Geoeconomics, Foreign Investment Screening & Trust in IR Theory

Investment screening mechanisms (“ISMs”) have been in a state of flux, both in practice and design, with a dramatic recent increase in new regulatory frameworks and significant amendments to existing screening systems observed globally. Regulatory approaches pertaining to the screening and review of foreign investments is an issue that states are increasingly coming to terms with, while several are reconsidering their incumbent stance towards who they partner with and what constitutes their security interests. Such shift in policymaking has been directly influenced by an increased perception that foreign investment no longer follows a strictly market-based logic but may also be utilised for geopolitical ends. Increased allocation of state resources towards developing better equipped institutional regulatory defences against geoeconomic threats should therefore be unsurprising. A greatly consequential, if not decisive, underlying factor affecting both the expansion and usage of ISMs has been the level of trust between states. Trust, or the lack of it, has arguably been at the heart of the recent cluster of state activity related to ISMs. Accepting foreign investment proposals, especially in critical sectors and involving state-controlled entities, naturally augments the host state’s potential vulnerability and requires a greater level of trust to be afforded to both, the investor and its governing home state. ISMs are therefore a symptom of mistrust, in their legislative form, and a test of trust, in their individual decisions. While a recent global rise in geoeconomic activity had already contributed to a perception of foreign inward capital as a security threat, the COVID-19 pandemic has greatly accelerated this mistrust to near-historical lows and heightened the perceived need for ISMs. While excessive trust may unwittingly expose states to an otherwise unwanted level of risk, excessive distrust too is undesirable and may lead to high opportunity costs by unduly forgoing economic and development gains. Despite being elusive empirically, as a distinct concept in international relations theory, trust is multidimensional in its abstract form and defies being easily captured within a singular definition. Nonetheless, taking geoeconomics as an analytical framework and Chinese outward foreign investment as a case-study, this contribution seeks to integrate ISMs, a key policy manifestation of geoeconomics, with trust in contemporary IR theory. Using foreign investment relations as focal point, it first seeks to explain the geoeconomic logic behind ISMs and subsequently, poses two key questions: First, within the prominent strands of thought that provide alternative explanations of trust and distrust in international relations theory (i.e. rational choice, sociological/constructivist and psychological/behavioural), how can we define trust and its role in a ‘geoeconomic foreign investment policy’ for the purpose of ISMs and how may such definitions overlap or vary across host states? Second, what are the appropriate tools that may be adopted to either build trust itself, or at the very least, to help mitigate the various forms of security threats that inward foreign investment may entail and optimally allow for investment flows to safely continue despite the general presence of mistrust?