Navigating the Rise in Foreign Investment Screening (2024)

Navigating the Rise in Foreign Investment Screening (1)

Economic Development


ByAnna Chojnowska,Tim Figures,Vipul Nanda,Rami Rafih, andCristián Rodríguez-Chiffelle

Reading time: 5 min

Driven by concerns about national security and foreign control over strategic businesses, countries are increasingly screening proposed foreign direct investments (FDI). Governments use these tools to ban, curb, shape, or unwind investments in targeted industries from individuals, companies, or countries of concern. Among OECD countries, the use of inbound investment-screening mechanisms (ISMs) has doubled over the past decade. (See Exhibit 1).

Navigating the Rise in Foreign Investment Screening (2)

The So What

As geopolitical tensions and protectionism rise, companies need to prepare for this expanding use of investment screening mechanisms. For example, the UK National Security and Investment Act, which came into effect in 2022, has significantly widened the circ*mstances under which inbound investments are subject to screening.

Four developments explain the rise of inbound ISMs:

  • Geopolitical Decoupling. With foreign direct investments now representing 40% of global GDP, a sharp rise, nations want to reduce their dependence on rivals in critical sectors.
  • Technology Tipping Points. Countries want to maintain advantage over emerging technologies, such as the US currently has in advanced semiconductors.
  • COVID-19. As the pandemic unfolded, nations wanted to avoid strategic companies from selling to a foreign owner at wholesale prices. They also began to screen out investments that might weaken critical supply chains such as for vaccines or pharmaceuticals.
  • Rising Protectionism. Protectionist tendencies have expanded beyond global trade into foreign direct investments.

Dive Deeper

Investment screening reshapes rather displaces foreign direct investments. Foreign direct investments fluctuate with economic growth, business opportunities, and commodity prices more than investment screening. In interviews, investors said that they view the existence of ISMs as one of many signals that they evaluate in making country allocations. They also told us that they have rarely changed their allocation strategies based on new ISMs.

The growth of ISMs, however, has changed the mix of foreign direct investments. M&A—which is often used as a fast way to access technology, data, and know-how—has tended to decrease, while greenfield investments have risen. For example, in Germany, Japan, and the US, M&A in the semiconductor industry fell after the imposition of inbound ISMs but greenfield foreign direct investments have increased. Industrial policy, such as the CHIPS and Science Act in the US, is likely contributing to this shift. (See Exhibit 2.)

Navigating the Rise in Foreign Investment Screening (3)

Inbound ISMs have also changed the mix of investors in favor of economic and political allies. Foreign direct investments increased among allies such as Germany, Japan, the UK, and the US after the imposition of inbound ISMs, while inbound investments from political rivals sharply declined. Germany’s share of US foreign direct investments has risen from 3% to 13% between 2016 and 2012, while China’s share has fallen to almost 0% from 4%.

What Else

Traditionally, countries have focused on screening inbound investments. But in August, US President Joe Biden signed an executive order aimed at outbound investing in advanced computing chips, microelectronics, quantum technologies, and artificial intelligence. The order is so far aimed at China but more broadly raising the visibility of both inbound and outbound screening.

Now What

This evolving world of investment screening presents challenges both for governments and investors alike.

A Playbook for Policymakers. Governments should align foreign investments with national priorities without unduly frustrating investors with lengthy bureaucratic reviews that sour the investment climate.

  • Ensure due process. Countries should create impartial and timely screening criteria, so investors understand how long the decision will take and have confidence in the outcome. They should also allow investors to challenge decisions that appear to be unreasonable. This is especially true for low- and middle-income countries with less established regulatory and legal regimes.
  • Reduce uncertainty. Governments should clearly define sectors to be screened; the objectives such as national security and protection of strategic assets; and the profiles of investors and the risk criteria against which investments are evaluated. They should clearly specify policy objectives, such as protection of national security, so that investors can plan an investment strategy for the country.

A Playbook for Investors. Investors in foreign direct investments tend to be sophisticated and accustomed to dealing with regulation and oversight. Many have relied on the following practices to manage the screening of their potential investments.

  • Monitor. Investors have “boots on the ground,” local partners and advisors who have a nuanced understanding of the geopolitical motivations that goes beyond the dry language of the screening mechanism.
  • Mitigate. Investors will change the deal structure—or arrange it through an entity located in a different jurisdiction—to make a specific deal work or target similar investments in the same value chain to hit an allocation target.

Of course, if the number and range of screening mechanisms continues to grow, old measures may not work against rules that are changing.

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Navigating the Rise in Foreign Investment Screening (4)

Anna Chojnowska

Lead Knowledge Analyst, Team Lead


Tim Figures

Partner and Associate Director, EU & Global Trade and Investment


Navigating the Rise in Foreign Investment Screening (6)

Vipul Nanda

GA Offer Senior Manager - Trade and Investments

ACC – London

Rami Rafih

Managing Director & Partner


Cristián Rodríguez-Chiffelle

Senior Advisor



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As an expert in international business, foreign direct investment (FDI), and economic development, my extensive knowledge in this field allows me to provide insights into the article shared. I have a deep understanding of the various concepts and factors influencing global investments, including the use of investment screening mechanisms (ISMs) by governments to safeguard national interests.

The article, dated January 05, 2024, discusses the increasing trend of countries employing inbound investment-screening mechanisms to regulate and monitor foreign direct investments. The authors, including Anna Chojnowska, Tim Figures, Vipul Nanda, Rami Rafih, and Cristián Rodríguez-Chiffelle, highlight key developments shaping this landscape.

Key Concepts in the Article:

  1. Rise of Inbound ISMs:

    • Governments worldwide are doubling their use of inbound investment-screening mechanisms over the past decade.
    • The UK National Security and Investment Act (effective in 2022) is cited as an example, widening the circ*mstances for screening inbound investments.
  2. Drivers of Inbound ISMs:

    • Geopolitical Decoupling: Nations aim to reduce dependence on rivals in critical sectors, given that foreign direct investments now represent 40% of global GDP.
    • Technology Tipping Points: Countries strive to maintain an advantage in emerging technologies, such as advanced semiconductors.
    • COVID-19: Pandemic-driven concerns led nations to prevent strategic companies from selling to foreign owners at low prices and to safeguard critical supply chains.
    • Rising Protectionism: Protectionist tendencies extend beyond global trade to foreign direct investments.
  3. Impact on Investment Landscape:

    • Inbound ISMs reshape the foreign direct investment landscape, affecting the mix of investments. M&A activities decrease, while greenfield investments increase.
    • Changes in the semiconductor industry in Germany, Japan, and the US are cited as examples.
  4. Shift in Investor Mix:

    • Inbound ISMs influence the mix of investors, favoring economic and political allies. Investments increase among allies (Germany, Japan, UK, and US) while declining from political rivals (e.g., China).
  5. Outbound Investment Screening:

    • The article mentions a shift in focus from screening inbound investments to outbound investing, as seen in the executive order signed by US President Joe Biden. The order targets advanced computing chips, microelectronics, quantum technologies, and artificial intelligence, primarily aimed at China.
  6. Challenges and Recommendations:

    • Challenges for Governments: Policymakers need a playbook to align foreign investments with national priorities, ensure due process, and reduce uncertainty.
    • Challenges for Investors: Investors should monitor geopolitical motivations, mitigate risks by adjusting deal structures, and adapt to an evolving landscape of screening mechanisms.

In conclusion, my expertise allows me to emphasize the importance of understanding the evolving dynamics of international investments, the impact of geopolitical factors, and the role of governments and investors in navigating this complex landscape.

Navigating the Rise in Foreign Investment Screening (2024)
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