European Investment Screening Mechanisms, Soft Law and Policy Learning

Over the past decade, European Union (EU) member states have implemented investment screening mechanisms (ISMs). While some ISMs are in response to growing concerns that Chinese investment and acquisitions of European companies reflect Beijing’s global economic strategy, other ISMs could be viewed as signaling increased protectionist or economic security measures. The EU’s Foreign Direct Investment (FDI) Screening Regulation came into force in 2020 aiming to harmonize the regulation of FDI across its 27 member states. There are, however, wide variations in terms of which industries are covered by ISMs as initial legislation does not impose uniform screening criteria for each Member State leading to differentiated implementation and so there are wide variations in terms of which industries are covered by the 27 member states. The result is a "policy patchwork" in which diverse approaches have evolved in terms of the scope and review of investment screening that reflects different regulatory traditions as well as existing levels of institutionalization. The divergent screening procedures in member states have led to concerns about regulatory arbitrage where foreign investors can benefit from different standards and procedures along with poor or limited screening practices in some jurisdictions. This heterogeneity has laid the groundwork for ‘policy learning’ which can be defined as adjusting understandings and beliefs related to public policy to assess how investment screening has fared (Dunlop & Radaelli, 2018). We suggest that ISMs represent a key area of integration that borders ‘soft’ and ‘hard’ power, where the EU capacity to assert itself in a changing geopolitical environment has faced difficulties in trying to standardize across the EU. We draw on literature in policy learning and policy evaluation to provide a new lens to assess FDI screening as a new tool of economic security.