Foreign Investment Controls in the European Union: Fragmentation of the Internal Market in Four Steps

Abstract

As foreign direct investment (FDI) screening mechanisms proliferate globally, the European Union (EU) faces a unique legal challenge: reconciling national security concerns with its foundational commitments to the internal market, particularly the freedoms of capital and establishment enshrined in the Treaty on the Functioning of the European Union (TFEU). This article critically examines the intersection of FDI screening and the freedom of establishment under Article 49 TFEU, arguing that the increasing regulatory scrutiny of foreign investments risks undermining the legal certainty and scope of establishment rights within the EU. The article contends that national FDI screening regimes, particularly those involving prior authorization and vague public security criteria, may disproportionately affect companies established in the EU by foreign nationals, thereby infringing on their right to establish and operate across Member States. The article further highlights the tension between Member States’ discretion in safeguarding national security and the EU’s obligation to uphold fundamental market freedoms. It concludes that without clearer harmonization and stricter proportionality standards, FDI screening risks becoming a disguised restriction on the freedom of establishment, threatening the integrity of the EU’s internal market.