How effective is foreign investment screening in reducing geopolitical risk?

Rising geopolitical tensions, hybrid threats and the strategic importance of critical infrastructure as well as emerging technologies have heightened the risks associated with cross-border M&A investments. In recent years, governments have therefore expanded foreign investment screening mechanisms as a comparatively moderate alternative to stricter protectionist policies. But are these mechanisms effective in reducing geopolitical risks? And what are the (unintended) consequences? TRR 266 researcher Gerrit von Zedlitz investigates these questions in a recent publication in “Wirtschaftsdienst”. For his contribution, he has been awarded the Stiftungspreis der Stiftung Wissenschaftsforum Wirtschaftsprüfung und Recht 2025.

 

Global capital markets have become increasingly intertwined with geopolitical considerations. Particularly, authoritarian states are increasingly using foreign acquisitions and investments not only for economic purposes but also to pursue broader geopolitical and strategic objectives. Such investments can target critical infrastructure, key technologies, or other assets considered essential to national interests. At the same time, Western democracies face the challenge of balancing national security interests with the fundamental principle of free capital movement that underpins open economies. In response, many governments have expanded foreign investment screening mechanisms to safeguard their geopolitical interests. Despite the growing policy importance of investment screening, academic knowledge on the subject remains surprisingly limited. By synthesizing the existing evidence, this study identifies several important insights about how investment screening affects market participants and capital markets, and thus a stronger foundation for policy discussions and future research.

How does foreign investment screening affect market behavior?

One of the study’s most important findings is that investment screening can affect market behavior even when governments do not formally intervene. The mere possibility that a transaction could be reviewed or blocked may discourage some foreign investors from proceeding with potential transactions. As a result, screening mechanisms can influence investment decisions long before any official action is taken. This finding highlights the broader influence of regulatory frameworks. Their impact extends beyond individual cases and shapes expectations throughout the market.

What are the economic consequences of foreign investment screening?

The study also raises important questions about the economic consequences of screening mechanisms. Existing evidence does not yet provide a clear answer as to how effectively these measures target genuine security risks or whether they inadvertently discourage economically beneficial transactions.

Furthermore, the introduction of screening mechanisms is often associated with negative market reactions. These reactions may reflect increased investor uncertainty, fears of protectionist intervention, and concerns that government involvement could weaken market correction mechanisms. Such findings suggest that the economic costs of screening deserve careful consideration alongside potential security gains.

Impact for Stakeholders

Given these potential effects on markets and investment decisions, the findings are relevant for several stakeholder groups.

  • Researchers benefit from a systematic synthesis of previously fragmented literature and a clearer identification of research gaps.
  • Regulators and policymakers gain a more evidence-based foundation for balancing national security concerns against the economic costs of restricting foreign investment.
  • Businesses and investors can better understand how screening mechanisms may influence market uncertainty, transaction risks, and capital allocation decisions.
  • Society benefits from a more informed discussion about the trade-offs involved in protecting critical infrastructure and strategic technologies while maintaining open and competitive economies.

Areas of future research

This study suggests that investment screening increasingly influences economic decision-making. However, policymakers continue to rely on relatively limited evidence about its actual effects. To ensure a more informed decision-making process, further research is necessary. The available evidence highlights two important areas of research:

  • Missing potential benefits: While much of the existing literature focuses on the costs of foreign investment screening, considerably less attention has been devoted to its potential benefits. There is limited empirical evidence regarding whether screening mechanisms effectively reduce geopolitical vulnerabilities or strengthen national security outcomes.
  • Evidence on distributional effects: The study also identifies a lack of research on distributional effects. For example, it remains unclear whether the costs associated with investment restrictions are ultimately borne by investors, firms, employees, or other stakeholders. These unanswered questions point to important priorities for future research.

Addressing these questions will be essential for evaluating whether foreign investment screening can successfully balance economic openness with growing geopolitical and security concerns.

 

To cite this blog:

Von Zedlitz, G. (2026). How effective is foreign investment screening in reducing geopolitical risk? TRR 266 Accounting for Transparency Blog. https://www.accounting-for-transparency.de/foreign-investment-screening-and-geopolitical-risk/

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