Choosing where to invest and seek funding are among the most fundamental decisions business leaders make. Recent geopolitical shifts are complicating the analysis, however. Across the globe, governments are increasingly regulating investment flows into and out of their territories and industries. While countries have long applied constraints on inbound foreign direct investment (FDI) to advance their economic and national security interests, the use of investment laws has increased significantly and governments are now starting to regulate outbound investment as well. Earlier this year, the United States implemented controls on how US citizens can invest in other countries, and the European Union has announced plans to develop similar rules.
Understanding the scope of FDI restrictions can help prevent surprises. For example, an investment fund with foreign sovereign-wealth-fund involvement could find its options constrained when it seeks to invest in infrastructure. A European company looking to acquire another European business might see US regulators block the deal if the target has bulk personal data or assets the US government considers sensitive.
To navigate this complex landscape, business leaders need an approach for assessing investments in areas that may have unclear or conflicting rules or may be subject to new restrictions as geopolitical trends shift. Mapping how evolving investment rules might affect competitive dynamics can help leaders avoid strategic mistakes—as well as identify new business opportunities.
Understanding the investment control landscape
As geopolitical competition heats up, investment controls have emerged as a prominent tool—alongside export controls, tariffs, industrial incentives, and other trade-related measures—that governments are using to advance economic prosperity and protect national security. Through investment restrictions, governments can prevent foreign companies from gaining control of sensitive industries or infrastructure, protect access to critical resources, and preserve strategic advantage in select sectors. Conversely, they may relax investment rules to create incentives for multinational corporations and investment institutions to inject funds into their economies.
Investment controls vary significantly from country to country but typically focus on sectors that affect national or economic security, such as semiconductors, quantum and AI technologies, energy technologies, biotechnology, and defense and dual-use items. They also often restrict investments in critical infrastructure, bulk personal data, and real estate located near sensitive government facilities.
Investment controls differ from capital controls, through which governments regulate the flow of money in and out of their economies to protect their financial stability. However, capital controls can be imposed in retaliation for other countries’ trade and investment restrictions and can include foreign exchange controls, limits on capital outflows, and taxes and levies on capital outflows.
The world’s largest economies have all established investment control regimes, although the nature of these restrictions varies depending on the level of state involvement in the economy. The Committee on Foreign Investment in the United States (CFIUS), established in 1975, expanded significantly in the 2000s in the wake of the 9/11 attacks, then again after 2018 as geopolitical tensions (especially with China and Russia) increased. In 2020, in response to growing geopolitical concerns, the European Union approved FDI screening regulations that mirrored CFIUS’s regime, and United States allies including Australia, Japan, and the United Kingdom followed suit in subsequent years.
In countries that have traditionally exerted more influence over the companies operating within their borders, investment controls evolved differently. In 2019, as trade tensions with the United States grew, the Chinese government enacted the Foreign Investment Law in 2019 to provide more clarity for foreign investors about requirements for investing in China. In particular, between 2002 and 2012, the Chinese government’s policies requiring technology transfers to domestic firms in order to operate in Chinese markets reportedly increased by 600 percent.
Many other jurisdictions impose their own versions of investment controls. Brazil, for example, restricts foreign investment in agricultural real estate. India requires government preapproval of FDI exceeding 49 percent of equity in private sector banking. Russia established a commission to review foreign investments in 2008, which it expanded in 2023 following widespread sanctions and economic decoupling from the global economy in the wake of its invasion of Ukraine. Taiwan has established a list of sectors in which foreign investors are prohibited or restricted and a list of businesses in which Chinese organizations are permitted to invest.
In addition to the expansion of investment controls to new geographies, the scope of the rules is growing. Earlier this year, the European Union expanded screening requirements for investments in media services, critical raw materials, and transport infrastructure. The United States, meanwhile, announced to expand investment controls to healthcare, raw materials, and agriculture, with a “fast track” process for investments from allied countries. Additionally, the outbound investment controls that the United States rolled out this year not only restrict funding but also aim to prevent the outbound flow of managerial and technical expertise in strategically important sectors. The US policy aims to prevent this funding and knowledge from accelerating the development of sensitive technologies by countries the United States perceives as adversaries.
Three trends in particular are reshaping the global investment screening landscape:
- Tightening and increasingly complex restrictions. Governments are placing heightened scrutiny on FDI and requiring companies to mitigate national security risks as a condition for approval. In the United States, for example, the share of investment transactions that required mitigation increased by 75 percent between 2020 and 2023 (exhibit). Such mitigation typically involves companies meeting specific compliance obligations and may mean extensive government oversight of the business after a deal’s completion. In the European Union, the number of transactions approved with conditions or mitigation measures also increased, albeit slightly, from 9 percent in 2021 to 10 percent in 2023. However, specific trends are less visible because mitigation measures are imposed by individual EU member states.
