Is the European Union Ready for Foreign Direct Investment from Emerging Markets?

The European Union (EU) boasts one of the world’s most liberal foreign direct investment (FDI) regimes (OECD 2007). EU member states are hosts to MNEs in most sectors, from virtually every corner of the globe, and many of the new FDI players from emerging markets opt for the EU as host. In the context of increased FDI flows from 2004, peaking at an historic US$1.9 billion in 2007, the EU—like most countries—was rightly criticized for increasing the implementation of restrictive policies and practices with an aim to limit inward FDI (IFDI) as and when governments thought barriers necessary or desirable (UNCTAD 2008). The EU has been criticized by various business executives from emerging markets for raising protectionist barriers to their firms, including Gazprom (Traynor 2007) and Mittal (as chronicled by Bouquet and Ousey 2008). The financial crisis and economic recession triggered by the collapse of the sub-prime market in the United States since 2007 changed the international context for FDI policy significantly. UNCTAD (2009) estimated that IFDI and cross-border mergers and acquisitions (M&As) to the EU declined by around one third in 2008: this represents the largest decline in any part of the world. Even larger declines are predicted for 2009. Governments in the EU are divided over needing short-term capital investment to guarantee jobs and economic growth, and the requirement that they satisfy medium- to long-term political and economic concerns, which fueled the rise of FDI restrictions in the first place. These concerns could escalate if the temptation toward protectionism is not firmly resisted.