Who’s Afraid of Foreign Investment Screening?

In recent years, most advanced economies have adopted or tightened their existing foreign investment screening mechanisms (ISMs), which empower national authorities to restrict foreign takeovers in strategic sectors. In 2019, the EU adopted the first regional investment screening framework. Against this backdrop, we document the main features of FDI screening regimes in the EU and other major advanced economies. We fill in a gap in research literature by developing a composite index measuring the restrictiveness of national ISMs, which is suitable for cross-country comparisons. We document the heterogeneity of national designs and the lack of legislative convergence within the EU. At a time of increased geopolitical tensions, we analyze how country-specific macroeconomic characteristics (such as China exposure and technological specialization) and geopolitical factors shape the restrictiveness of national ISMs. We analyze how investment screening regimes could reconcile openness to growth-fostering inward FDI with enhanced scrutiny of potentially hostile foreign takeovers. We demonstrate how ISMs can coexist alongside otherwise liberal investment regimes. We also investigate the impact of ISMs on FDI inflows. We build a comprehensive database mapping the outcome of screening decisions and provide a tentative assessment of the impact of screening on transactions.