U.S. national security and de-globalization

Abstract

Globalization, defined as trade- and FDI-related interdependence among nations, increases social welfare by transmitting managerial practices, advanced technologies, and labor skills across borders. Recent declines in FDI flows have prompted scholars to speculate on the nature, magnitude, and determinants of de-globalization trends. We investigate whether a U.S. national security-related foreign investment screening law, the Foreign Investment and National Security Act of 2007 (FINSA), contributes to de-globalization trends. FINSA awarded a regulator known as the Committee on Foreign Investment in the United States broad new powers to revise or reject foreign acquisitions of firms in national security-related industries. Using a difference-in-differences research design, a wide variety of model specifications, and estimation samples spanning 1990–2016, we document post-FINSA declines in foreign takeovers of U.S. firms in national security-related industries. Consistent with techno-nationalism, we document that takeover declines are concentrated among research-intensive national security firms. Placebo, event-time, and robustness tests corroborate our results. Our empirical evidence suggests that foreign investment screening laws help explain the nature, magnitude, and determinants of recent de-globalization trends and prompts multinational enterprise managers to increasingly weight the political factors behind foreign investment screening laws when assessing foreign investment strategies.