Foreign direct investment (“FDI”) control has historically been centred on inbound FDI, meaning investment inflow into a country. The tide is turning, as the United States seems ready to introduce an outbound FDI control mechanism, whereby capital outflow towards certain countries will be subjected to a screening process. Similarly, the European Commission (“Commission”) 2023 Work Programme indicates that the EC will “examine whether additional tools are necessary in respect of outbound strategic investments controls”, and is “prepared to revise the EU’s FDI screening regulation.”
The United States Leading the Charge
The U.S. Consolidated Appropriations Act (the “CAA”), which was signed into law on December 29, 2022, allocated approximately $1.7 trillion in federal funding to various government agencies, including the U.S. Departments of Commerce and the Treasury. The explanatory statements that accompanied the CAA included specific language encouraging Commerce to consider its role in the establishment of, and Treasury to consider formally establishing, an outbound investment screening program to “address the national security threats emanating from outbound investments from the United States in certain sectors that are critical for U.S. national security.” According to those same statements and a press release by U.S. Senator Bob Casey, Congress allocated approximately $20 million of the $1.7 trillion to Commerce and Treasury and instructed them to submit a joint report by late February 2023 “describing such a program including the resources required over the next three years to establish and implement it.”
Prior to the CAA, a proposed piece of legislation that has not been enacted into law known as the National Critical Capabilities Defence Act (“NCCDA”) included provisions that would establish a new federal agency, the Committee on National Critical Capabilities (“CNCC”) that would have jurisdiction to review any transaction by a “U.S. business” that (i) shifts/relocates to a “country of concern” or transfers to an “entity of concern”, the design, development, production, manufacture, fabrication, supply, servicing, testing, management, operation, investment, ownership, or any other essential elements involving of one or more “national critical capabilities”; or (ii) could result in an unacceptable risk to a “national critical capability”.
More recently, the Biden administration reportedly has been working on drafting an executive order that would establish an outbound investment review screening mechanism. The exact scope of the regime included in the executive order, which we understand remains subject to interagency review within the executive branch, remains unclear. However, reports suggest that the Biden administration is considering limiting the scope of the mechanism to focus on semiconductors, artificial intelligence, and quantum technology.
These are important developments that signal that U.S. investors should expect that the United States will introduce an outbound investment screening mechanism at some point soon. At this point, however, it’s unclear whether such a mechanism will be an executive branch lead effort, a legislative effort, or some combination of the two. It’s also unclear what types of investments will be captured by such a mechanism and what the review process will look like.
EU Could Leverage Existing Inbound FDI Cooperation Framework For Outbound Investments
In the EU, while commercial policy is an exclusive competence of the Union, Member States—under the control of the Court of Justice—determine where free movement of capital shall be restricted on public security and public policy grounds or for overriding reasons in the general interest.
The EU adopted a regulation establishing a new European framework to facilitate the cooperation among Member States screening foreign investments in their jurisdictions and, to a limited extent, coordinate their domestic FDI regimes (“FDI Screening Regulation”), which entered into force in October 2020. In parallel, the EC repeatedly urged all Member States to either use or enhance existing, or adopt new, FDI regimes to protect critical technologies and infrastructures in the EU. As a result, essentially all EU Member States have introduced or are in the process of introducing an FDI regime.
Unlike well-established FDI regimes in the United States, Canada, and Australia, investment screening within EU is fundamentally decentralized. The EU does not have the power to review and authorize foreign investments nor, more generally, act as an overarching regulator. Instead, the EC facilitates cooperation among Member States screening foreign investments under their national FDI screening processes, and provides views and opinions for the Member States consideration where relevant.
In May 2021, the EU also introduced the Export Control Regulation, which sets out an EU-wide framework for the exports, brokering, technical assistance, transit and transfer of dual-use items. However, the Export Control Regulation does not cover (outbound) investments.
