Introduction

The rise of China presents a distinctive and unprecedented challenge to the dominant position of the US (Li et al., 2022a; Rose, 2022; Slawotsky, 2021), creating the potential emergence of a “two hegemon” world (Grosse et al., 2021, p. 6). China has increasingly been seen as a hegemonic rival in the realms of economics, politics, and values, thus posing a perceived threat to the US (Allison, 2017; de Graaff et al., 2020; Hass, 2020; Walt, 2021). The international relations literature suggests that in a world of hegemonic rivalry, an incumbent hegemon,Footnote 1 when threatened, seeks to maintain the balance of power through a combination of domestic policies and external alliances (Gilpin, 1981; Ikenberry & Nexon, 2019; Waltz, 1979). Drawing on these insights, we explore the US response to the rise of China using the regulation and screening of inbound foreign direct investment (FDI) as a key area of focus (Lai, 2021; Lenihan, 2018). Adopting a hegemonic rivalry perspective, our study examines not only the domestic regulation of FDI within the US but also the use of external alliances to achieve policy convergence between the US and its allies.

In examining domestic regulations on FDI in the US, we consider the evolving nature of US concerns regarding Chinese FDI. There is evidence, including results of this study discussed below, that the scope of US concerns with respect to China has expanded from an initial focus on FDI by state-owned enterprises (SOEs) to concerns over Chinese investments in a broader set of strategic industries, regardless of ownership. Since China’s accession to the World Trade Organization in 2001, China’s Outward FDI (OFDI) began to increase, with Chinese SOEs playing a significant role (Cuervo-Cazurra et al., 2022). Although there was a general concern over the role of SOEs at the time, US FDI screening measures were largely directed at Chinese SOEs, based on national security concerns (Graham & Marchick, 2006; Rose, 2016; Sauvant, 2009). The intense and prolonged opposition in the US congress to the attempted takeover of the US oil company Unocal by the state-owned China National Offshore Oil Corporation (CNOOC) in 2005 exemplifies these concerns (Feng, 2009).

More recently, with the enactment of the Foreign Investment Risk Review Modernization Act (FIRRMA) in 2018, the US has defined its national security concerns regarding Chinese FDI in terms of strategic sectors, particularly those related to advanced dual-use technologies, regardless of ownership (Arasasingham & DiPippo, 2022; Dimitropolous, 2021; Rose, 2022; Slawotsky, 2021). Recent contentious political debates and discussions surrounding companies like Huawei and TikTok, both privately owned, underscore the shift in US concerns in strategically important sectors considered crucial to national security.

Given this transition, we consider two elements of US FDI screening: regulations focused directly on FDI by SOEs, and regulations directed at strategic sectors regardless of ownership. In both cases, we analyze the US FDI screening regulations in the context of hegemonic rivalry between the US and China, exploring how FDI screening serves as both a domestic and external strategy to balance the rise of China and to preserve or enhance relative advantages over China.

With respect to domestic policies, we investigate two research questions. If hegemonic rivalry is the primary driver behind US regulations on foreign SOE investments, we would expect that the US, in comparison to similar countries (defined below), would be an early adopter of SOE regulations on national security grounds, as a response to the challenges posed by China. Therefore, our first research question seeks to investigate whether the US does indeed act as an early adopter of such SOE regulations relative to other advanced economies. Similarly, considering the escalating national security challenges posed by China in terms of technology, our second question explores whether the US is the policy leader in establishing FDI regulations specific to defined strategic sectors.

With respect to external alliances, we examine the extent to which US regulations on foreign SOE investments and foreign investments in strategic sectors have diffused to its allies, resulting in policy convergence. At issue is the ability of a hegemon to create and leverage alliances to diffuse its policies so as to minimize the threat of a challenger (Ikenberry & Nexon, 2019; Lenihan, 2018; Waltz, 1979). Accordingly we compare the US approach to regulating FDI with that of security allies in the Five Eyes Intelligence Alliance (FVEY)Footnote 2 (Australia, Canada, New Zealand, and the UK). Not only are these countries US allies, but they also share similarities in terms of their economic, political, and legal systems. While it is generally expected that countries with strong transnational communication channels and shared learning, along with similar institutions and values, are more likely to converge on policy approaches (Knill, 2005; Strang & Meyer, 1994), a focus on hegemonic rivalry provides a possible alternative. As an incumbent hegemon, the US places unique emphasis on national security, and even its allies may take different approaches in terms of the weight placed on national security policies (Wehrlé & Pohl, 2016). Therefore, our third and fourth research questions ask whether the US’s internal approach to FDI by SOEs and in strategic sectors has diffused to its FVEY allies. Table 1 provides an overview of our research questions (Table 1).

Table 1  Research questions
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Empirically, we construct two sets of official FDI screening documents for the five countries under study, spanning the year of each country’s initial publicly available document until 2023. One set includes the full documents, while the other specifically focuses on passages related to SOEs, manually extracted from the full documents. We employ natural language processing (NLP) to conduct a content analysis, using appropriate keywords that reflect national security concerns. We complement this approach with careful readings of key regulatory documents.

Consistent with the balance of power approach rooted in threats to US hegemony, our results indicate that the US concern over SOEs as national security challenges was in evidence before other FVEY countries and increased over time, with a significant increase in 2007 marked by the introduction of Foreign Investment and National Security Act (FINSA). At the same time, we find limited evidence that this emphasis was followed by all FVEY partners, suggesting a degree of heterogeneity among FVEY members with respect to national security concerns over SOEs. We also find that the US was a leader in adopting an expanded approach to national security in 2018 with the enactment of the Foreign Investment Risk Review Modernization Act (FIRRMA). FIRRMA broadens national security concerns to a wider range of strategic sectors, with a particular focus on critical technologies, and at the same time broadens foreign ownership criteria beyond SOEs. We find evidence that these broader considerations based on defined strategic sectors did diffuse to all FVEY partners, as evidenced by their adoption or reinforcement of national security reviews targeting FDI in these sectors. This alignment is further supported by the designation of the FVEY partners as “excepted states” by the Committee on Foreign Investment in the United States (CFIUS), whereby certain investments in the US by firms from the FVEY partners receive exemption from national security reviews by CFIUS. Our findings indicate that common institutions are not always sufficient to ensure convergence, but convergence is more likely when the hegemon can provide appropriate incentives in support of a suitably defined policy goal.