- Growing extraterritorial reach of controls. Investment controls can apply beyond the jurisdiction of the government imposing them. US regulations can affect any company around the world seeking financing from US-based partners. For example, the outbound investment restrictions now apply to activities of American companies and citizens outside the United States when those activities concern investments in semiconductors, quantum computing, certain AI technologies, or if they have specified links to “countries of concern.” The United States has exercised extraterritorial jurisdiction on FDI controls even before the establishment of the outbound regime. In 2016, for example, CFIUS blocked a German company’s acquisition of another German company because the target had a US subsidiary that manufactured equipment with military applications, and the acquirer’s ultimate owner was a Chinese investment fund. Four years later, the agency prevented a US robotics manufacturer from entering into a joint venture with a Chinese company, even though the venture would not have involved US assets or operations. CFIUS’s rationale was that the deal would have licensed “critical technology” to the Chinese joint venture.
- Heightened risks associated with sources of capital. Governments are increasingly scrutinizing investment sources. For example, in 2024, Spain blocked a Hungarian consortium’s plans to acquire a Spanish high-speed-train manufacturer because the deal was deemed to pose “insurmountable risks for national security and public order.” Similarly, CFIUS’s intervention in the German merger above was deemed high risk because of the involvement of a Chinese fund established with government support to promote China’s semiconductor industry. In the past year, CFIUS also announced an increased focus on the nationality of limited partners in private equity funds—including passive investors with contributions of less than 5 percent.
How to mitigate geopolitical risks in investments
Decision-makers planning investments in foreign jurisdictions or with foreign funding should consider five actions to minimize risks and maximize opportunities. By integrating these considerations into their strategic plans, investors can better navigate the complex regulatory landscape and make informed decisions that align with both their business objectives and compliance obligations.
Track geopolitical shifts that may affect investment rules
Integrating investment control scenarios into business cases—both from a funding and market perspective—will help business leaders weigh their strategic options. In the same way that geopolitical tensions are reorienting global trade corridors, with implications for companies’ go-to-market and supply chain strategies, investment controls are affecting where companies consider investing, where they may wish to focus their fundraising efforts, and what markets they may want to exit. Take the case of a global telecommunications company with a large equity stake held by Middle Eastern investors. To continue investing in a region such as the European Union, for example, the company’s leaders should closely track European foreign policy toward the Middle East, as its direction would affect whether the company should deprioritize EU investments or try to shift its shareholder composition. The case of the Spanish train manufacturer likewise attests to the impact that shifting EU policy toward Russia can have on business plans.
Focus on strategic risk alongside regulatory compliance
The speed of regulatory change and the growing extraterritorial reach of investment restrictions may require companies to incorporate a geopolitical lens on their long-term strategic plans. Rather than taking a compliance view of whether an investment is permitted, decision-makers should consider potential geo-economic policy changes that could affect an investment’s business case. Investment decisions made today may have unexpected ripple effects on the company’s future ability to invest in certain sectors or countries. The current investment portfolio, partnerships and affiliations, and geographical span may also make it more challenging to obtain regulatory approvals for future investments in strategic industries. Business leaders should therefore understand potential outcomes in various investment-control scenarios and align on a risk framework for evaluating investments.
Assess your investments’ regulatory risk exposure
In selecting markets for investment, decision-makers should understand the risks that investment regulations may present. Two main factors affect investments’ regulatory risk. First, where does the company’s funding originate? The presence of shareholders or limited partners with government affiliations (such as sovereign wealth funds), for example, could limit the company’s options, especially if those organizations have representation on the board of directors. Leaders may find that companies in their portfolios have “secret beneficial owners” that hail from jurisdictions and can trigger investment restrictions. Foreign governments could leverage anonymous investment mechanisms as part of their strategies to expand influence.
Second, where are the assets or investments currently deployed (by geography, customer, and industry)? Operations in high-risk jurisdictions, ties to foreign military or defense sector companies, and links to a country’s strategic projects (such as China’s Belt and Road Initiative) can all increase an investment’s risk profile.
For example, CFIUS pays particularly close attention to foreign investments in sensitive US companies when the same investors also hold stakes in Chinese companies. Under the America First Investment Policy, the United States has advised foreign investors to avoid partnering with countries it considers adversaries if the investors wish to qualify for the fast-track process, which is expected to streamline approvals for investors from trusted allies in critical US industries.
Understand the implications of capital controls
Governments can limit investors’ ability to sell their investments on geopolitical or economic grounds. For example, a company might wish to divest a high-risk asset and allocate those funds to a US opportunity but be prevented from doing so by restrictions on capital outflows in the country they seek to divest from. It’s important to remember that capital controls can change suddenly as geopolitical developments evolve. In 2022, for example, the Russian government imposed limits on the transfer of dividends and profits abroad, effectively restricting foreign investors’ ability to repatriate profits from their investments in Russia. While Russia and other countries have tightened capital controls, some countries— Argentina, China, and India among them—have been easing such restrictions.
Understanding the evolving investment controls landscape can enable companies and institutional investors to reduce risk while potentially identifying innovative investment plays. Incorporating geopolitical-risk analysis early in decision-making can help companies thrive in today’s global markets.
