National Security and Foreign Direct Investment

The Capstone team was tasked with examining a set of sectors in foreign countries’ that are deemed critical to national security and defining the measures these countries use to restrict foreign direct investment (FDI). A number of countries, including the United States, either have or may be developing a regulatory regime to analyze and deal with national security issues that may arise from foreign direct investment activities. Treasury/OIA wanted to better understand which countries have or may be developing such a regulatory regime, and what regulation is in development. The team analyzed the potential impacts--either negative or positive--on the protection of that country’s national security, FDI into that county, or other measures of economic health as a result of the regulatory regime.

The team’s research revealed important distinctions by country. Russian law for example designates 44 sectors as "strategic" and subject to government scrutiny. Indonesia operates what is known as a 'negative investment list' that outlines sectors that are either completely closed or partially closed to foreign investment. Within Israel individual executive agencies regulate legal restrictions on foreign investments in several sectors. In India the government periodically releases press notes changing or updating their policies restricting FDI on national security grounds. The team also looked into how the Ministry of Commerce in China reviewed incoming FDI and the measures and standards MOFCOM used to determine whether certain FDI posed concerns for national security.

From their research, the team developed an evolving matrix dataset and a corresponding set of case studies to address these questions developed in collaboration with the Treasury Department.