We contribute to the international policy literature in three ways. First, we provide a new perspective that considers hegemonic rivalry within the context of the balance of power, rooted in international relations research, to understand the regulation of inbound FDI. Our approach suggests that when an incumbent hegemon perceives a threat, it uses a combination of domestic policies and external alliances to protect its national security and maintain or strengthen its relative advantages over its rival. Consistent with Lenihan (2018) and Ikenberry and Nexon (2019), we study policies that go beyond military conflict. To our knowledge, this study is the first to examine both domestic policy initiatives and alliance strategies in the context of FDI regulations. Second, we contribute to the study of FDI review policies in an international context, advancing our limited understanding of the national security grounds that countries use to regulate FDI (Cuervo-Cazurra, 2018). Lai (2021: 499) argues that ambiguity in the definition of national security across countries implies a “wide variety of policy approaches” with respect to the application of national security regulations, suggesting limited convergence in FDI policies on national security grounds. Our results reveal possible boundary conditions to this conclusion. An incumbent hegemon can successfully use alliances to promote a common approach to FDI regulation, but success depends on a broad and well-defined policy goal related to national security, and the ability of the hegemon to offer appropriate incentives. Third, we take a novel empirical approach to international comparative policy analysis by combining NLP keyword analysis with careful reading of selected documents to provide a nuanced understanding of public policy creation and diffusion in an international context.

Theory and empirical implications

Hegemonic rivalry, national security, and balance of power theory

China’s rapid economic and technological growth poses a formidable challenge to the US’s dominant position in the world. China’s increasing capabilities, coupled with its distinct economic and political systems, have led the US to perceive it as a national security threat (Li et al., 2022a). As China regards OFDI, particularly international acquisitions, as a crucial means to access advanced technologies and knowledge globally, the regulation of inbound FDI becomes a significant policy tool for the US to safeguard its advanced technologies and knowledge from being acquired by Chinese firms, thereby maintaining its advantages over China. We therefore adopt a hegemonic rivalry perspective, focusing on the US as the incumbent hegemon perceiving a threat from China, to understand FDI regulations in the US and the diffusion of those regulations to US allies.

Our analysis is rooted in the realist traditions of the international relations literature, drawing upon influential works on balance of power theory such as Waltz (1979) and Gilpin (1981), while also incorporating more recent literature on hegemonic rivalry such as Ikenberry and Nexon (2019). Realist theories are built on the assumption that the international system is “anarchic” in the sense that there is no international authority that can guarantee a country’s national security (Waltz, 1979). As a result, countries prioritize their own security and survival with an “acute sensitivity to balance of power” (Kirshner, 2012: 56) and constantly seek to maintain or enhance their power relative to others when faced with threats or challenges (Waltz, 1979).

Gilpin (1981) extends this argument by explicitly considering hegemonic struggles that can reorder the system.Footnote 3 Rising powers are viewed as potential sources of instability that threaten the existing equilibrium, as their self-definition of interests expands along with their increasing capabilities (Gilpin, 1981). In a world where power is relative, the “extended strides [of rising countries] cannot help but encroach on someone else’s toes” and “even when without being stepped on, other states cannot help but be wary of a rising power, simply because it represents, at the very least, the possibility of a threat” (Kirshner, 2012: 58). Thus, the tensions between existing and rising powers are inevitable, and the existing hegemon takes actions to counterbalance rising powers.

Waltz (1979) suggests that a country can balance the power of another country either internally by increasing its own economic and military capabilities, or externally by forming alliances to strengthen its position or weaken a rival’s position. Ikenberry and Nexon (2019) propose that the next generation of hegemony studies should focus on a broad range of issues including the dynamics of hegemonic rivalry by means “short of military conflict” (p. 410).Footnote 4 We therefore focus on public policy as a crucial instrument in hegemonic rivalry. When the incumbent hegemon perceives a threat from a rising power, it may seek to restore a balance of power by implementing domestic policies to bolster its capabilities relative to those of the rival and by developing external alliances to diffuse its domestic policies. Specifically, we focus on foreign investment screening policies.

The regulation of inbound FDI is increasingly viewed as an important nonmilitary means to address challenges faced by an incumbent hegemon. A country’s national regulations that tighten scrutiny on inbound FDI can be understood as a domestic tool aimed at maintaining or enhancing a balance of power (Lenihan, 2018). FDI from countries perceived to be strategic rivals can raise national security concerns because such FDI may be viewed as a tool for a rival country to gain footholds in vital industries, exploit valuable and sensitive dual-use (civilian and military) technologies, or potentially engage in acts of sabotage (Feng, 2009; Slawotsky, 2021). By implementing FDI regulations on national security grounds, a country seeks to prevent critical domestic assets and technologies with implications for national security from falling into the hands of the rival country, thereby preserving or enhancing a country’s economic, technological, and military capabilities in comparison to its rival (Lenihan, 2018). Additionally, invoking national security concerns in national regulations allows governments to navigate constraints imposed by organizations such as the WTO that discourage discriminatory practices against firms from particular countries (Dimitropolous, 2021; Lai, 2021; Nuruzzaman et al., 2022).Footnote 5 Thus, national regulations on FDI serve as a domestic strategy intended to maintain or strengthen a country’s economic, technological, and military advantages over its rivals.

External strategy is often understood as the creation and utilization of alliances to support the hegemon in its quest to maintain or increase its relative power (Waltz, 1979). Ikenberry and Nexon (2019: 411) suggest that the ability of a dominant power “to order relations among actors” includes establishing various alliances and partnerships that minimize threats to the hegemon. Mastanduno (2019) also highlights that hegemonic orders reflect patterns of relations among states that embody the interests and values of the dominant state, while necessitating the consent of secondary states, particularly those “lynchpin” states vital to the ability of a hegemon to maintain hegemonic order. However, it is important to note that lynchpin states also require benefits in order to join alliances, and as de Graaff et al. (2020) emphasize, the assessment of these benefits may depend on a variety of factors, including the degree of economic engagement with the rising power. Our study focuses on the external strategy of the US in terms of diffusing its FDI regulations to a set of its closest allies, with the goal of restricting the rival country’s access to advanced assets and companies in allied countries, thereby enhancing or preserving its relative advantage over the rival country. As discussed further below, we examine the rationale behind why these allies may or may not adopt similar FDI regulations to those implemented by the US.

Domestic strategy: FDI regulations in the US

We begin by drawing on existing literature and our close readings of US FDI regulation documents to discuss the milestones in US FDI regulations and how they reflect the evolving US concerns over Chinese FDI.

There is evidence that the US has traditionally regulated FDI inflows to protect national security and balance rising powers, even before the rise of China. With rising FDI in the US especially from OPEC countries, the Committee on Foreign Investment in the United States (CFIUS), an interagency committee, was created by Executive Order in 1975 to review transactions involving FDI in the US to determine the effect of such transactions on national security (Arasasingham & DiPippo, 2022). The US has over time expanded the authority of CFIUS to scrutinize FDI. Unease over the rising presence of FDI from Japan in the 1980s led the US to pass the Exon-Florio Amendment to the Defense Production Act in 1988, which authorizes the president to investigate foreign investments in US companies from a national security perspective (Du, 2016; Graham & Marchick, 2006; Rose, 2016). In 1993, to address concerns over acquisitions of US firms by foreign SOEs, the US passed the Byrd Amendment to Exon-Florio, which requires a prolonged review for transactions proposed by firms owned or controlled by foreign governments that could result in controlling interests in US businesses and threaten US national security (Rose, 2016).

