We are in a world of increasing geopolitical tensions and protectionism. This has led to a trend in the introduction of Foreign Direct Investment (FDI) screening mechanisms. Protectionism is not new in trade and investment. Governments have felt compelled to intervene in the economy, specially, in times of crisis, war or pandemics. Even if there have been periods in which governments have tried to retreat from intervening and allow the markets to function freely, as during the 1990s, it is almost inevitable that they find a reason to embrace policies oriented to protect their domestic economies. Geo-political tensions and the COVID-19 pandemic has prompted governments to try to align business interests with national strategic ones and industrial policy. In a synchronised fashion governments have been adopting or reinforcing rules to control foreign investment. These rules are often broad in scope, enforced by governmental bodies which are equipped with extensive powers, sometimes developed through procedures that are unclear, resulting in decisions that are largely discretionary. These rules, despite being effective in deterring investments from foreign entities/countries failed to offer the required levels of transparency, predictability and certainty that should inform these types of interventions.
A constructive dialogue between policy makers and companies involved in FDI is required to reconcile the recurring issues in some jurisdictions or the teething ones in some others. There are risks of using national security to accomplish a wider number of goals, especially when done in a non-transparent manner. Among them, growing worries that politicians, who are more prone to regulatory capture, will be involved with the national security (and in some countries the merger control assessment) process risking the independence of the relevant agencies and at times unjustifiably making enforcement less credible, less predictable, and less easy to administer.
Additionally, the trend toward protectionism can stifle innovation and economic dynamism. By creating barriers to foreign investment, governments risk reducing competition, which can lead to inefficiencies and complacency among domestic firms. Regulatory overreach can discourage international businesses from entering key markets, leading to reduced capital flows and slowing economic growth. Moreover, inconsistent application of FDI rules across different jurisdictions creates an uneven playing field, making it harder for companies to navigate regulatory frameworks effectively. If protectionism continues unchecked, it may ultimately erode trust in regulatory institutions, making them tools of political influence rather than independent enforcers of fair and efficient markets.
