by Dávid Szász
The majority of states have established regimes to screen inbound foreign investments decades ago mainly, but not solely for the purpose of national security. In contrast, only a fraction of the states have adopted mechanisms to control outbound investments, that hold the potential to draw capital and assets away from the internal market of the state.[1]
These states include the Republic of Korea (“Korea”) and Taiwan. In the case of Taiwan, a separate ministry, the Ministry of Foreign Investment[2] is dedicated to this this purpose, which carries out the screening and authorization process. Due to Taiwan's special relationship with the People's Republic of China (“China”) additional restrictive provisions are in place, limiting mainly the investments in the market of advanced technologies.[3] In addition, special rules have been laid out for small and medium-sized enterprises. They are only allowed to invest up to 60% of their net asset value, but not more than 2 million USD in China. In Korea the screening regime also aims to preserve and strengthen the competitiveness of domestic companies. Its main purpose, however, is to prevent the leakage of the so-called "National Core Technology".[4] Outbound investments are reviewed by the Ministry of Trade, Industry and Energy[5] in Korea.[6]
In the United States of America (“USA”) the Biden-administration has laid out plans to introduce a similar screening regime and has already taken the first steps to achieve this goal. The regime will be established on grounds of national security and will complement the Committee on Foreign Investment in the United States (“CFIUS”), which has been in operation since 1975 as a branch of the U.S. Department of the Treasury and is responsible for screening inbound foreign investments. The screening regime, also referred to in the media as the "reverse CFIUS", is likely to be introduced by Executive Order (“EO”), which could significantly speed up the legislation process, as it will not be a subject of political debate and bargaining before the Congress. Although it is not yet clear exactly which markets, areas of industry and countries will fall under its scope, its hidden agenda is most likely to restrict the outflow of domestic capital to China[7]via investments in the areas of high technology, especially semiconductors and artificial intelligence (“AI”). The regime will thus complement the CHIPS and Science Act[8] (the US equivalent of the European Chips Act), which aims to strengthen the position of the USA in semiconductor technologies while preventing China from advancing in the same field.[9]
This move of the Biden-administration is a catalyst for action by the European Union ("EU"), in particular the European Commission ("Commission"), as the Commission's Digital Strategy aims to increase the EU's role in global semiconductor manufacturing and related technology development. In response, the Commission has indicated[10] in its work plan[11] for 2023 that it will examine during the course of the year the need to introduce additional mechanisms to the existing regulatory framework in order to control strategic investments outside the Member States, which could lead to the creation of a parallel screening regime.[12]
The current EU legislation, which is expected to be reviewed in October 2023, is essentially embodied in EU Regulation 2019/452[13] ("Regulation"). The Regulation only covers inbound foreign investments to a limited extent.[14] This is complemented by the Foreign Subsidies Regulation[15] (“FSR”), which addresses distortions in the internal market caused by foreign subsidies. The FSR lays down rules and procedures for the investigation and correction of foreign aid that distorts the internal market, stressing that distortions may occur in relation to any economic activity, particularly in the context of mergers and public procurement. The Commission is likely to discuss, during the review of the Regulation, the need to establish an outbound investment screening regime.[16]
If the Commission decides to set up a parallel screening regime, achieving it will not be an easy task. Except in the cases covered by the Regulation, the control, authorization, and prohibition of investments is in the hands of the Member States, not an exclusive EU competence. The introduction of such a regime would therefore require an extension of EU and a loss of Member State competence, which would presumably generate heated political debates.[17]
Hungary, like the majority of EU Member States, has a mechanism to screen inbound foreign investments. The process is regulated by Act LVII of 2018[18] and Government Decree No. 561/2022[19].
[1] Hanemann, T. - Witzke, M. - Vest, C. - Dudley, L. - Featherston, R. (2022), ’ An Outbound Investment Screening Regime for the United States?’, A Report by the US-China Investment Project, available at: https://rhg.com/wp-content/uploads/2022/01/RHG_TWS_2022_US-Outbound-Investment.pdf (last accessed: 2023.05.04.).