In 2007, the US passed the Foreign Investment and National Security Act (FINSA) which mandates even greater scrutiny over FDI made by foreign SOEs in the US (Sauvant, 2009). Unlike the Byrd Amendment, which allowed some leeway in mandatory investigations of foreign SOE transactions, FINSA requires CFIUS to investigate all foreign SOE transactions that could result in controlling interests in US firms (Du, 2016). Thus, the assumption of FINSA is that any foreign SOE transactions resulting in control of US firms could pose national security threats and thus requires regulatory scrutiny. FINSA highlights critical infrastructure including major energy assets and mandates CFIUS investigations of foreign control in these industries (US Department of Treasury, 2007).

We consider the passage of FINSA in 2007 as a critical strategic inflection point in the US regulation of SOEs which also brought a particular focus on China. There is evidence that changes introduced by FINSA were related to Chinese SOE investments in the US. Although SOE investments from Middle Eastern countries were also triggers for FINSA (there were heated congressional debates and opposition to the Dubai Ports deal in 2006), the unique potential threat and challenges posed by China were increasingly recognized at the time (Graham & Marchick, 2006; Sauvant, 2009). For example, early recognition in the US of national security concerns regarding Chinese SOEs was reflected in the creation of the US–China Economic and Security Review Commission in 2000, which recommended in 2004 and 2005 that the US government revise regulations to expand the definition of national security to address economic threats from China (USCC, 2004, 2005). Although China’s FDI was still low relative to advanced economies, it was argued that Chinese FDI could represent a potential threat to US national security because the Chinese government owned or controlled many large Chinese companies, notably in construction and energy, that could acquire American firms in these critical sectors (Graham & Marchick, 2006; Rose, 2016). Thus, Graham and Marchick (2006: 94) argue that the implications of Chinese FDI for national security in the US are “more fundamental and more complex than FDI from most other nations” because China is not a US ally but is a rising power that “could one day challenge the US in economic might”.Footnote 6

The most recent major changes in the US FDI regulations occurred in 2018, via the Foreign Investment Risk Review Modernization Act (FIRRMA). If FINSA is understood as mainly directed at China, FIRRMA is clearly and fully directed at China and can be viewed as a tool for the US to further balance China’s rising economic, technological, and military power. From 2007 to 2018, China experienced rapid economic and technological growth and demonstrated its ambition for global technology leadership (for example via Made in China 2025). At the same time, US–China hegemonic rivalry increased with the Obama administration’s “Pivot to Asia” strategy in 2012 and was intensified under the Trump administration (Li et al., 2022a).

A closer examination of FIRRMA clearly suggests that its passage reflected broadened national security concerns of the US regarding Chinese investments. Indeed, the primary goal of FIRRMA is to defend the US’s global technology advantage over China for national security reasons. FIRRMA urges CFIUS to scrutinize transactions involving “a country of special concern that has a demonstrated or declared strategic goal of acquiring a type of critical technology or critical infrastructure that would affect United States leadership in areas related to national security” (there is no doubt that a country of special concern refers to China) (FIRRMA, 2018, p. 541). Notably, FIRRMA expands the scope of strategic sectors beyond the critical infrastructure emphasized in FINSA, to include a broad range of critical technologies, sensitive personal data, and sensitive real estate near military facilities (US Department of Treasury, 2020). FIRRMA not only expands the definition of critical technologies but also mandates declarations for transactions involving these technologies, irrespective of state or private ownership, resulting in heightened scrutiny in these cases (FIRRMA, 2018).Footnote 7 Moreover, FIRRMA grants CFIUS the authority to review foreign investments taking noncontrolling interests in strategic sectors in the US, extending the traditional authority to review FDI taking controlling interests (Patnaik et al., 2022; US Department of Treasury, 2020).

In conclusion, FINSA of 2007 remains the most critical inflection point in terms of SOE regulations in the US, and FIRRMA of 2018 reflects the broadened national security concerns over strategic sectors, regardless of ownership. We therefore empirically examine both the US FDI regulations with respect to SOEs as well as its focus on specific strategic sectors. We ask in both cases whether there is evidence that the US, as the incumbent hegemon, is more likely than a specific set of allies to take early and decisive actions to balance a rising China.

When examining the regulation of foreign SOE investments, our analysis considers both national security and commercial concerns, the two major considerations regarding SOEs (OECD, 2016). There is a substantial literature that outlines the various regulatory issues arising from the purely commercial problems associated with SOEs, such as agency costs, incentive problems, opaque corporate governance, anti-competitive practices, and goal ambiguity, which can raise commercial concerns in host countries regarding the possible negative efficiency and competitive effects of foreign SOEs (Cuervo-Cazurra et al., 2022; Cuervo-Cazurra et al., 2014; Cuervo-Cazurra & Li, 2021; Estrin et al., 2020; Lazzarini & Musacchio, 2018; Shapiro & Globerman, 2012).Footnote 8 Moreover, the literature has with increasing regularity noted the potential national security threats posed by SOEs, as they may pursue political objectives and acquire critical resources, information, and technology that may undermine the host country’s national security (Balbuena, 2016; Clodfelter & Guerrero, 2012; Lai, 2021; Globerman & Shapiro, 2009a, 2009b; Leblond & Labreque, 2020; Stone et al., 2022; Ufimtseva, 2020; Wehrlé & Christiansen, 2017). Considering the possible commercial and security considerations in SOE regulations, our empirical analysis focuses on whether the US indeed assumes a leader role in adopting SOE regulations based on national security grounds.

Although there is growing recognition across a variety of disciplines that national security concerns have expanded to include a wide range of strategic economic sectors, in particular those related to dual-use technologies (Luo, 2022; Rose, 2022; Slawotsky, 2021), the discussion is limited relative to the extensive literature on SOEs. However, we argue that these technologies have become a critical component in the exercise of hegemonic power, as reflected in the passage of FIRRMA. In our empirical analysis, we therefore examine whether the US indeed takes the lead in regulating FDI in strategic sectors, with a particular focus on advanced technologies.

Alliances and the diffusion of US regulations

We consider the alliance strategies of the US in terms of its ability as a hegemon to use alliances to achieve goal and policy alignment between itself and its allies. Indeed, FIRRMA requires CFIUS to establish a formal process for sharing information with allies regarding specific technologies and entities acquiring such technologies, engage in meetings and consultations with allied government, and disseminate best practices that strengthen national security reviews to allies (FIRRMA, 2018). The US congress also urged the US president to engage in more international outreach to allies to promote processes similar to CFIUS to screen foreign investments for national security risks and to facilitate collaboration with the US (FIRRMA, 2018). Therefore, we explore whether the US has succeeded in achieving international policy convergence by diffusing both SOE and more general regulations with a focus on national security reviews on strategic sectors to alliance partners.

