The effect of the EU's novel food regulations on firm investment decisions

Abstract

In this study, we assess the effect of the European Union's novel food regulations on firms' incentives to invest in such products. We adopt a conceptual framework based on real option value theory, which underpins an empirical analysis of a detailed dataset comprising 326 applications submitted under both the 1997 EU novel food regulation and its 2018 replacement. We investigate the dynamics of novel food applications under these regulations and disentangle the determinants of successful cases. Our results show a relatively stable number of applications over the years, with a spike after the introduction of the 2018 regulation, which sought to simplify and centralise the approval process. This upsurge can be interpreted as a reduction in the real option value of postponing investments, attributable to the introduction of a transitional regime and of 5‐year data protection measures. However, the new regulation did not shorten the authorisation process, with the expected benefits of centralisation compromised by operational bottlenecks and a lower chance of approval. Finally, we find that approvals under the 2018 regulation are more likely when applicants are private entities from non‐EU countries and have substantial experience with novel foods. Our empirical evidence suggests that the new regulation may be insufficient to speed up and streamline the novel food assessment process, which is inevitably constrained by EU food safety principles. This, in turn, may discourage future investments.