Analysis: Perspectives on the Economic Effects of FDI and Investment Screening

Foreign direct investment (FDI) is a key driver of economic growth and welfare. This analysis discusses how security and economic concerns should be balanced when deciding on a foreign direct investment screening mechanism.

This paper discusses the economic effects of foreign direct investments. Why is this interesting?

Sweden is about to introduce a screening mechanism of foreign direct investments. The proposal for legislation follows a Swedish governmental inquiry that has suggested a screening mechanism that focuses on essential security aspects and many countries’ formal decisions to stop or condition investments.

At the same time, it is well known that foreign direct investment is a key driver of economic growth and welfare. It promotes competition, technological progress and contributes to employment. A balance between security and economic concerns is therefore of great national value. We therefore believe that it is important for decision makers to, in tandem with security concerns, consider economic effects. Is eliminating a risk to public security worth the societal economic price of stopping or conditioning an investment?

Which are the most important conclusions?

Our review clearly shows that there is evidence for claims that foreign direct investments in many cases contributes to economic development, promotes competition and employment, while it at the same time is difficult to identify the effects from a specific investment.

The reason why the impact of a specific investment is difficult to identify is that many effects come in the form of spillovers. Spillovers do not follow payment flows and therefore leaves no paper trace which makes them difficult to measure.

We also note that it is important to limit the number of screened sectors since you want to reduce uncertainty as much as possible. Predictability is highly valued among investors.

What challenges and difficulties did you encounter when doing the analysis?

As of today, there is no consensus on how to view the potential trade-offs between security and economic concerns. Which factors that attract investments to a nation are well researched. What is less researched, however, is the potential effects of an investment screening mechanism on the amount and quality of investments received by a country. With this as a background we used existing research on what attracts investments and linked it to the investment screening mechanism. By doing this, we hope to contribute to a more nuanced view on foreign direct investments in light of an investment screening mechanism.

What do you wish to accomplish with this paper?

We show how difficult it is to measure effects of non-existing investments, but we also point out the importance of making such an analysis to the extent possible. Only then is it possible to weigh different societal interests against each other. It is our hope that the paper gives decision makers tools to take more informed decisions.