In order to explore this question, we focus on a specific alliance. We examine the diffusion of FDI regulations from the US to a set of its allies, defined by membership in the FVEY intelligence alliance (Australia, Canada, New Zealand, and the UK). The FVEY alliance is one of the world’s most unified multilateral agreements, and it stands out from other agreements because these countries are similar in their economic and political systems (liberal democracies with market economies), are rooted in the Anglo-Saxon system of common law, and are bound by a common language.Footnote 9 The FVEY alliance also encompasses a wide range of formal and informal information sharing arrangements and policy alignment meetings, organized through specific working groups in the intelligence, defense, and diplomacy spheres (Hemmings & Varnish, 2021).

Under these circumstances, the policy convergence literature would suggest policy convergence between the US and the FVEY partners. The alliance serves to facilitate transnational communication and shared learning which are identified as important mechanisms for policy convergence (Dobbin et al., 2007; Holzinger & Knill, 2005; Knill, 2005; Lenschow et al., 2005). Thus, the commonalities, close relations, and frequent communications among the US and its FVEY allies may facilitate information sharing, lesson drawing, and joint problem solving, leading to convergence of the allies’ regulations with those of the US.

However, considerations of hegemonic rivalry may suggest an alternative conclusion: in a world where hegemonic power is not evenly distributed, even US allies may give less weight than the US to national security considerations with regard to Chinese FDI. As some realist thinkers emphasize, individual state actors may hold heterogeneous views on a given situation, notably national security (Gilpin, 1981). With more modest positions in the international political system, many countries, including US allies, may perceive the threat of a rising power such as China as being less important, resulting in heterogeneous responses to national security issues related to Chinese FDI (OECD, 2018; Wehrlé & Pohl, 2016). At the same time, some US allies may give more weight to commercial (as opposed to national security) considerations based on their trade and investment dependence on China, thus having less incentive to offend China (Li et al., 2022a). Therefore, instead of simply and quickly following the US, even US allies may “hedge” or adopt a wait-and-see approach to effectively balance their relations with both the existing and rising power to avoid retaliation from either side (Ciorciari & Haacke, 2019).

The FVEY sample represents the most favorable case for possible US policy diffusion and policy convergence among alliance members. At the same time, failure to find such convergence provides evidence that a hegemon’s attempt to balance a rising power through an alliance strategy may have limitations or be subject to boundary conditions.

Method

Data and samples

We construct two sets of samples composed of national FDI regulation documents released by each of the FVEY countries: the US, Australia, Canada, New Zealand, and the UK. One set includes the full documents, while the other specifically focuses on passages related to SOEs, manually extracted from the full documents. Our sample period begins in the year of each country’s initial publicly available document and extends to 2023.

To construct the sample with full documents, we start with the UNCTAD Investment Laws Navigator available on the Investment Policy Hub to identify the core FDI regulatory documents for each country (Investment Policy Hub, 2022). Data from the UNCTAD Investment Policy Hub have been used in prior studies on FDI regulations (Bauerle Danzman & Meunier, 2022; Berger, 2019). This dataset, however, includes only the most updated versions of the FDI regulations and does not include all historical documents. Because we study the evolution of FDI regulations over time, we supplement the UNTCAD data with government websites and legislative databases in each of the five countries (Appendix Table A1 summarizes all data sources). For countries that have released multiple versions of the same document over a single year, we include only the final version of the document released during that year. For countries that have not re-released their documents every year, we assume that these documents continue to be effective over the years. For example, in Canada, the 2007 regulations were not updated until 2012. Thus, we replicate the 2007 document in subsequent years until the release of the new document in 2012. As shown in Table 2, this process yields 311 FDI regulatory documents from the earliest year in which a given country has FDI regulations to 2023 (Appendix Table A2 provides document titles and publication years) (Table 2).

Table 2  Research sample
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To construct the sample with SOE passages, we manually extract foreign SOE-relevant passages from each FDI regulatory document. Specifically, we select passages that contain keywords such as state/government owned, controlled, sponsored, or assisted (see a full list of SOE-related keywords in Appendix Table A3). Additionally, we include regulatory guidance documents specifically focused on SOEs, such as Canada’s Statement Regarding Investment by Foreign State-Owned Enterprises. As shown in Table 2, our SOE sample consists of 127 country-year FDI regulations with SOE passages in Australia, Canada, New Zealand, the UK, and the US from the year in which a country began to have SOE regulations to 2023.

Table 3  Results of keyword frequency analysis
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Natural language processing (NLP)

We use NLP to understand the regulation of FDI in each country, and in particular the degree to which such regulation is related to national security considerations. NLP is a relatively new tool for the analysis of large quantities of text in IB and management studies (Kang et al., 2020; Wu et al., 2020). NLP has been applied to analyze policy and legal documents because texts in these documents can be quantified and classified (Choi, 2020; Johnson & Lerner, 2021; Ruhl et al., 2018; Spruit & Ferati, 2020). We rely on NLP to process and clean the text and extract keyword frequencies for analysis.

We first process the raw text in the regulatory documents using the NLP software. For this step, we copy selected regulatory passages into a text document (using UTF-8 encoding). We upload the documents to R for data processing. The documents are cleaned to remove stop words (words that occur often in the English language and do not add meaning to the text), stemmed (to capture the word stems of individual keywords to ensure that the analysis can capture all keywords related to the single stem), and tokenized (reduced to single words) for further processing (Kang et al., 2020). The processed text is turned into a word–document matrix with keyword frequencies, which produces a bag-of-words model for our analysis (Johnson & Lerner, 2021; Kang et al., 2020).

We then use the NLP tool – keyword frequencies – to analyze the documents. Specifically, we use NLP to generate keyword frequencies based on a list of keywords (the generation of the keyword list is discussed below). The practice of keyword generation through the bag-of-words model focuses on keyword frequency distribution within the text and assigns a numerical value to individual keywords based on their usage across documents (Bielik, 2020; Cady, 2017; Choi, 2020; Johnson & Lerner, 2021). For example, the bag-of-words model has been used by management scholars to identify key terms in patent applications (Wu et al., 2020). Following this research strand, we identify keyword frequencies for our keywords to understand their evolution over time and across countries. By analyzing the content of documents through keyword frequencies, we can assess similarities of FDI regulations across time and country.

Keyword generation

Our list of keywords on FDI regulations is generated using two sources: the literature and NLP-generated high-frequency words. For the analysis of our SOE sample, we compile a list of keywords for “commercial considerations” based on existing studies (Balbuena, 2016; OECD, 2016; Rubinim & Wang, 2020), which commonly address competitive neutrality and corporate governance issues in SOEs. Accordingly, we classify the commercial consideration keywords into two broad categories, encompassing corporate governance and competitive neutrality practices, either encouraged or discouraged by the host countries (OECD, 2016, 2021). We use commercial consideration keywords as a starting point to analyze SOE regulations, and our primary focus centers on SOE regulations driven by national security concerns.

