Mapping out the trends of FDI in Europe: A look at the EU’s Fifth FDI Annual Report

Introduction

On 14 October 2025, the European Commission (the “Commission”) published its 5th Annual Report on the screening of foreign direct investment into the Union (the “Report”). The Report provides a comprehensive summary and insight on the latest matters dealing with foreign direct investment (“FDI”) in the EU, including FDI screening enforcement and legislative developments across the Union by analysing submissions made from all 27 Member States for the year 2024.

FDI in Europe – Investment Trends

The Report notes that FDI into the EU slowed down during 2024, particularly as a result of a downtrend in greenfield FDI driven by ongoing uncertainties including escalating global trade tensions and conflicts. As in previous years, the United Kingdom and the United States continue to rank as the largest drivers of FDI in the EU, accounting for nearly half of all transactions. Deals originating from China and Hong Kong were also prominent in 2024, with such deals accounting to 23% of the total incoming deal flow of FDI in 2024.

In terms of the receiving end of FDI, Germany, France, Italy, Spain and the Netherlands emerged as the front runners, with Poland also recording the strongest increase in M&A transactions at 39% of the total deals into the EU.

Legislative developments in FDI mechanisms across the EU

Since the introduction of Regulation (EU) 2019/452 of the European Parliament and of the Council of 19 March 2019 establishing a framework for the screening of foreign direct investments into the Union (the “FDI Regulation”), Member States have increasingly introduced their own FDI screening mechanisms or continued to bolster their existing ones at national level.

2024 saw two new Member States adopt FDI screening mechanisms, these being Bulgaria and Ireland. Although the FDI Regulation does not (so far) oblige Member States to have FDI regimes in place, only Cyprus and Croatia are yet to formally introduce their own frameworks, with both Member States looking to do so imminently. Other Member States have introduced various amendments to their current screening mechanisms, particularly aimed at extending the list of economic activities which they consider as activities strategically important for their national security and which should, therefore, fall within the scope of screening. France, for example, has extended its framework to cover photonics and this considering the increasing developments in photonics being used for renewable energy.

Such changes showcase that the sectors and economic activities which Member States view as meriting screening is constantly evolving, particularly due to rapid technological advancements which are increasingly intertwining with matters which may affect the national security of Member States. Whilst Member States are currently able to choose which sectors should be subject to screening or otherwise, the EU is currently debating a new regulation (the “Proposed Regulation”) which will introduce a mandatory sectoral scope of industries together with 20 EU-wide projects and programs which must be subject to screening. The text of the Proposed Regulation is yet to be finalised.

The Report further highlights convergences between various screening mechanisms including the scope of the regimes, the applicable procedural timelines and the notification requirements that need to be met by parties where their transactions fall within scope. The Proposed Regulation aims to reduce this regulatory burden on parties, particularly where their transactions fall within the scope of various regimes by harmonising, to an extent, these differences.

Screening Activities at Member State Level

The year 2024 saw just over 3,000 requests for authorisation across the EU, with the overwhelming majority (86%) being approved without any conditions. Of the remaining, 9% of the decisions involved the imposition of commitments or mitigation measures, with only 1% of the total decisions being blocked and the remaining 4% of the applications being withdrawn before a formal decision was adopted.

The Report professes that the high approval rate demonstrates that despite the increasing sophistication and scope of FDI screening mechanisms, the EU has remained open to foreign investment. The Report also highlights that decisions approved subject to conditions have dropped from 10% in 2023 to 9% in 2024.

Notably, around 60% of notifications made by investors in 2024 were ultimately unnecessary given that they fell outside of the scope of national FDI screening mechanisms. Such number may be indicative of a cautious approach being taken by investors, choosing to play it safe and notify transactions when in doubt. This could be driven by a lack of guidance at national level as to what falls within the scope of the FDI rules. This factor may be exacerbated by the fact that many of the decisions taken by national authorities are not published due to security reasons, leaving investors without the possibility of referring to these decisions as precedent for their own cases.

Manufacturing continues to dominate the spotlight in the EU Cooperation Mechanism

The FDI Regulation set up an EU wide cooperation mechanism (“Cooperation Mechanism”) whereby national authorities are able to notify their foreign counterparts and the Commission of notifiable transactions which may have a cross-border effect. In turn, Member States are able to take coordinated action on the potential investment which could potentially impact various jurisdictions.

In 2024, 477 notifications were made under the Cooperation Mechanism, 8% of which were subject to a Phase 2 investigations. The manufacturing sector represented the main category of transactions which required a Phase 2 investigation, and these were largely driven through investments planned to be made in critical technologies, critical infrastructure and supply of critical inputs. Unsurprisingly, a large part of the Phase 2 investigations in critical technologies relate to the defence sector, followed by semiconductors and aerospace. Other critical technologies which were brought under the spotlight include investments in artificial intelligence and robotics.

Looking Ahead

The Report highlights that the regulatory environment in which both M&As and greenfield investments operate is constantly evolving both at national and European level. Although the Report highlights that almost all Member States now have an FDI regime in place, the coming into force of the Proposed Regulation as drafted, will impact the regulatory landscape across all the Member States, particularly to align with the mandatory sectoral scope that the Proposed Regulation introduces.

Looking ahead, investors must remain agile in navigating the ever-evolving regulatory environment both to ensure that deals are implemented well, as well as to avoid jumping the gun or overreporting, which can both prove timely and costly.

Disclaimer: This Law Report does not constitute legal advice. This article was first published in ‘The Malta Independent’ on 05/11/2025.