20 June, 2023
The China dilemma in foreign direct investment screening: Comparing the Finnish and Swedish approaches
Erik Simander/TT, AP/TT
- For the past decade, Finland and Sweden have been among the largest recipients of Chinese foreign direct investment (FDI) in the European Union (EU). In cumulative terms, they were ranked the fifth- and sixth-largest destinations for Chinese FDI in 2000–2022.
- Finland amended its national FDI controls in 2020 following the introduction of the EU’s FDI screening framework in 2019 (EU 2019/452), and Sweden’s new mechanism is expected to enter into force in 2023. On a European scale, Finland’s operational FDI legislation is arguably an example of a more liberal approach. Sweden’s forthcoming scope for screening will showcase a more extensive model. China’s global investment practice has been factored into developments in both countries. In Sweden, the security risks linked to Chinese FDI have directly shaped the process of drafting a legislative proposal.
- Until now, Chinese FDI in Finland and Sweden has focused on company acquisitions in knowledge-intensive fields, many of which are strategic or key sectors of the Chinese economy. The security risks of investments have been increasingly emphasized, but the positive contributions to economic development continue to be recognized, especially in business circles. The two countries are therefore faced with a “China dilemma” in their FDI screening: how to mitigate the risks of Chinese FDI while ensuring that desirable investments continue to be attracted in the future.
- The Finnish approach to FDI screening is shaped by a focus on safeguarding the provision of sufficient amounts of critical supplies and services in all circumstances (i.e., supply security), while Sweden also seeks to consider broader national security concerns and investor intentions. Sweden’s broader scope with regard to the origins of investment (including by Swedish investors), and types of FDI and industry, is likely to result in the screening of a larger number of Chinese investments in the future. Nonetheless, the Finnish mechanism can in theory also cover most of the industries listed by Sweden.
- Finland is unlikely to proceed to formal blocking of Chinese investments by its government. Risks are more likely to be mitigated or Chinese investors might withdraw from the process to avoid major media exposure. Sweden’s decisions will be made by an expert agency, which might be less vulnerable to influencing attempts. However, Chinese retaliatory measures could follow, since the entire breadth of political considerations cannot be taken into account.
- Finland’s less clear rules and Sweden’s more expansive scope of screening could create potential confusion and an administrative burden that has a negative impact on the investment climate. However, there is also a possibility that passing a screening process in these countries could provide “immunity” to public criticism and contribute positively to Chinese companies’ global image and activities. Moreover, both countries’ country-neutral approach to FDI screening is likely to reduce Chinese investors’ feelings of being targeted.
- China’s increasingly assertive global role will continue to present unknown and “unthinkable” security challenges to small open economies such as Sweden and Finland. Their ability to mould and adjust their respective FDI screening mechanisms will be a key factor in dealing with these challenges. There may also be lessons in this for other states.
- Finland’s achieved and Sweden’s likely NATO membership are also likely to affect their ability to take an independent stance on tackling their China dilemma on FDI screening. NATO’s growing concern about China means that mitigation of risks could be increasingly emphasized over maintaining beneficial FDI flows, and each country might need to expand its list of sensitive industries that are subject to screening. In addition, any potential EU-level outbound investment controls will add another dimension to Finland and Sweden’s ability to balance between investment risks and the benefits of openness.