The Erosion of a Liberal Economic Norm : Network Effects in the Adoption of Foreign Investment Screening

Foreign investment screening mechanisms (ISMs) which allow governments to review and restrict foreign acquisitions on national security grounds, have proliferated across an increasing range of economic sectors over the past two decades. We develop a formal model in which the political cost of adopting an ISM in a given sector declines as more countries in a state's network of international relations adopt screening in that same sector, generating diffusion through the erosion of a liberal economic norm. Using a novel country-sector-year panel covering ISM adoption across 42 OECD and EU countries from 2007 to 2021, we find strong support for the norm-erosion mechanism: a country's probability of adopting an ISM in a given sector rises substantially as adoption in that sector increases in the network. This pattern is sectorspecific and broad-based rather than driven by a small number of powerful states. While trade, political, and geographic proximity each predict adoption when considered individually, none displaces a simple equal-weighted measure of foreign adoption once compared directly, nor do bilateral networks recovered through penalized regressions. We interpret this as evidence that ISM diffusion reflects a broad, sector-specific international norm rather than any single channel of bilateral influence.