Inbound investment, also known as foreign direct investment (FDI), refers to overseas capital invested into domestic markets. It is a major form of international capital flow in the modern era. Inbound investment can stimulate economic growth, introduce advanced technologies, enhance productivity, and strengthen supply chain resilience. However, potential national security risks and loss of core technologies are major concerns. Wise investment screening policies are needed to balance openness and prudence.
Inbound investment serves as an important capital source but may also crowd out domestic firms
According to IMF’s definition, inbound investment involves foreign investors gaining considerable managerial control when investing in overseas production or operation. For developing countries like China, inbound FDI is an important way to obtain capital, technology know-how, and access to global supply chains. However, some low-end manufacturing FDI does have the risk of crowding out domestic private firms. Policymakers need to encourage more high-tech and high-value inbound investment while providing support to strengthen domestic innovation capabilities.
Inbound FDI can facilitate positive productivity spillovers but also poses technology security risks
Inbound investment enables international technology and knowledge diffusion. Foreign firms can drive localized productivity growth by demonstrating use cases of cutting-edge techniques, collaborating with domestic suppliers and clients, and nurturing professional talent. However, core and sensitive technologies like semiconductors and AI may also be transferred overseas via FDI, posing risks to national technology security. Government agencies need to work closely with businesses to enact FDI screening mechanisms to allow beneficial investments while preventing risky capital flows.
Globalization necessitates inbound FDI screening aligned with international rules
In response to growing economic statecraft and technology rivalry, major countries are expanding investment screening policies to hedge national security risks. However, unilateral screening mechanisms can also be weaponized for strategic competition, harming multilateral cooperation and global value chains. Policymakers should collaborate to establish coordinated FDI review frameworks abiding by non-discrimination principles. Information sharing and alignment of screening practices can balance openness and security in the era of limited globalization.
Inbound investment serves as an important engine for economic growth and technology progress. However, its national security risks and technology diffusion effects also call for prudent screening policies, striking a balance between openness and security. Rule-based, aligned investment review mechanisms can facilitate benign FDI flows while mitigating risks.