To capture national security concerns, we use the keyword “security” as our main measure and use a broader set of terms (i.e., security, threat, espionage, surveillance, defense, intelligence, public order, and terrorist) in our supplementary analysis. Note that we use “security” instead of “national security” because legal documents sometimes add filler words between the phrase “national security” or only mention “security” when implying national security.

We further supplement our keyword list with NLP-generated keywords. The NLP software automatically identifies keywords and computes their frequencies. We manually inspect all NLP-generated keywords and add those that are not included in the original list but have the same meaning as those in the original list. As part of this process, we engage in a re-iterative keyword analysis supported by a domain-specific dictionary to interpret keywords generated through NLP (Zaki & McColl-Kennedy, 2020). As a result, Tables A5 and A6 in the Appendix summarize the final list of keywords for commercial and security considerations for our keyword frequency analysis.

In our study of SOE regulations, we use the two keyword lists (one for security considerations and the other for commercial considerations), and in our analysis of full FDI regulations, we use the security consideration keyword only. The NLP software generates the frequency distribution of keywords across the documents. We further manually check the meaning of each “security” keyword in the documents to ensure that our keyword frequency counts do not capture unrelated keywords.Footnote 10 This is a common practice in NLP research whereby qualitative text analysis supplements the results generated by the computer software to increase validity (Calomiris & Mamaysky, 2019; Spruit & Ferati, 2020). Appendix Table A4 summarizes the details of our data storage and handling including processing of keyword frequencies.

Results

Is the US an early adopter of SOE regulations on national security grounds?

Figure 1 illustrates the frequency of security keywords in the SOE passages of FDI regulations among the FVEY countries from 2000 to 2023. This figure clearly indicates that the US stands out as an early adopter of SOE regulations with a focus on national security considerations, relative to its FVEY alliance partners. The use of security keywords began in 1994 and experienced a notable surge in 2007. Australia and Canada are the only two countries in our sample that have followed suit by incorporating national security keywords into their regulatory texts addressing foreign SOE investments, in 2016 and 2022, respectively. These results confirm the hegemonic rivalry perspective, indicating that the US, as an established hegemon, tends to promptly adopt FDI regulations targeting foreign SOEs due to national security concerns. This inclination is driven by its heightened sensitivity to emerging power threats and its readiness to take early and decisive actions to balance a rising power.

Fig. 1 
figure 1

Notes: The UK does not have FDI regulations containing SOE passages and therefore the UK does not appear on the graph. The increase in the frequency of the security keyword in Canada in 2022 can be attributed to the introduction of the 2022 Policy Regarding Foreign Investments from State-Owned Enterprises in Critical Minerals under the Investment Canada Act. The upsurge in the security keyword in Australia in 2021 can be attributed to the introduction of Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020 which established a new national security test and became effective in 2021

Frequency of security keywords in SOE passages of FDI regulations among the Five Eyes alliance countries, 2000 to 2023.

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Examining the evolution of the US regulatory policies concerning SOEs over time in Figure 1, we find that the emphasis on national security expanded substantially in 2007, suggesting that FINSA of 2007 represents the most critical inflection point in the application of US SOE regulations. This rapid change may be viewed as a form of “punctuated equilibrium”, an idea suggesting that public policies may be characterized by long periods of incremental change punctuated by a short period of radical change (Joly & Richter, 2022; True et al., 2019).Footnote 11 As we argued, the radical, non-linear shift in 2007 was primarily driven by the unique challenges posed by China and an increasing perception of Chinese SOE investments as threats to US national security.

Have the US SOE regulations diffused to FVEY partners?

Keyword frequency analysis

In Table 3, panels A and B, a comparison is made between the frequency of security keywords prior to the enactment of FINSA in 2007 and its aftermath.Footnote 12 If there were diffusions of FINSA from the US to its FVEY alliance partners, we would observe an increase in the use of security keywords in the SOE passages of the FDI regulations in the FVEY partners. Panels A and B show that the security keyword appears 62 times in the US SOE regulation documents pre-FINSA (at a rate of 4.77 times per document) and 363 times post-FINSA (at a rate of 21.35 per document). This demonstrates a heightened occurrence of the security keyword in the US SOE regulations post-FINSA. However, we observe similar patterns – characterized by an increase in the use of security keywords post-FINSA – only in Australia and Canada but not in New Zealand and the UK. The increase in the frequency of the security keyword in Canada in 2022 can be attributed to the introduction of the Policy Regarding Foreign Investments from State-Owned Enterprises in Critical Minerals under the Investment Canada Act (Government of Canada, 2023). The increase in the security keyword in Australia in 2021 can be attributed to the introduction of Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020 which established a new national security test and became effective in 2021 (Parliament of Australia, 2020).

Table 3 panels A and B further reveal that the US places more emphasis on national security concerns over commercial considerations than any other country when regulating foreign SOE investments. In the US, the frequency ratio of total security keywords to commercial consideration keywords increases significantly, shifting from 2.38 pre-FINSA and 10.68 post-FINSA. The ratio for Canada changes from 0 pre-FINSA to 0.11 post-FINSA, and the ratio for Australia increases from 0 pre-FINSA to 1.16 post-FINSA. Indeed, during the post-FINSA period, Canada focuses predominantly on commercial considerations, with commercial keywords appearing 163 times, while security keywords appear 18 times in Canadian documents. Thus, even though the US, Canada, and Australia all have a dual regulatory focus, the US has a disproportionally higher emphasis on national security concerns (as opposed to commercial considerations) than Australia and Canada.

In the case of New Zealand, our findings indicate that its investment screening regulations on foreign SOEs do not incorporate any of the keywords related to national security or commercial considerations pre-FINSA, and only feature commercial keywords seven times post-FINSA. In the case of the UK, our examination of FDI screening documents, both before and after FINSA, yields no passages referencing SOEs. Thus, the UK lacks SOE-specific investment screening regulations. Ultimately, our keyword analysis based on SOE regulations suggests that by 2023, policy convergence around the US regulatory policies that highlight national security reviews of foreign SOEs has been moderate.

Recent FDI guidelines on foreign SOE investments

Our main sample is primarily based on FDI laws and regulations. As a supplementary analysis, we review the latest FDI guidelines in the US’s FVEY alliance partners. These guidelines pertain to the implementation of FDI regulations concerning foreign SOEs. It is possible that a country might not have established regulations on foreign SOE investments but could enhance the enforcement of existing laws to intensify oversight over such investments. We find that Canada released a Guideline on the National Security Review of Investments in 2021, subsequently revised it in 2022, which emphasizes the potential harm foreign SOE investments may pose to Canada’s national security. This guideline mandates enhanced regulatory scrutiny for all investments, regardless of value, made by foreign SOEs or private firms influenced by foreign government (Government of Canada, 2021). Likewise, Business Investment Guidance, published by Australia’s Foreign Investment Review Board and updated in 2023, stipulates that foreign government investors generally require approval when acquiring a direct interest in an Australian entity or business, or starting an Australian business, regardless of value (Australia Government, 2023). These developments align with the outcome derived from our security keyword analysis, which underscores that Australia and Canada emphasize national security in their SOE-focused FDI regulations.