[2] Homepage of the Ministry: https://www.moeaic.gov.tw/english/ (last accessed: 2023.05.04.).
[3] Mainland Affairs Council: Act Governing Relations between the People of the Taiwan Area and the Mainland Area, available at: https://law.moj.gov.tw/ENG/LawClass/LawAll.aspx?pcode=Q0010001 (last accessed: 2023.05.04.).
[4] This consists for example the knowledge accumulated in the areas of biotechnology and battery production.
[5] Homepage of the Ministry: https://english.motie.go.kr/www/main.do (last accessed: 2023.05.04.).
[6] Center for Strategic and International Studies „CSIS” (2023), The United States Prepares to Screen Outbound Investment. available at: https://www.csis.org/analysis/united-states-prepares-screen-outbound-investment (last accessed: 2023.05.04.).
[7] Investments bound for Russia, North Korea, Venezuela, Cuba, and Iran will likely fall under screening too.
[8] The White House (2022), Fact Sheet: CHIPS and Science Act Will Lower Costs, Create Jobs, Strengthen Supply Chains, and Counter China.available at: https://www.whitehouse.gov/briefing-room/statements-releases/2022/08/09/fact-sheet-chips-and-science-act-will-lower-costs-create-jobs-strengthen-supply-chains-and-counter-china/ (last accessed: 2023.05.04.).
[9] King & Spalding (2023), U.S. Outbound Investment Review Regime Moving Forward. available at: https://www.kslaw.com/news-and-insights/us-outbound-investment-review-regime-moving-forward (last accessed: 2023.05.04.).
[10] "The EC will examine whether additional tools are necessary in respect of outbound strategic investments controls.”
[11] Communication from the Commission to the European Parliament, the Council, the European Economic and Social Committee and the Committee of the Regions: Commission work programme 2023, 2022, COM (2022) 548 final, available at: https://commission.europa.eu/system/files/2022-10/Commission%20work%20programme%202023.pdf (last accessed: 2023.05.04.).
[12] Cleary Foreign Investment and International Trade Watch (2023), Outbound Investment Screening Regime — EU May Follow In U.S. Footsteps.available at: https://www.clearytradewatch.com/2023/02/outbound-investment-screening-regime-eu-may-follow-in-u-s-footsteps/#_ftn12 (last accessed: 2023.05.04.).
[13] Regulation 2019/452 of the European Parliament and of the Council on establishing a framework for the screening of foreign direct investments into the Union, available at: https://eur-lex.europa.eu/eli/reg/2019/452/oj?locale=hu (last accessed: 2023.05.04.).
[14] In terms of its scope, it applies only to long-term investments made by natural persons or legal entities originating from certain third countries if the investments affect critical infrastructure or technology (such as energy, media, water, healthcare, data management, military contracts, semiconductors, artificial intelligence, nuclear materials).
[15] Regulation 2022/2560 of the European Parliament and of the Council on foreign subsidies distorting the internal market available at: https://eur-lex.europa.eu/legal-content/HU/TXT/?qid=1673254237527&uri=CELEX%3A32022R2560 (last accessed: 2023.05.04.).
[16] Lexology (2023), EU to screen outbound investment in sensitive markets and sectors. available at: https://www.lexology.com/library/detail.aspx?g=3b66eee0-b45c-4958-96a7-494443e71b70 (last accessed: 2023.05.04.).
[17] Center for Strategic and International Studies „CSIS” (2023), Transatlantic Approaches to Outbound Investment Screening. available at: https://www.csis.org/analysis/transatlantic-approaches-outbound-investment-screening (last accessed: 2023.05.04.).
[18] Act LVII of 2018 on the control of foreign investments damaging Hungary's security interests, available at: https://net.jogtar.hu/jogszabaly?docid=a1800057.tv (last accessed: 2023.05.04.).
[19] Government Decree No. 561/2022 on the different application of certain provisions necessary for the economic protection of Hungarian companies during the time of national emergency, available at: https://net.jogtar.hu/jogszabaly?docid=a2200561.kor (last accessed: 2023.05.04.).
