The writer is the head of the investment division of the OECD. 

The international investment landscape has transformed significantly, with security becoming focal to policymakers around the globe. 

The integration of foreign direct investment (FDI) into national economies has long been a cornerstone of economic prosperity and development. Countries across the world have opened their markets to FDI to spur growth and societal wellbeing. However, recent years have marked a pivot as geopolitical and geo-economic shifts have prompted a reassessment of the security risks associated with certain international investments. 

This recalibration has led to the implementation and modernisation of investment review mechanisms, reflective of a broader spectrum of security concerns, which are influenced by the diversification of investing countries, the strategic intents of state-guided investments and transformative technological advancements.

Governments have long been cognisant of the potential security risks posed by foreign investment, employing a variety of mechanisms to mitigate them. However, the recent trend is a pronounced shift towards investment screening — a process that scrutinises individual transactions against predefined criteria to assess and manage potential security risks. 

Crises have shaped the developments in this policy area to varying degrees. While the global financial crisis of 2008/09 had little discernible immediate impact, the Covid-19 pandemic and, to a lesser extent, Russia’s invasion of Ukraine have left a visible mark on policy making in 2020 and 2022.

The reasons why policy responses have varied in the face of the deep economic disruptions caused by these crises have not been fully assessed. 

Unlike the 2008/09 crisis, when many countries chose to open further to foreign capital, the pandemic has prompted governments to tighten their scrutiny of FDI to align with the new geopolitical order characterised by the US–China dualism. 

The relatively limited policy response in light of the war in Ukraine is likely because policies had been newly strengthened after the Covid-19 crisis, and sectors associated with military conflict were already covered in most countries.

A notable evolution in investment policies related to national security is the diversification and broadening of their scope of application. While previous policies were typically sector-specific or limited to a few sectors, a greater share of economies now operate cross- or multi-sectoral investment screening mechanisms. Multi-sectoral investment screening regimes also encompass a wider array of industries deemed to be sensitive or critical to national security. This expansion reflects the changes in industries and sectors that are sensitive to foreign ownership, moving beyond traditional sectors such as defence to include advanced technologies and critical infrastructure. 

Critical and emerging technologies (CETs) and the resilience of supply chains are areas that have garnered increased attention in the wake of recent global crises. The inclusion of CETs under the umbrella of investment screening mechanisms underscores the importance of these sectors to national security. Similarly, the focus on supply chain resilience, intensified by the Covid-19 pandemic, has led to an expanded scope of review mechanisms to include industries critical to the supply of essential goods and services.

Despite a progressive convergence in views on the merits of investment-screening mechanisms, at least in advanced economies, the global policy landscape remains heterogeneous. This diversity in approaches and mechanisms reflects variances in risk perception, policy priorities and economic contexts among different jurisdictions. Yet, there is an emerging consensus on the need for international cooperation and dialogue to harmonise approaches, share best practices and ensure that investment policies both safeguard national security and promote a stable, open investment environment.

Frequent reforms and adjustments of screening mechanisms – beyond their simple expansion – testify of sustained efforts to incorporate good policy practices in the administration of their investment screening regimes. Detailed provisions, such as assessment criteria, procedural rules and responsibilities are adopted, leading to a higher degree of regulatory clarity and predictability. Annual reporting has become more systematic and extensive — both in terms of the number of reporting countries and the depth of information made available, thereby enhancing transparency and accountability. Data on implementation also reveals that  actual interventions in transactions remain relatively rare.

Good policy practices are crucial to ensure that investment screening regimes remain effective tools to address legitimate security concerns without obstructing investment flows. The international investment policy community has been guided in this endeavour by the Guidelines for Recipient Country Investment Policies relating to National Security, a recommendation by the OECD Council that enshrines principles for the design of security-based investment policies. 

The guidelines provide generally that governments should be guided by the principles of non-discrimination, transparency, predictability, proportionality and accountability when they consider or introduce policies or measures designed to safeguard national security.

There is a delicate balance between fostering open economic environments and addressing legitimate security concerns — a challenge that will continue to evolve in response to the dynamic interplay of global political, economic and technological forces. As the world grapples with these complexities, international standards and cooperation will undoubtedly play a critical role in shaping future policy directions, with a view towards achieving sustainable growth, security, and prosperity in an interconnected global economy.

The article first appeared in 'The FDI Report 2024'. You can download the full report at this link.  

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