions will trigger immediate scrutiny. The same heightened vigilance applies to investments within the bloc that are ultimately controlled by non‑EU actors.

Mandatory Screening Across Member States

Under the new framework, FDI into high‑risk sectors will become compulsory for every member state. Currently, four countries—Croatia, Bulgaria, Greece, and Cyprus—lack an adequate system, while Ireland is still developing its processes.

When a country identifies a potentially suspicious investment, the Commission and other national authorities can provide comments, creating an EU‑wide dialogue. However, the final decision to block the investment rests solely with the national authority, not with Brussels.

Context and Rationale

European leaders argue the shift reflects the changing global environment, marked by the COVID‑19 pandemic, Russia’s invasion of Ukraine, and China’s growing assertiveness. Recent incidents, such as Beijing’s export restrictions on gallium and germanium—key materials for electronic components—highlight the vulnerability of European supply chains.

The Commission’s approach seeks to mitigate the risk of future economic disruption by ensuring that vital technologies do not fall under foreign control without sufficient oversight. The new rules are a response to high‑profile cases like the Spanish government’s forced 10% stake purchase in Telefonica, which prevented Saudi Telecom Company from becoming the largest shareholder.

Commission Leadership Statement

Margrethe Vestager, the Commissioner responsible for the digital agenda, emphasized that Europe will remain “as open as possible, as close as necessary.” She highlighted that over 1,200 FDI transactions were reviewed since the 2020 screening rules, with Brussels issuing an opinion on less than 3% of cases.

Next Steps

The updated legislation will be negotiated between the European Council and the European Parliament. The process may be delayed by upcoming EU elections.

Inbound vs outbound

EU’s Bold Shift on Foreign Investment: From Inbound Oversight to Outbound Safeguards

The Economic Security Strategy presented the EU’s approach to foreign direct investment as a single equation with two influential variables: the influx of capital from abroad and the outward flow of EU funds to other jurisdictions. While Brussels has tightened scrutiny of inbound deals and curbed external subsidies, the outbound component remains largely unchecked—an issue that is growing increasingly urgent given the bloc’s status as the world’s largest creditor.

Outbound Investment: A Massive Blind Spot

• In 2022, EU‑resident investors controlled €9,382 billion of owned foreign assets.
• Limited visibility over these holdings raises potential security threats, particularly when technology transfers could benefit authoritarian regimes.
• Concrete example: a German firm backs a microchip facility near Shanghai, risking the release of proprietary research to the Chinese government under pressure.

Strategic Promise and Public Pushback

During the June unveiling of the Economic Security Strategy, President von der Leyen assured a forthcoming screening mechanism for outbound investment. However, opposition from member states and industry stakeholders—that such a system might curtail commercial freedom—dampened the initiative’s momentum.

In response, the Commission released a white paper rather than a binding proposal. The document, devoid of enforceable power, aims to ignite debate across EU nations.

Roadmap to Legislation

• Brussels plans a prolonged consultation phase, lasting until the summer of 2025, to gather data and insights.
• Following this, the Commission will assess persistent risks and, if needed, draft outbound screening legislation.
• Enforcement is projected for the end of 2027, after a minimum two‑year negotiation period.

Vice‑President Valdis Dombrovskis acknowledged the delay during a press briefing with Commissioner Vestager:

“The timeline has slipped slightly,” Dombrovskis said. “From the outset, we recognized the need to balance institutional prerogatives and respect the fact that national security remains a member‑state competence. This delicate balance must guide our approach.”