The Price of Security? A Network Perspective on Investment Screening Mechanisms

Abstract

This paper investigates the rise of foreign investment screening mechanisms (ISM), a new policy friction in the global economy, over the last two decades. Originally conceived as a policy to regulate the foreign control of sensitive industries for national security reasons, ISMs have proliferated across broader sectors of national economies. We formally analyze the sectoral-level choice of ISM adoption in a model that emphasizes norms within networks of international relations as the driving force behind the diffusion of ISMs. We argue that as leading economies adopt ISMs across sectors of the economy, the cost of violating norms of economic openness decreases for the other networked economies, and ISM adoption spreads. We then empirically scrutinize the role of network effects using a unique country-sector-level panel data set on ISM adoption. Examining a broad variety of network linkages -- bilateral trade relations, membership in the EU, geographic and political distances, and linkages to the world's major economic powers -- we conclude that network effects explain ISM adoption, and that economic linkages are more important than political linkages.