Despite our keyword analysis indicating that New Zealand does not mention security keywords in its SOE regulations, we do find that in its 2021 Foreign Investment Policy and National Interest Guidance, New Zealand subjects foreign government investments resulting in over a 25% interest in sensitive New Zealand businesses to additional regulatory scrutiny (New Zealand Government, 2021). Nonetheless, New Zealand’s SOE guidelines are more lenient than those of Australia, Canada, and the US, as the latter require reviews for all foreign government investments, irrespective of industry or value. Consistent with our keyword analysis, the UK’s guidance does not explicitly subject foreign government investments to heightened regulatory examination (Government of UK, 2021). Therefore, although we observe more recent indications of alignment based on SOE guidelines, the overall convergence remains constrained, with New Zealand and the UK maintaining relatively more relaxed regulations concerning SOE investments.

Is the US an early adopter of FDI regulations for strategic sectors on national security grounds?

Figure 2 charts the occurrence of the security keyword in the FVEY countries from 2000 to 2023, accompanied by explanatory notes for each juncture where a notable surge in the security keyword’s frequency is observed. In the US, three distinct timeframes manifest spikes in the use of the security keyword: 2007, 2018, and 2023. These instances closely align with the introduction of FINSA in 2007, FIRRMA in 2018, and the incorporation of US President Biden’s 2022 executive order into the FDI regulations in 2023. As previously discussed, FIRRMA enacted in 2018 broadens the scope of national security to encompass a wide array of strategic sectors, including critical technologies, critical infrastructure, and sensitive data. This expansion strengthens regulatory scrutiny over these sectors, irrespective of whether the foreign investor is state owned or privately owned. Moreover, the 2022 executive order issued by the US President emphasizes once again the potential threats to U.S. national security due to foreign investments in strategic sectors, particularly technologies and data. This order directs CFIUS to bolster its regulatory screening of these investments.

Fig. 2 
figure 2

Notes: From 2020 to 2022, Australia, New Zealand, and the UK introduced new regulations strengthening national security reviews for FDI. Canada is amending the Investment Canada Act for stronger national security reviews. Recent FVEY regulations stress rigorous oversight in critical sectors, especially critical technologies, infrastructure, and data, aligning with US priorities in FIRRMA. These partners received a CFIUS exception for certain investments in the US, which underscores the alignment of their FDI national security regulations with those of the US

Security keyword frequency per document in the full FDI regulation documents among the Five Eyes alliance countries, 2000 to 2023.

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Figure 2 illustrates notably upward shifts in the frequency of the security keyword for New Zealand, Australia, and the UK, following the enactment of FIRRMA and since 2020. This can be attributed to the adoption of new legislations by these three countries aimed at enhancing regulatory scrutiny over FDI in strategic sectors for the sake of national security, as explained below. Although Canada introduced the National Security Review of Investment Regulations in 2009, that regulation did not target specified strategic sectors. Taken together, Figure 2 points to the US as a forerunner in establishing FDI regulations in 2018 that target strategic sectors for reasons of national security, when compared with its counterparts in the FVEY alliance.

Have the US FDI regulations for strategic sectors diffused to FVEY partners?

Both our keyword analysis and our qualitative analysis of recent FDI regulations and guidelines collectively suggest a significant diffusion of US FDI regulations for strategic sectors among FVEY partners, potentially surpassing the level of convergence in SOE regulations, as all partners have intensified their regulatory oversight of FDI in strategic sectors by 2023.

First, Table 3 panels C and D underscore a marked increase in the frequency of the security keyword per document post-FIRRMA for the US, Australia, New Zealand, and the UK, relative to pre-FIRRMA frequency. In addition, there is a modest increase for Canada. Specifically, the frequency of the security keyword per document post-FIRRMA is about 3 times for the US, 162.8 times for Australia, 41 times for New Zealand, 2.7 times for the UK, and 1.4 times for Canada compared to the corresponding frequency pre-FIRRMA. Furthermore, Figure 2 illuminates a pattern of punctuated equilibrium regarding the frequency of the security keywords, indicating notable shifts in Australia, New Zealand, and the UK post-FIRRMA and since 2020. Indeed, from 2020 to 2022, Australia, New Zealand, and the UK introduced new national security reviews pertinent to FDI. These milestone regulatory developments include The Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020 in Australia, The National Security and Public Order regime in New Zealand in 2020, and The National Security and Investment Act in the UK in 2021 (Government of UK, 2020; New Zealand Government, 2021; Parliament of Australia, 2020). Canada’s revised guidelines on the National Security Review of Investments in 2021 and 2022 signify an elevated emphasis on national security reviews, and the country is currently in the process of introducing an amendment to the Investment Canada Act to further strengthen its national security reviews of FDI (Government of Canada, 2021).

Second, our reviews of the recent regulations and guidelines across the FVEY partners reveal a unanimous emphasis on regulatory vigilance pertaining to FDI in critical sectors, particularly critical technologies (including dual-use technologies), critical infrastructure, and data. This convergence aligns closely with the focal areas prioritized by the US under FIRRMA. Specifically, New Zealand, in its National Security and Public Order regime introduced in 2020, incorporates these strategic sectors in its definition of “strategically important business,” mandating heightened scrutiny for national security and public order considerations (New Zealand Government, 2021). Australia, in its Foreign Investment Reform (Protecting Australia’s National Security) Regulations 2020, similarly designates these strategic sectors as constituting “national security business” (Parliament of Australia, 2020).Canada identifies these sectors as relevant to national security in its 2021/2022 Guidelines on the National Security Review of Investments (Government of Canada, 2021). In parallel, the UK includes these strategic sectors within its guidance framework for the 2022 National Security and Investment Act, where it outlines a compilation of sensitive industries (Government of UK, 2023).

