Regulating inbound foreign direct investment in a world of hegemonic rivalry: the evolution and diffusion of US policy

Abstract

AbstractWe employ insights from the international relations literature to offer a novel perspective on the regulation of inbound foreign direct investment (FDI). We argue that in a world of hegemonic rivalry, the incumbent, when it perceives a threat, tends to employ both internal and external policy mechanisms to maintain the balance of power. Specifically, in response to China’s rise, the US expanded its internal national security review regulations, moving from a primary focus on FDI by state-owned enterprises (SOEs) to including Chinese investments in a broad set of strategic industries, regardless of ownership. External mechanisms include the diffusion of those internal regulations to allied countries, and we focus on a specific Alliance, the Five Eye (FVEY) intelligence alliance. Empirically, we combine natural language processing of keywords with close reading of selected documents to analyze FDI regulations in the US and FVEY allies. The results suggest that the US is an early adopter of both SOE and broader FDI regulations targeting strategic sectors for national security considerations. While SOE regulations exhibit relatively limited evidence of convergence, we find a more significant and recent convergence between the US and its alliance partners on the national security reviews of FDI in strategic sectors.