The return of investment screening as a policy tool
One of the most striking trends in investment policy over the past decade has been the increased use of investment screening as a policy tool, particularly in developed economies. A recent example is the EU’s new investment screening framework, which came into effect on October 11, 2020. The EU envisages a network comprising national investment screening mechanisms in each EU member state. The EU regulation establishing the framework provides for coordination and information sharing among the member states, including a process by which the European Commission and other member states can provide comments on an investment undergoing screening in a member state. New or enhanced investment screening requirements have been adopted in several other countries, including Australia, Canada, New Zealand, the UK, and the United States. Although this trend predates the COVID-19 crisis, it has accelerated in response to new concerns about foreign investment in light of the pandemic.
Investment screening, for the purposes of this article, refers to requirements under the law of the host state that foreign investors attain approval prior to (or concurrently with) making a new investment, along with the associated institutional mechanisms by which such approval is granted or withheld. Unlike other regulatory approvals that may be required to carry out an investment project—such as construction permits or mineral leases—investment screening relates to the admission of new foreign investment. Investment screening often involves the evaluation of prospective investments according to abstract criteria, such as “national security” or “the national interest.” The EU framework provides for screening on the grounds of “security or public order.”
Investment screening was widely used as a policy tool in developing countries prior to the 1990s. Many developing countries subsequently dismantled requirements for screening and approval as part of a general policy shift toward greater openness to foreign investment. For example, the early stages of South Korea’s industrialization were characterized by a highly restrictive attitude to foreign investment, which was reflected in a cross-sectoral investment screening mechanism. The 1998 Foreign Investment Promotion Act ended the general requirement for new foreign investment to obtain government approval.
The return of investment screening differs from this earlier era in that the countries involved profess a high degree of openness to new foreign investment. For example, Australia’s investment policy, which provides the framework for investment screening by Australia’s Foreign Investment Review Board, begins with the statement “The Australian Government welcomes foreign investment.” Insofar as information is publicly available, it seems that only a small fraction of foreign investments are blocked as a result of screening. (It is also likely that some potential investment proposals never get off the ground due to the risk that they might be blocked as a result of screening.) Nevertheless, the return of investment screening shows that governments are taking a more active role in assessing the costs and benefits of foreign investments on a case-by-case basis rather than simply assuming that all foreign investment is beneficial.
Triggers and policy criteria in investment screening
There are important differences between the design and operation of investment screening mechanisms in different states. A comprehensive examination of different mechanisms is beyond the scope of this article. Nevertheless, it is possible to identify two key elements that are common to most investment screening mechanisms.
A first key element is the set of “triggers” that define the scope of the screening mechanism’s operation. A proposed investment that meets a particular trigger must go through the screening process; a proposed investment that does not meet any of the triggers can generally go ahead without being evaluated or approved through the screening process. A second key element is the specification of policy criteria by which proposed foreign investments that fall within the scope of the screening mechanism are to be evaluated—for example, “national security” or “the national interest.” There is normally a close relationship between these two elements. A proposed foreign investment in the defence or military sector will normally trigger the operation of an investment screening mechanism that screens investments on national security grounds.
The variety of triggers for investment screening
Different investment screening mechanisms have different sets of triggers, which often operate in combination with one another. Among other factors, triggers may relate to:
- The value of the proposed investment
- The sector in which the proposed investment is being made
- The origin (home state) of the proposed investment
- The characteristics of the investor, particularly whether the investor is a state-owned enterprise or privately owned
- The type of asset being acquired—e.g., purchase of land vs. purchase of shares in a business enterprise
- In the case of investment in a business enterprise:
- Whether the investment involves acquisition of an existing enterprise or, alternatively, establishment of a new enterprise.
- The extent of ownership/control over the enterprise—e.g., shareholdings over the threshold of 10% may require screening.
- The share of a product/service market that would be controlled by the enterprise. (This factor is particularly relevant in investment screening mechanisms that incorporate evaluation of investments on the grounds of competition policy, as is the case in the UK under the Enterprise Act 2002).
The set of triggers reflects a set of assumptions about the risks associated with foreign investment that are built into the operation of any particular screening mechanisms. In general, investments in core infrastructure on which an economy depends, investments that create or consolidate monopoly power, and investments by foreign state-owned enterprises are more likely to trigger the operation of investment screening mechanisms.