Third and more important, our reviews of recent CFIUS regulations indicate that CFIUS has the authority to except certain countries from CFIUS national security reviews over certain investments made by firms from these countries (US Department of Treasury, 2022b). An excepted foreign state is defined according to a two-criteria test. CFIUS first identifies a foreign state as an eligible state, and then determines whether an eligible state has established and is effectively utilizing a robust process to review foreign investments for national security risks and can facilitate coordination with the US on matters relating to investment security (US Department of Treasury, 2022a). This exception has not been applied until 2020. In fact, CFIUS has identified the FVEY partners, Australia, Canada, and the UK, as the only initial eligible foreign states in 2020 and added New Zealand to the list in 2022. In 2022, CFIUS granted Australia and Canada the status of “excepted states,” (the second criterion) and CFIUS offered the same to the UK and New Zealand as of February 2023. Thus, CFIUS has granted “excepted states” status only to the FVEY partners in 2022 and 2023, further suggesting convergence in their national security reviews of FDI, at least viewed from the US perspective. These actions of CFIUS suggest the importance of alliances in achieving such convergence, in particular the importance of incentives rather than coercion by the hegemonic power. It is worth noting that the most important piece of evidence for policy convergence in this case is indeed the hegemon’s (the US) recognition that national security regulations of its allies are sufficiently aligned with those of the US to warrant an exception.

Discussion

We argue that the US regulatory approach to FDI screening can be understood as a mechanism for an incumbent hegemon (the US) to balance a rising power (China). To maintain or strengthen its relative advantages over China, and to protect its national security, the US implements domestic regulations initially targeting foreign investments by SOEs and later foreign investments in strategic sectors, regardless of ownership. Moreover, the US leverages international alliances to diffuse and promote these regulations among allied countries. Given the US’s unique position as an incumbent hegemon in the international system, we expect the US to be an early adopter of FDI regulations on national security grounds, with respect to both foreign SOE investments and foreign investments in strategic sectors. We then examine whether the US regulatory approach has diffused to a set of close allies, resulting in policy convergence. Our empirical analysis is based on FDI regulation documents across the FVEY countries (Australia, Canada, New Zealand, the UK, and the US) using both keyword analysis and close reading of relevant texts.

Our analysis shows that, relative to its allies, the US is indeed an early adopter of SOE regulations on national security grounds, and that the US has focused predominantly on national security over commercial concerns regarding foreign SOE investments. We find that the US made major changes to its SOE regulations in 2007 through FINSA and that there was a significant increase in the use of the keyword “security” in FINSA. We argue that the passage of FINSA was largely motivated by the threat to the US posed by the rising power of China whose outbound FDI was dominated by SOEs.

Our findings also show that while all FVEY countries incorporate commercial considerations in their approach to regulating foreign SOEs, there is a more limited convergence on national security considerations. As of 2023, similar to the US, both Australia and Canada emphasize national security concerns on foreign SOE investments and subject all foreign SOE investments to additional regulatory scrutiny. New Zealand only subjects certain SOE investments to regulatory scrutiny and the UK has yet to single out SOE investments in its regulations.

The limited convergence in SOE regulations on national security grounds suggests some degree of heterogeneity even among close allies. One source of heterogeneity is that not all countries feel equally threatened by foreign SOEs. Australia and Canada likely share the US concern with national security risks posed by Chinese SOE investments because both countries are major destinations for Chinese SOE investments. Based on the number of international acquisition announcements by Chinese SOEs from 2001 to 2019, we find that Australia, the US, and Canada are the top three destinations for Chinese SOE acquisitions, accounting for 17%, 11%, and 7% of total international acquisition deals by Chinese SOEs, whereas the UK and New Zealand account for 5% and 1%.Footnote 13 In addition, Australia and Canada may share the US’s national security concerns about Chinese SOE investments because both countries are major destinations for natural resource investments and most large Chinese natural resource companies are state owned. Thus, it is reasonable that both countries have a higher degree of convergence with the US in SOE regulations (relative to New Zealand and the UK).

However, the evidence is somewhat different when we consider broader national security considerations in FDI regulations. The passage of FIRRMA in 2018 in the US indicates a notable expansion of the country’s national security concerns about Chinese FDI, shifting from specific concerns about Chinese SOE investments, often in infrastructure sectors, to broad concerns about any Chinese firm investing in a wider range of strategic sectors, particularly in critical technologies. Recent evidence suggests that the US has stepped up efforts since 2020 to diffuse these broader concerns among FVEY allies by providing incentives such as CFIUS review exceptions for certain investments from these allies. Perhaps not surprisingly we find that these partners have all developed national security reviews of FDI in the same (or similar) strategic sectors in their most recent FDI regulations and guidelines after FIRRMA (until 2023). Thus, once the scope of national security expands beyond SOE investments to also include investments in strategic sectors, irrespective of ownership, we indeed find significant and relatively rapid convergence (in two to five years) among the US and its closest allies on FDI regulations for national security purposes. It is noteworthy that the SOE regulations that bring Canada and Australia into closer alignment with the US were adopted in 2021 and 2022, about 15 years after the US’s passage of FINSA. This temporal difference highlights the significance of a well-defined policy goal for US policy diffusion. Furthermore, the most important evidence supporting our finding of policy convergence in strategic sector FDI regulations is the US’s recognition that national security regulations of its allies are sufficiently aligned with those of the US to warrant an exception under CFIUS.

Therefore, our results suggest that a hegemon can successfully diffuse its public policies internationally through alliances. That success appears to depend not only on the nature of the allies, but also on the provision of proper incentives and a suitably defined policy goal. Thus, common institutions are not sufficient to ensure convergence if the policy goal is defined too narrowly, such as in the case of SOEs. When the policy goal is framed more broadly in terms of safeguarding defined strategic sectors for national security purposes, convergence becomes more likely. At the same time, our results also suggest that the outcome will depend on the ability of the hegemon to provide appropriate incentives, such as CFIUS exceptions, which can speed convergence. Thus, alliance strategies can be important for an incumbent hegemon to diffuse its internal policies, but alliances alone (without incentives) may not be sufficient to ensure convergence.

Implications for business and government policies

Firms should be aware of the importance of geopolitical rivalry in shaping regulations on inward FDI. Chinese firms seeking to invest in advanced technology sectors within FVEY countries are likely to encounter greater regulatory barriers. At the same time, businesses from FVEY partner nations may encounter fewer regulatory hurdles when operating in the US. In response to these regulatory shifts, multinational firms may adapt their investment strategies. Chinese firms looking to invest in advanced technology sectors may opt for more greenfield investments instead of acquisitions, prioritize partnerships over wholly owned subsidiaries to navigate host-country regulatory scrutiny, and explore investment opportunities in countries with less stringent regulatory oversight. In contrast, firms from FVEY countries may increasingly consider investment opportunities within these countries due to their more favorable regulatory environment.

Our study reveals the growing focus that links critical technologies to national security in the US and its FVEY partners. However, the increased reliance on national security as grounds for restrictive policies carries the potential to impede global governance institutions that necessitate collaboration between the US and China in areas like artificial intelligence and the green transition. Consequently, the US may risk losing its leadership position in shaping global governance frameworks to address global challenges. At the same time, there is an opportunity for countries other than the US and China to assume a more significant role in advancing the development of multilateral agreements. A recent example is the world’s first major summit on artificial intelligence safety hosted by the UK, featuring participation from both the US and China in establishing global regulations for artificial intelligence, with South Korea and France set to host future submits in this domain (Criddle et al., 2023).

