Europe needs to become better at producing advanced technologies

International trade and investment are essential for economic growth, productivity and technological progress. Swedish multinationals invest abroad, not only to gain access to international markets, but also knowledge and technology. However, concerns that such outbound investments in critical technologies undermine national security interests are growing.

Trade Policy Advisers Hannes Lenk and Ebba Lundqvist

Some countries, such as Taiwan and South Korea have long had rules on outbound investment screening in place. The US has recently adopted its own set of rules, and the European Commission is expected to present a recommendation on monitoring outbound investments activity in the coming months. We believe that an extensive regime for screening outbound investments could stifle the EU's technological development and global competitiveness, making it more difficult for the EU to close the innovation gap. Instead, such rules should be based on clearly identified, sector- and technology-specific security risks, rather than on the grounds of industrial policy.

Investments in these technologies can foster innovation and capacity building abroad.

Critical technologies such as semiconductors and artificial intelligence (AI) are crucial for state-of-the-art military and surveillance capabilities. Foreign access to these technologies poses legitimate security concerns, especially amid escalating geopolitical tensions.

Export controls — such as those controls recently imposed by the US on advanced semiconductors and related manufacturing equipment — aim to prevent the export of technology to countries of concern. However, investments in these technologies can foster innovation and capacity building abroad, potentially leading to technology leakage similar to what has previously been experienced in exports. To bridge this gap, the US is developing rules for screening outbound investments, and the European Commission is poised to follow suit.

Meanwhile the EU can only play catch up in hopes to close the existing innovation gap.

Although the threat that outbound investment screening aims to address is not country-specific, in practice, screening mechanisms in the US, Taiwan and South Korea target specifically China's advancement in critical technologies.

Even EU rules on outbound investments are expected to take aim at technology transfer to China. The US is clearly motivated by maintaining its technological leadership. Meanwhile the EU can only play catch up in hopes to close the existing innovation gap.

Whether the screening of outbound investments can facilitate these aims remains, however, questionable. China's capacity for innovation has significantly evolved; it no longer relies on replicating Western technology. As an upper-middle-income economy, China ranks high on the Global Innovation Index, excelling in innovation output and technology adoption. In global research and development (R&D) spending, China matches Europe; only the US spends more. China is also aggressively pursuing the development of global standards for cutting-edge technologies such as 6G. Put briefly, China's capabilities extend beyond replication; it is a global leader in fields such as AI, connectivity and advanced manufacturing.

 

The rationale for outbound investment screening differs between the EU and the US. While the US aims to maintain its technological edge, the EU lacks mass manufacturing capacity and generally does not compete with China or the US in the above-mentioned sectors.

Where outbound investments circumvent export controls or create apparent security risks, screening or monitoring is legitimate. Yet, there is a risk that EU rules on outbound investments become another example of the EU’s broader shift towards geoeconomics.

In his confirmation hearing, Commissioner Maroš Šefčovič declared that amid rising geopolitical tensions, the EU’s trade and investment policy has become a “geostrategic tool.” Reducing economic dependency on China by building domestic manufacturing capacity, as outlined in the European Commission's Economic Security Strategy, is central to this narrative, including in critical technology sectors. If used as a form of protectionism, outbound investment screening could become a tool for protecting uncompetitive industries rather than addressing specific security threats.

For Swedish companies, such protective measures would be counterproductive. Outbound investments enable Swedish companies to access advanced technologies abroad and build partnerships that enhance their productivity and competitiveness. Restricting access to technological advancements abroad, including China, by limiting outbound investments would hinder, rather than advance, Europe's competitive edge.

Hannes Lenk
Trade Policy Adviser

Ebba Lundqvist
Trade Policy Adviser

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