Countries Should Reduce FDI-Related Risks Stemming From Screening Regimes, Expert Says

Countries need to revise their foreign direct investment screening environments, which are contributing to a global drop in FDI, said Simon Evenett, a trade and economics professor at the University of St. Gallen. Evenett, who co-wrote a recent report arguing for a policy reset around FDI (see 2106030034), said a rise in screening tools is chilling investments and creating uncertainty over a range of industries.

Investment screening regimes “have mushroomed in the last five years,” Evenett told the Center for Strategic and International Studies June 9. “It’s a real source of concern for foreign direct investment,” he said, adding that screening mechanisms “ostensibly were put together to target some emerging markets” but are “actually having a broader reach.”

The U.S. last year expanded the jurisdiction of its Committee on Foreign Investment in the U.S. to cover emerging and critical technologies (see 2009140041), and several other countries, including the United Kingdom (see 2006080029) and Japan, have recently sought to bolster their screening tools.

While Evenett said “there’s a strong sense in the U.S.” that CFIUS “has been implemented relatively responsibly,” that may not be the case among other countries’ regimes. He said the U.K.’s new screening mechanism is “a little bit more vague and deliberately” set up to maximize investment discretion. “It’s more loosey-goosey,” he said. “I think this is where we really have to get these FDI screening mechanisms done right and targeted.”

If not, countries could risk causing uncertainty for global investors looking to do business in their country, Evenett said. “I think we have to worry about the impact of the design of these regimes on investor expectations and forecasts,” he said, especially as more countries turn to screening tools.

Mary Lovely, a China and economics expert at the Peterson Institute for International Economics, called investment screening measures involving service industries “very worrying.” But she said countries shouldn’t necessarily look to counteract those tools, which could give some business environments unfair advantages. “I would ask whether it's bad that countries have implemented fewer policy interventions conducive to FDI,” she said. “Shouldn't we be seeking a level playing field for domestic and foreign investors?”

She also said a rise in screening tools could further lead to U.S.-China decoupling. CFIUS has been particularly focused on reviewing investment transactions involving China, some stemming from years-old deals (see 2101290021, 2005290027 and 2010270050).

“Should we call it decoupling? I'm not sure. If the U.S. and China persist in this back-and-forth with restrictions, it could very well be decoupling,” Lovely said. Although the “CFIUS legislation was responsibly constrained, it's not clear how far other types of measures will go.”