Policy criteria applied in investment screening
One distinction among investment screening mechanisms is between those focused solely on national security considerations, as is the case in the United States, and those that integrate broader concerns, as is the case with the “national interest” test applied in Australia and the “net benefit” criterion applied in Canada. However, in recent years, this distinction has become blurred through the adoption of progressively more expansive conceptions of national security in states where screening is limited to national security considerations.
For example, in August 2018, the U.S. Congress passed the Foreign Investment Risk Review Modernization Act (FIRRMA). FIRRMA concerns the role of the Committee on Foreign Investment in the United States (CFIUS)—the U.S.’s investment screening mechanism. FIRRMA defines CFIUS’s basic mandate in the same way as earlier legislation:
the Committee on Foreign Investment in the United States should continue to review transactions for the purpose of protecting national security and should not consider issues of national interest absent a national security nexus.
But FIRRMA, in conjunction with its implementing regulations, changes the way in which CFIUS review operates in significant ways. First, it requires mandatory declaration to CFIUS of investment by an entity in which a foreign government has a substantial interest or investment by any investor in U.S. ”critical technology” industries. Second, it gives CFIUS additional powers to review transactions involving a U.S. business that “maintains or collects sensitive personal data.” The combined effect of these changes is to significantly expand the domain of national security beyond traditional concerns relating to investment in the defence sector and critical infrastructure. Similar changes are afoot in the UK under the National Security and Investment Bill. The UK government is currently conducting a consultation on expanding requirements to notify proposed foreign investment in a range of technology sectors, communications and “data infrastructure.”
Further developments in response to the COVID pandemic
In March 2020, the European Commission issued a formal communication to the member states containing new guidance on investment screening in light of the COVID-19 pandemic. As previously mentioned, the EU FDI Screening Regulation envisages review of foreign investment by a network of national screening mechanisms according to the policy criteria of “security or public order.” The guidance on COVID-19 does not formally change these criteria but instead encourages member states to interpret them broadly, taking into account:
- The risk that foreign acquisition of health care capacity or medical research establishments could “have a harmful impact on the EU’s capacity to cover the health needs of its citizens.”
- The risk of the sale of “undervalued” assets to foreign investors beyond the health care and research sector by European firms facing temporary financial hardship as a result of the pandemic.
These same considerations are reflected in changes to the triggers for investment screening in several other countries. For example, Australia temporarily lowered the monetary trigger for investment screening to AUD 0, in light of concerns about the sale of distressed assets to opportunistic foreign buyers. The effect of this change is that any foreign investment in Australia must go through Australia’s investment screening mechanism for the time being. Notwithstanding these changes, it is unclear whether any foreign investments in Australia or elsewhere have been blocked due to considerations relating to the COVID-19 pandemic.
The return of investment screening mechanisms has three related implications. First, it points to a growing consensus that all foreign investment is not equally beneficial. Instead of maximizing the amount of inward foreign investment, investment policy should be focused on maximizing the benefits of foreign investment. Screening of new foreign investment is one example from a wider policy tool-kit to achieve this goal.
The second implication relates to the importance for states of maintaining the necessary policy space under international agreements to allow for the operation of investment screening mechanisms. Several provisions found in investment treaties potentially create legal complications for the operation of screening mechanisms, including:
- National treatment and most-favoured nation (MFN) treatment provisions, insofar as those treaty provisions apply to the pre-establishment phase.
- Prohibitions on the use of performance requirements. Many investment screening mechanisms have the power to conditionally approve—as well as to block—foreign investment. Conditions attached to the approval of foreign investment can include requirements relating to the management structure, employment, and sourcing practices of the investment, among others. Such provisions are potentially inconsistent with the sweeping prohibitions on performance requirements found in some investment treaties.
- Expropriation provisions. In some countries, foreign investors do not have to obtain approval prior to making a new investment, but the screening mechanism is given the power to “call in”—that is, to force divestment of—investments that are subsequently identified as raising national security concerns. This is the model proposed under the UK’s National Security and Investment Bill. In the absence of appropriate exceptions, an arbitral tribunal might characterize the exercise of call-in powers as an expropriation requiring compensation under an investment treaty. This issue has received almost no attention to date, even though call-in powers are not unique to the UK’s investment screening mechanism.
