Investment screening: US and China drive M&A in declining FDI environment, while screening practice remains stable

In mid-October, the European Commission published its fifth annual report on the screening of foreign direct investments (FDI). The report provides an overview of trends in foreign direct investment in the EU Member States, the number and outcomes of investment screening procedures and an outlook on the forthcoming revision of the EU Screening Regulation. Several trends from recent years persisted in 2024: despite an overall decline in FDI, the United States remained the most important country of origin and Germany the most important destination for M&A transactions. M&A transactions originating from the US and China increased for the first time in years (A). The share of approvals and restrictions in national investment reviews remained almost unchanged (B.). Similarly, the recourse to the EU cooperation mechanism remained stable. Member States continue to be sceptical of FDI in critical defence-related technologies (C.). Finally, the planned recast of the EU Screening Regulation is expected to result in more detailed annual reports in the future (D.).

A. In declining FDI environment: the US and Germany remain key origin and destination countries; first significant increase in FDI from China in years

In 2024, the EU recorded 3,676 foreign direct investments, including 1,973 M&A transactions and 1,703 greenfield investments. These figures continue the downward trend seen in previous years: Foreign direct investment into the EU declined by 8.4% in total, driven primarily by a 19% drop in greenfield investments. In contrast, M&A transactions rose slightly again for the first time (+2.7%).

As in previous years, the United States was the most important country of origin for FDI (30% of M&A, 37% of greenfield investments), followed by the United Kingdom and Switzerland. Notably, investment from China and Hong Kong recovered significantly for the first time in years. Acquisitions rose by 23% year-on-year, although the number of greenfield investments continued to edge down slightly (-2.5%).

Germany, France and Spain again ranked as the leading destination countries. Germany remained the most important destination for acquisitions, accounting for just over one fifth of all transactions, while Spain once again hosted the largest share of greenfield investments, with just under one quarter.

The sectoral trends of previous years also persisted: manufacturing and the ICT sector remained the main focus of M&A transactions, followed by finance, retail and the provision of professional, scientific and technical services.

B. Investment screening: mechanisms established across the EU, screening practice remains stable

The importance of investment screening as a security policy instrument continues to grow: in 2024, 24 EU Member States had investment screening regimes in place. By now, Greece, Croatia and Cyprus have also adopted equivalent rules.

The number of notified and screened foreign direct investments increased sharply in 2024, rising by 73% to a total of 3,136 cases. This development is being driven by the newly introduced investment screening system in Sweden. Although notifications increased significantly, a smaller share of 41% resulted in formal screening procedures compared with the previous year (56%). Yet, the level of scrutiny remains unchanged: 86% of screenings concluded with unconditional clearance, 9% with conditional clearance, and only 1% with a prohibition, while 4% of notified cases were withdrawn early.

C. EU screening mechanism: number of notifications remains stable, fewer multi-jurisdictional cases

For the EU cooperation mechanism, a slight decline in notifications was recorded for the first time: 21 Member States notified a total of 477 investments (2023: 488 cases), with Spain, Austria, Italy and France accounting for most of the cases.

In 2023, 36% of the notified cases were multi‑jurisdictional transactions, while in 2024 this share fell to just 19%, marking a low point. Most of the notified investments originated – mirroring the figures set out above – from the United States and the United Kingdom. In line with the increase in FDI from China and Hong Kong, the share of notified investments from China rose from 6% to 9%.

As in previous years, manufacturing and the ICT sector were at the forefront of notified cases. In the in‑depth reviews within the manufacturing sector regarding critical technologies, the authorities focused on defence (37%, an increase of 11 percentage points compared with the previous year), semiconductors (21%) and aerospace (16%). This underlines that EU Member States continue to view FDI in defence‑related critical technologies with scepticism considering the growing security relevance of the European defence industry. Notwithstanding, the number of companies also being active in the defence sector is likely to continue to rise.

The EU Commission continues to close the vast majority of these cases within 15 days, with only 8% proceeding to an in‑depth review.

D. Outlook: New reporting requirements promise greater transparency

At the end of the report, the EU Commission refers to the ongoing reform of the EU Screening Regulation. The reform is likely to result in a revision of the reporting requirements for Member States and the EU Commission, which is to be welcomed. The reporting requirements are to be expanded and made more detailed. This promises greater transparency regarding the conduct and outcome of investment screening procedures, for example with respect to specific risk factors such as the target company’s sector and the investor’s country of origin.

In summary, 2024 saw an increase in M&A transactions from the US and China, bucking the market trend. Investments from these countries in particular cause an increased need for advice, because national screening authorities regularly take a critical view of investments from China.