Global Money, Local Rules: The Investor’s Dilemma

Authors: Ashley Lenihan and Daniela Muhaj

Global investment is being reshaped by rising powers, geopolitical tensions, and the rapid expansion of new rules for cross-border investors. This realignment presents investors with a new reality: the need to navigate a landscape fraught with regulatory hurdles, supply chain vulnerabilities, and geopolitical tensions while uncovering opportunities in an era of heightened economic statecraft — the strategic use of economic tools to advance foreign policy objectives.

The New Reality of Global Investment

Over the past decade alone, the number of countries with investment screening mechanisms (ISMs) focused on national security has risen dramatically – from 14 in 2013 to 41 by 2023 –  and more are expected in the years ahead. In many countries, these regimes also target more types of foreign investment, and more areas of the economy, than investors have long been used to.

Figure 1. The Global Rise in Comprehensive Investment Screening Regimes, 1995-2023, per UNCTAD 2024

For example, where countries do not have cross-sectoral ISMs covering the whole economy, the Organisation for Economic Co-operation and Development (OECD) has reported a rise in coverage of critical infrastructure, emerging tech, raw materials, and energy, in addition to more traditional sectors of concern like defense or sensitive real estate. And while many regimes historically focused on the ability to review, mitigate, or block brownfield foreign acquisitions of control, others go farther or have widened their understanding of what constitutes ‘control.’ The Australian and Canadian regimes, for example, cover greenfield investments, and the U.K.’ new regime covers intangible assets and investments of domestic origin. 

This new emphasis on national security in the investment sector is the result of fundamental shifts in global affairs – rising geopolitical competition, revolutionary technology that has expanded a variety of national security concerns across the investment landscape, and a greater willingness by states to use economic tools to achieve political outcomes within that context. The International Monetary Fund (IMF) highlighted this trend in a recent report that shows foreign direct investment (FDI) is increasingly directed toward geopolitical allies, rather than merely neighboring countries. 

It is important to understand that this trend is about strategic positioning rather than protectionism. As some states leverage foreign investment as a tool of economic statecraft – enhancing their power by securing key industries and technologies through acquisition abroad – other states are understandably focused on balancing this by improving their ability to review, mitigate, and block foreign investment in strategic and sensitive entities and assets whose acquisition could pose a risk to national security. These actions aim to manage these risks without destabilizing broader economic and political relationships.

It is also important to remember that investment screening regimes allow states to continue to welcome the majority of foreign investment into their countries, fostering otherwise open investment environments so important to continued economic growth. While there is a wide degree of heterogeneity in these ISMs and their use, the rate of states formally vetoing an investment are  relatively rare (remaining roughly below 1% for most regimes according to UN Trade and Development). Though mitigation rates vary more by jurisdiction, they also remain relatively low in comparison to the overall level of FDI in most countries. The caseload of investments being reviewed in many countries does appear to be climbing dramatically, however, with some investments subject to reviews in multiple jurisdictions. For example, in 2013 the U.S. Committee on Foreign Investments in the United States (CFIUS) reviewed 97 notices and mitigated nine investments, and in 2023 reviewed 233 and mitigated 35 investments.

For investors, the challenge lies in navigating this dynamic and uncertain landscape. Regulatory scrutiny is compounded by fragile supply chains exposed by COVID-19, trade disputes, and natural disasters. Success requires a strategic shift: diversifying investments, understanding state motivations, and adapting to intensified economic statecraft. Those who master these dynamics can turn risks into opportunities in an increasingly complex and contested global market.

