In a context marked by public health and geopolitical crises, most advanced economies have recently strengthened or implemented foreign investment screening mechanisms for reasons of national security (Bencivelli et al., 2023). The EU in particular has introduced a harmonised framework under a 2019 regulation. These mechanisms allow national authorities to vet investments in sectors deemed strategic, or from investors linked to third-country governments. The investments can be completely blocked, or authorised with or without conditions.
In France, the screening framework is the responsibility of the Ministry of the Economy and Finance and has been substantially reinforced in recent years. In 2020, for example, the threshold above which non-European equity investment projects in French listed companies are subject to screening was lowered to 10% of capital. The list of critical activities has also been expanded: it was initially limited to defence and security activities, but now includes critical infrastructure (physical and electronic), critical technologies (quantum technologies, etc.), food security, media, and technology essential for the energy transition. On average, 320 approval requests for inward foreign direct investments (FDI) in these sectors were submitted annually to the Treasury between 2021 and 2023, accounting for nearly 20% of all projects identified by Business France (2024).
However, only a share of these – just over 10% – were deemed likely to pose a national security threat by the Treasury, and therefore subject to heightened controls.
It should be noted that this screening, which is proportionate and in the interests of national security, is not incompatible with a policy of attracting FDI for French industries of the future, such as electric battery factories (Business France, 2024).
Between 9% and 25% of FDI stocks in France can be deemed strategic
Given the confidentiality of screening procedures for FDI in France, it is difficult to estimate the amount of stocks. We propose two methods for quantifying inward investments liable to be considered critical, which gives us an estimate range. The upper bound is calculated by taking into account all sectors defined as strategic under French legislation. However, a second, more granular approach is needed to avoid overestimation, as a formal sectoral classification covers more firms than are actually identified as critical by the French authorities.
We therefore estimate a lower bound using a smaller list of firms operating in strategic sectors (defence, artificial intelligence, biotechnologies, semiconductors, quantum technologies, etc.), identified manually and using specialised databases (Refinitiv for financial and market data and Crunchbase for data on start-ups and investment). We also compile a list of firms in which the French state holds a stake and which are therefore likely to be subject to screening. We then match these two lists with the corresponding DI data compiled by the Banque de France. Whereas the legislation only applies to new FDI flows, our estimates take into account retroactive stocks (for example, we include all stocks of DI in defence in 2023, even though some of the flows generating these stocks date from before this period).
According to our upper estimates, in 2023, 25% of the stock of inward DI (excluding intragroup loans) was in an activity classified as critical under French law (see Chart 2). This large share is consistent with the high number of approval requests submitted each year to French authorities. The main ultimate investing countries in these sectors (i.e. where the economic decision-making centre is located, irrespective of any intermediate countries) were EU countries (13% of total stocks), notably Germany (2%), and the United States (5%). As a proportion of total DI stocks, investments in strategic sectors have declined over the past decade (they reached 33% of total stocks in 2016), due notably to the change in US DI in France. While the US Tax Cuts and Jobs Act (2018) – which encourages the repatriation of earnings held in US firms’ foreign subsidiaries – does not appear to have a had major impact on US DI in France in general (Banque de France, 2024), its implementation does coincide with a sharp drop in US DI stocks in strategic sectors – although this is offset to an extent by a concomitant rise in non-strategic DI stocks. This trend also coincides with a global reconfiguration of DI flows prompted by geopolitical considerations, especially in sectors where there is a high risk of “weaponisation” of economic relations (Alcidi et al., 2024).
Chart 2: Stock of inward DI in critical sectors calculated using 1st method (EUR billions and % of total)