Limitations and future research

Our study is limited to a sample of the FVEY countries, selected because in addition to belonging to a security alliance, they share common institutions and language. It therefore remains to be seen whether similar conclusions could be drawn from the consideration of sample alliances involving more heterogeneous countries. Indeed, the US has recently placed more emphasis on its alliance building efforts, and it would be valuable to examine the effectiveness of such efforts in facilitating the diffusion of domestic policies. For example, research can closely monitor whether CFIUS will designate more countries as “excepted states” and exempt certain investment from those countries from regulatory reviews. There are discussions about admitting other countries such as Japan into the FVEY (Hemmings & Varnish, 2021), and this would provide the possibility of a natural experiment on convergence with partners that are less institutionally similar. Similarly, Rose (2022) suggests that FDI restrictions based on broad national security concerns directed at China are increasing in the EU and are reflected in the EU Regulatory Guidance on FDI released in 2019, and this too warrants further research, notably the relation of the EU guidelines to FIRRMA. Future research might also examine policy convergence through bilateral or multilateral institutions, such as the EU-US’s Trade and Technology Council, which has work groups tasked with administering the coordination and exchange of investment trends affecting national security and sensitive industries (Benson, 2022).

Our study reveals the convergence of national security reviews of inbound FDI in strategic sectors among the US and other FVEY countries. Considering the leadership role of the US in developing these regulations and the fact that CFIUS designates FVEY allies as “excepted states,” we argue that this convergence results from the diffusion of US regulations to FVEY partners. However, we do not account for other factors, such as domestic politics in the respective countries and their bilateral economic and political relationships with China, which may have influenced the regulatory convergence. This limitation underscores the need for further research to explore these aspects in more detail.

We suggest that such research should be informed by a perspective which carefully accounts for the different policy constraints and cost–benefit calculations facing countries. For example, it has long been argued that a crucial determinant of the strategies pursued by different countries is economic ties. Papayoanou (1997) suggests that when countries have strong economic links with a threatening power, but weak economic links among themselves, they are more likely to face internal political and economic constraints that limit commitment to balancing rising powers. Thus, as a country’s economic dependence on China increases, it faces higher costs associated with following the US regulatory approach and possibly offending China. Moreover, such economic dependence can make a country susceptible to economic sanctions, further elevating the costs of adopting US regulations.

Thus, future research should systematically examine the conditions under which the advantages outweigh the drawbacks for countries that adopt US regulations. Additionally, future research can focus on the consequences of following the hegemon’s lead in adopting similar regulations on trade and FDI. It would be valuable to explore whether there is a discernible pattern of reduced trade and FDI with China and increased trade and FDI with the US and other allied nations as a result of policy convergence with the US. Such research can illuminate the costs and benefits of adopting US-influenced regulations for supporters of the hegemonic power.

Our study focuses on a specific external strategy, based on an intelligence alliance. We acknowledge that there are other means through which the US may diffuse its policies, including bilateral or regional trade agreements. International trade agreements do not typically explicitly include national security provisions so that they are not appropriate for our purpose. However, trade agreements are increasingly “deep” (Mattoo et al., 2020) in that they cover a variety of commercial policy issues including clauses on SOEs (Rubinim & Wang, 2020; Willemyns, 2016). In this way, trade agreements can be understood as part of an external strategy to balance the power of China. For example, it has been argued that the Trans-Pacific Partnership (TPP) exemplified the possibility of using trade agreements to contain China and enhance national security of the US (Bhala, 2017; Chow, 2017; Kim, 2017). It is further argued that the US played a decisive role in shaping rules applicable to SOEs in the TPP that could serve as a template for future trade agreements, with the intended effect of excluding China (Fleury & Marcoux, 2016; Zhou, 2021). Although the US eventually withdrew from TPP, the chapter on SOEs that the US initiated and shaped has been kept by the remaining members in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) (Gao & Zhou, 2022). At the same time, the United States–Mexico–Canada Agreement (USMCA) not only contains a chapter on SOEs, but also contains a clause that prevents member countries from forming trade agreements with “non-market” economies, which implicitly refers to China (Grosse et al., 2021). Evidently, the (CP)TPP and USMCA did not involve participation by China, limiting its options to define the rules.Footnote 14

Although these examples suggest that the US approach to FDI and its concern with China has been reflected in some trade agreements, it is unclear whether the recent increase in SOE chapters in trade agreements (Rubinim & Wang, 2020) or the more general use of national security concerns to restrict FDI (Bauerle Danzman & Meunier, 2022; Rose, 2022) can be associated with US influence (Gao & Zhou, 2022). It is also not clear whether such clauses are effective (Lefebvre et al., 2021). Thus, more research is needed on both the diffusion of US approaches and their effects.

Our study focuses on the formal laws and regulations that countries employ to systematically screen FDI. Our approach does not consider other means by which politicians can discourage FDI from specific countries. For example, they can discourage FDI from certain disliked countries through political statements, discussions, and debates. Anecdotal evidence suggests that companies often withdraw their acquisition bids when such bids lead to intense political discussions. For example, CNOOC withdrew its acquisition bid for Unocal amid heated discussions and debates among US politicians, with the expectation that their acquisitions are unlikely to meet regulatory approval in the US. It would be valuable for future research to explore the degree to which such signals do in fact discourage FDI from rival countries.

Finally, it is worth noting that our approach is US centric, and future research might explore the evolution and diffusion of FDI regulations in China from a hegemonic rivalry perspective. For example, it would be intriguing to explore how China’s external alliance strategy may differ from that of the US. While the US emphasizes the diffusion of its FDI policies to its allies, China’s external alliance strategy may revolve around supporting its firms’ foreign investments in countries such as those participating in its Belt and Road Initiative (Li et al., 2022b).

Conclusion

Our study proposes a hegemonic rivalry perspective rooted in balance of power theory to understand both the nature and evolution of US regulations on inward FDI and the degree to which these regulations have diffused to alliance partners. In the era when the US held a dominant hegemonic status, it played a central role in providing international public goods, particularly through the support of open-trade regimes (Ikenberry & Nexon, 2019). The US actively promoted liberal norms and values, as reflected in the Washington Consensus, which encouraged the adoption of liberal FDI policies by various countries, facilitating the removal of constraints on foreign investors. However, in the current era of geopolitical rivalry between the US and China, the incumbent hegemon is less inclined to promote economic liberalization, as it would also greatly benefit the rising rival. Our study analyzes the surge in protectionism in terms of inbound FDI regulations in the US and a select group of allies. Our findings highlight how the rivalry between the US and China has fundamentally shaped the landscape of internal US FDI regulations and those of its allies. We suggest that geopolitical rivalry will continue to be important in shaping the international regulatory environment, and we hope our research paves the way for further exploration in this direction.