Third, many of the concerns that are now addressed by investment screening were not foreseen even a decade ago. This is true both of the range of transactions that are now seen as implicating national security in some way, and of concerns relating to domestic security of supply in the health care sector and distressed asset sales prompted by the COVID-19 pandemic. In decades to come, investment policy may well be grappling with new issues that are difficult to anticipate now. This a further reason to ensure that the treaties being negotiated today do not unduly tie the hands of governments in the future.
Jonathan Bonnitcha is an associate with IISD’s Economic Law and Policy Program who is based in Sydney, Australia. He is also a Senior Lecturer at the Law Faculty of the University of New South Wales.
 The decision to establish an investment screening mechanism remains within the exclusive competence of each member state, but the EU has encouraged all member states to establish a national investment screening mechanism and provides support to member states seeking to establish such mechanisms (see https://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157945.pdf. As of November 4, 2020, 15 of the 27 EU member states had notified the Commission of the existence of a national investment screening mechanism. See https://trade.ec.europa.eu/doclib/docs/2019/june/tradoc_157946.pdf.
 Article 6 https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0452&from=EN
 United Nations Conference on Trade and Development (UNCTAD). (2019). National security-related screening mechanisms for foreign investment: An analysis of recent policy developments. https://investmentpolicy.unctad.org/publications/1213/investment-policy-monitor-special-issue—national-security-related-screening-mechanisms-for-foreign-investment-an-analysis-of-recent-policy-developments (UNCTAD 2019)
 Ibid., p. 2
 Te Velde. D.W. (2001). Policies towards foreign direct investment in developing countries: Emerging best-practices and outstanding issues. Overseas Development Institute, pp. 17–18. https://www.odi.org/sites/odi.org.uk/files/odi-assets/publications-opinion-files/5543.pdf
 Nicolas, F., Thomsen, S., & Bang, M. (2013). Lessons from investment policy reform in Korea (OECD Working Papers on International Investment, 2013/02). OECD Publishing. http://dx.doi.org/10.1787/5k4376zqcpf1-en p. 20.
 Australian Department of the Treasury. (2020a). Australia’s foreign investment policy. https://firb.gov.au/guidance-resources/policy-documents
 For example, UNCTAD identifies 20 known foreign investments in nine host states that were blocked or withdrawn following screening on national security grounds between 2016 and September 2019. Over the same period, several thousands foreign investments were granted approval in these same countries, and many more foreign investments would have been made in each of these countries that without triggering the requirements of investment screening. UNCTAD, supra note 3, Annex I, Annex II.
 Some law firms have compiled introductory overviews of the investment screening mechanisms in different countries. See, for example, DLA Piper. (2019). Multi-jurisdiction guide for screening of foreign investment. https://www.dlapiper.com/~/media/files/insights/publications/2019/11/a00493_fdi_guide_v19.pdf. Even this relatively basic comparative review exceeds 100 pages.
 For an overview, see DLA Piper (supra note 9). The UK is currently proposing amendments to this mechanism https://www.gov.uk/government/news/new-powers-to-protect-uk-from-malicious-investment-and-strengthen-economic-resilience?utm_source=3296e277-d0a4-44ec-9ff2-d6db10546512&utm_medium=email&utm_campaign=govuk-notifications&utm_content=immediate
 UNCTAD, supra note 3, p. 9.
 Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA) § 1702 (9).
 Ibid. § 1706.
 § 1703 (4).
 “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 (FDI Screening Regulation),” C(2020) 1981 final. https://trade.ec.europa.eu/doclib/docs/2020/march/tradoc_158676.pdf
 Organisation for Economic Co-operation and Development (OECD). (2020). Investment screening in times of COVID – and beyond, p. 3. http://www.oecd.org/coronavirus/policy-responses/investment-screening-in-times-of-covid-19-and-beyond-aa60af47/
 Australian Department of the Treasury. (2020c). Temporary measures in response to the coronavirus [GN53]. https://firb.gov.au/guidance-resources/guidance-notes/gn53
 Australian Department of the Treasury. (2020b). Q&A – Temporary changes to foreign investment framework. https://firb.gov.au/qa-temporary-changes-foreign-investment-framework