The European Commission wants to make it tougher for investors in rival countries like China to take big stakes in EU startups developing critical tech — but says it will keep new requirements on European VCs light.
The EU executive on Wednesday announced a long-delayed package of measures to protect its deeptech companies and prevent intellectual property leaks to hostile countries, amid increasing rivalry between US and China.
It proposed tweaking its law on foreign direct investment screening to require all 27 EU countries to monitor and potentially block foreign takeovers of tech businesses in the four areas the EU considers most sensitive — AI, advanced semiconductors, quantum and biotech.
The rules, which will now be discussed with the member states, would also target takeovers from entities based in the EU “but controlled from the outside”, Margrethe Vestager, the Commission’s vice president for digital and competition, told a press conference.
For startups, this means that significant investments from Chinese firms, or EU-based firms with LPs in rival countries, are more likely to be blocked.
“There is fierce competition worldwide for the technologies we need the most and, in this competition, Europe cannot just be the playground for bigger players, we need to be able to play ourselves,” Vestager said.
Investment and export controls
EU startups have attracted increasing amounts of capital from Chinese investors in recent years, as Europe was seen as a safer market for their capital than the US and while Washington protected its own deeptech companies.
To make it easier to understand whether a non-EU investment poses a security risk, the Commission said it plans to build a database bringing together business information from across the bloc.
“We really do not want to burden investors more than absolutely necessary,” Vestager says. “We need to know before we act in order to make sure that we can keep the regulatory burden at the necessary minimum.”
Brussels also wants to open a discussion with member states on preventing EU capital from flowing towards the bloc’s competitors, when such outbound investments “could enhance military and intelligence capacities of actors who may use these capabilities to threaten international peace and security”.
Dual-use tech
As part of the same package, the Commission also proposed the development of uniform EU controls on dual-use tech export controls to hostile countries (“dual-use tech” refers to technology that can be used for both civil and military applications). This would cover things like advanced electronics, toxins and nuclear technology — which, at the moment, are set by EU member states individually.
The Commission says this could be done via a new “senior-level forum for political coordination” but will consult with national governments before making a final call.
But as more emerging technologies do offer both civil and military applications, the Commission put forward proposals aimed at making sure the EU does not lag behind geopolitical rivals in their development.
These include expanding the EU’s €95bn Horizon Europe programme, which currently only funds tech projects for civilian applications, to support some dual-use tech projects. This, the Commission says, would make more companies want to take part in Horizon Europe projects.
Another idea proposed today would be creating an entire new EU funding scheme focused on dual-use tech, which could fund space systems and autonomous vehicles, among other innovations.
Vestager says the Commission will now open a consultation period on these options, running until April 30, which EU startups can feed into.
Unified approach
These measures are generally about trying to establish a common strategy between the EU’s 27 member states on how to deal with China, wary of the fact that some countries are more keen on having a close economic relationship with the Asian giant than others.
Five EU countries — including Greece and Cyprus — lack screening mechanisms to monitor foreign investments into their tech businesses, and as many as 12 “did not analyse or notify any cases” of foreign investment between 2020 and 2022 despite having such tools, according to the European Court of Auditors.
Jan Goetz, CEO and cofounder of Finnish quantum and chip startup IQM, welcomed the Commission’s proposals, arguing it is a “nightmare” for a company like his, present in different EU countries, to navigate the current patchwork of rules and export controls. But he says the Commission should be careful not to overload EU-based investors with many more requirements.
“What we see is that member states are doing their own thing and I think generally it’s a good approach if the Commission would harmonise so we don’t have 27 individual approaches but one coordinated effort coming from Brussels,” he tells Sifted.
The US has urged its European allies to follow its lead in banning semiconductor exports to China. One recent result of this was lobbying the Dutch government to stop ASML — which builds machines for making semiconductors — from shipping two of its devices to China, prompting European chip startups to start planning a future where China is off-limits.
National governments, however, are very protective of their right to set their own terms in their bilateral relationship with Beijing, forcing the Commission to proceed with caution. And as the EU is heading for elections to the European Parliament in early June, none of these measures are expected to come into effect until a new EU executive emerges from the polls.
While the Commission’s plan does not name China, Commission president Ursula von der Leyen warned in March that the country’s “changing policies” were forcing the EU to prevent “sensitive technologies” that could be used with military or security purposes from leaking to Beijing.
“We need to ensure that our companies’ capital, expertise and knowledge are not used to enhance the military and intelligence capabilities of those who are also systemic rivals,” she said at the time.