Strategic Considerations for Global Investors 

While the challenges are real, they are not insurmountable. For agile and informed investors, the current upheaval presents unique opportunities to align strategies with the shifting landscape. Consider these five actionable approaches:

• Portfolio Diversification: ​Employ adaptable diversification strategies across regions and industries to avoid over-exposure to localized geopolitical risks. Remember that sectors and countries of concern are not static, and states’ understanding of national security will continue to evolve. Balancing short-term volatility with long-term returns can contribute to a more resilient portfolio, which would be better equipped to navigate evolving geopolitical landscapes and market disruptions.
• Scenario Planning: Analyze historical comparable cases to predict the likelihood of outright vetoes versus conditional approval with mitigation agreements. Look at the annual reports of the ISMs in different countries to get a better idea of the likely timeline for their review processes. Proactive planning ensures readiness for diverse outcomes and enables informed decision-making in uncertain environments​.
• Regulatory Intelligence: Establish robust monitoring systems for real-time updates on policy changes. Insights into national security-driven measures, such as the U.S. outbound investment program or the E.U.’s anti-subsidy regulations, empower investors to navigate complexities and identify emerging opportunities​.
• Collaboration and Advocacy: Build relationships with local partners, regulators, and industry stakeholders to gain deeper insights into market dynamics and compliance expectations. In many countries, non-notified transactions impacting national security can later be unwound or declared void by some governments. Engaging early with authorities allows investors to address potential roadblocks preemptively and align with evolving regulatory norms​.
• Supply Chain Resilience: As supply chains become battlegrounds for economic power and national resilience and security, focus on diversifying sourcing networks, developing alternative technologies and components, and investing in technologies that enhance traceability and compliance. This approach mitigates disruptions stemming from geopolitical tensions, trade disputes, or natural disasters, ensuring operational stability in volatile markets​. Examples of this approach include Tesla’s alternative chip redesigns during the COVID-era and recent efforts by companies like Taiwan Semiconductor Manufacturing Company Limited (TSMC) to diversify their semiconductor manufacturing footprint.

By embracing these strategies, investors can more effectively manage risks, capitalize on emerging opportunities, and thrive in an increasingly complex global market.

Thriving Amidst Geopolitical Shifts 

The surge in national security-driven investment policies marks a decisive shift in the global economic landscape where power dynamics and national security concerns may increasingly dictate the flow of capital.

For investors, this is not a time for retreat but recalibration. The ability to anticipate government interventions, diversify risk, and foster strategic alliances will determine success. This is a market where adaptability matters—where those who decode the geopolitical chessboard and embrace regulatory complexity will uncover opportunities others overlook.

The message is simple: thrive by understanding the rules of this new game, or risk being left behind.

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1.  The authors thank Vasudha Jalan, a former Baratta Center Student Fellow, for her valuable research support.
2. https://education.cfr.org/learn/reading/what-economic-statecraft#:~:text=Economic%20statecraft%20describes%20the%20various,advance%20their%20foreign%20policy%20priorities.
3.  https://unctad.org/system/files/official-document/wir2024_en.pdf, p. 57.
4. https://web-archive.oecd.org/temp/2024-06-07/674847-OECD-natsec-conference-2024-background-note.pdf
5.  Lenihan, Ashley Thomas and Shambaugh, George. ‘Balancing, Bandwagoning, and other Classic Geo-Economic Behaviors,’ Presented at the International Studies Association annual conference, San Francisco, April 4, 2024.
6.  https://www.elibrary.imf.org/display/book/9798400224119/CH004.xml
7.  Lenihan, Ashley Thomas. Balancing Power without Weapons: State Intervention into Cross-Border Mergers and Acquisitions. Cambridge: Cambridge University Press, 2018.
8.  Lenihan, Ashley Thomas. Balancing Power without Weapons: State Intervention into Cross-Border Mergers and Acquisitions. Cambridge: Cambridge University Press, 2018 
9.  https://unctad.org/system/files/official-document/wir2024_en.pdf, p. 57.
10. https://web-archive.oecd.org/temp/2024-06-07/674847-OECD-natsec-conference-2024-background-note.pdf, P. 12
11. https://home.treasury.gov/system/files/206/Covered-Transactions-Withdrawals-Presidential-Decisions-2008-2023.pdf