The EC’s statement on potential outbound FDI screening is short, but the announced readiness “to revise the EU’s FDI screening regulation” indicates that some form of control will likely be introduced in the foreseeable future. The following reflections are noteworthy in this regard:
First, EU Member States may end up driving the FDI outbound initiative before the Union takes any harmonized legislative action. This is precisely how the FDI inbound control framework has developed in Europe and may serve as a model for outbound control too. Indeed, the German Foreign Ministry’s draft document on new China Strategy published in November 2022 stated that Germany is “examining the creation of a legal basis for scrutinizing foreign investments by German and European companies in security-critical areas”. Germany is also leading in the supply chain area having adopted the Supply Chain Due Diligence Act came on January 1, 2023 while the EC’s proposal for a Corporate Sustainability Due Diligence Directive is still pending.
Second, the EC’s outbound control framework would likely be closely mirrored on the inbound control model – setting a list of recommended sensitive activities/areas but ultimately leaving the scope to the Member States discretion. The focus would likely be on transfer of strategic capabilities or manufacturing/supply chains to “risk” countries. However, any such defined scope inevitably risks potential misuse to simply prevent relocation of manufacturing capabilities regardless of any obvious national security concerns. The cooperation mechanism would also likely be leveraged, though the urge of other Member States to intervene may be less obvious than in relation to inbound investments.
Third, adding outbound FDI control to the regulatory toolbox will further increase M&A complexity and cost. Transactional parties would need to consider merger control (EU and national), inbound and outbound investment control (national and under the EU cooperation mechanism), as well as the new EU Foreign Subsidy Regulation.
The introduction of an outbound investment screening mechanism at the EU level is still in its ideation phase—no details have been shared yet. While the EU might follow in U.S. footsteps in the trend towards more investment screening activism, the situations are not comparable on both sides of the Atlantic. While the United States’ investment screening system is centralized and builds on decades on experience, the EU’s investment control system is a looser patchwork, which is still in the process of being harmonized but remains nonetheless decentralized by design and in need of reform.
 Consolidated Appropriations Act, 2023, H.R. 2617 117th Cong. (2022), see:https://www.appropriations.senate.gov/imo/media/doc/JRQ121922.PDF.
 The NCCDA was included in the trade title of the America COMPETES Act. United States Innovation and Competition Act, 2021, H.R. 4521 117th Cong. (2021), see: https://www.congress.gov/117/bills/hr4521/BILLS-117hr4521eas.pdf
 The term U.S. business means a person engaged in interstate commerce in the United States. Ibid.
 Country of concern means any foreign government or foreign non-government person engaged in a long-term pattern or serious instances of conduct significantly adverse to the national security of the United States or security and safety of United States persons, or any non-market economy that is later identified by the Committee. Ibid.
 Entity of concern means any entity the ultimate parent entity of which is domiciled in a country of concern; or that is directly or indirectly controlled by, owned by, or subject to the influence of a foreign person that has a substantial nexus with a country of concern. Ibid.
 “National critical capabilities” were defined as “systems and assets, whether physical or virtual, so vital to the United States that the inability to develop such systems and assets or the incapacity or destruction of such systems or assets would have a debilitating impact on national security or crisis preparedness.”
 Article 65 of the Treaty of the functioning of the European Union (“TFEU”).
 European Parliament and Council regulation establishing a framework for the screening of foreign direct investments into the Union, OJ L 791.
 Communication from the Commission – Guidance to the Member States concerning foreign direct investment and free movement of capital from third countries, and the protection of Europe’s strategic assets, ahead of the application of Regulation (EU) 2019/452 (25.3.2020, C(2020)).
 Second Annual Report on the screening of foreign direct investment into the Union, European Commission, 1 September 2022 (accessed on 31 January 2023), see: https://ec.europa.eu/transparency/documents-register/detail?ref=COM(2022)433&lang=en
 Regulation (EU) 2021/821 of the European Parliament and of the Council of 20 May 2021 setting up a Union regime for the control of exports, brokering, technical assistance, transit and transfer of dual-use items, see: https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX%3A02021R0821-20220505&qid=1674572543326
https://www.politico.eu/article/europe-commission-mulls-tighter-control-over-how-companies-invest-overseas/ (accessed on 26 January 2023)
 https://oeil.secure.europarl.europa.eu/oeil/popups/ficheprocedure.do?reference=2022/0051(COD)&l=en (accessed on 26 January 2023)