25 October 2021

Business Investment in Europe at Significant Risk From EU Foreign Subsidies Proposal New Study Finds

New rules could impact innovation, growth and jobs in both European and non-European companies

Foreign investors’ willingness to pursue business ventures in the EU Single Market could decline if a new EU law on non-EU subsidies is adopted as proposed, according to a new study released today by RBB Economics. The study was commissioned by the Computer & Communications Industry Association (CCIA Europe).

The proposed EU Regulation, published by the European Commission (EC) on 5 May 2021, is designed to tackle non-EU subsidies that the EC claims cause distortions and prevent a level playing field in the EU. Tackling non-EU backed subsidisation has the potential merit of allowing EU and non-EU companies to compete on a more even footing. However, the study shows that the rules would introduce substantial new risks, increasing legal uncertainty for multinationals  looking to complete acquisitions and participate in government procurement procedures. The rules would also open up the prospect of burdensome investigations, which would act as a deterrent to investment in the EU.

Benoît Durand, Partner at RBB Economics said: “The European Commission’s Proposal to level the playing field creates significant new risks for all firms doing business in the Single Market. The Commission’s broad approach can be expected to seriously discourage foreign investment in the EU – even if that investment involves no subsidy and results in no distortion – to the detriment of Europe’s economic recovery. Crucially, the Commission has not shown that any benefit from the Proposal will outweigh the costs.”

“We hope our paper will help provide EU lawmakers with additional information to ensure that the final Regulation meets its stated goals while avoiding unintended harms to Europe’s economy.”

The study outlines a number of negative impacts of the proposal, including:

A reduction in the overall flows of Foreign Direct Investment (FDI) into the EU. The measures in the proposed Regulation risk deterring global companies from making EU investments. As the Proposal is unclear on exactly what is non-EU subsidy and when it is distortive, companies will face significant legal uncertainty. Furthermore, it gives the EC the power to impose strong redressive measures where it identifies distortive foreign subsidies, including divestments, publication of research and development results, and licensing on FRAND terms.

European growth and competitiveness will suffer if FDI flows are reduced. Given that 25 percent of total research & development investment in the EU is made by foreign-owned companies, innovation in Europe is very likely to be affected. FDI often stimulates innovation in products and services and reduced FDI will limit the spread of technology and know-how of firms operating in the EU single market, with a knock-on impact on growth. Jobs and wages could be hit as many foreign-owned firms invest significantly in the EU, creating high value jobs.

European companies would also be adversely affected. Those companies who benefit from non-EU subsidies would also face the same burdensome obligations as foreign entities. Furthermore, the Proposal risks triggering third country retaliation to the detriment of European firms and the European economy.

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