Key Takeaways

  • FDI law governs cross-border investments where a foreign investor gains significant control or influence over a domestic company.
  • Core characteristics include long-term relationships, ownership of at least 10% voting rights, and managerial influence.
  • FDI is regulated by domestic laws and international treaties, including bilateral investment treaties, WTO agreements, and arbitration frameworks.
  • Risks include political instability, regulatory changes, and expropriation, but protections exist through insurance agencies and dispute resolution bodies.
  • National security screening and antitrust reviews are increasingly shaping FDI law, especially in strategic sectors like technology, defense, and energy.
  • Investors must navigate evolving regulatory regimes, from U.S. CFIUS reviews to the EU’s FDI Screening Regulation.

FDI law regulates foreign direct investments, a situation in which an investor who lives in one national economy has significant influence or control over a business that exists in a different economy, according to the International Monetary Fund.

FDI Characteristics

This type of investment consists of:

  • A long-term relationship between the business and the investor
  • Ownership of more than 10 percent of the business's voting shares, either directly or indirectly
  • Substantial influence over the operations of the business

While portfolio investment is passive, FDI is considered active investment because of its managerial component. Unlike the widespread nationalization practiced from the 1950s through the 1970s, today FDI is supported across the globe for its ability to stabilize economies, encourage growth, and share technology and knowledge.

Why Countries Encourage and Restrict FDI

Governments often encourage FDI because it brings capital inflows, job creation, and technology transfer. Developing economies in particular view FDI as a tool to stimulate growth and integrate into global markets. Incentives such as tax holidays, reduced tariffs, or preferential land-use rights are common.

However, FDI law also sets restrictions to protect sensitive industries. Many countries maintain “negative lists” that prohibit foreign ownership in sectors like defense, energy, telecommunications, and natural resources. Even when entry is permitted, foreign investors may face ownership caps or requirements to form joint ventures with local partners. These restrictions reflect the tension between economic liberalization and national security concerns.

Laws Governing FDI

This form of investment is regulated by international laws as well as the applicable domestic laws for both economies involved in a transaction. The latter primarily focuses on safeguarding investors, attracting FDI, resolving disputes, and establishing security measures, tax incentives, and standards for national treatment.

International law for FDI comprises multilateral treaties, inter alia, bilateral investment treaties, judicial decisions, and established international law. Multilateral treaties are designed to be used when national laws conflict and include Agreement on Trade-Related Investment Measures and the Agreement on Trade-Related Aspects of Intellectual Property. Although no attempts to create an overarching treaty of this kind have been successful, U.S. FDIs are governed by bilateral treaties with more than 40 nations.

When a dispute arises between the investor and the nation in question, the investor should first rely on his or her own national laws, followed by the laws of the other nation, and then by international dispute resolution and arbitration procedures.

National Security Reviews and Screening Mechanisms

An increasingly important aspect of FDI law is national security screening. In the U.S., the Committee on Foreign Investment in the United States (CFIUS) has broad authority to review—and block—transactions that could threaten national security. Reviews often target deals in critical infrastructure, advanced technology, and data-rich businesses.

The European Union also introduced an FDI Screening Regulation in 2019, which coordinates member states’ review mechanisms. Countries like Germany, France, and Italy have since tightened their screening laws, particularly for acquisitions in healthcare, energy, and technology. Similar mechanisms exist in China, India, Canada, and Australia.

For investors, this means compliance requires not only meeting standard investment rules but also undergoing multi-layered reviews to ensure national interest protections.

Risk Management

The risks of FDI are covered by international law. One example is the United Nations General Assembly resolution 1803, which calls for adequate compensation. The Multilateral Investment Guarantee Agency (MIGA) provides insurance against contract breach, currency issues, civil disturbance, war, and terrorism for individuals and businesses who invest in developing economies. A federal agency called the Overseas Private Investment Corporation offers private insurance policies for U.S investors that cover currency issues, political violence, and expropriation.

The International Centre for Settlement of Investment Disputes (ICSID) offers international dispute arbitration. This agency formed a multilateral treaty that has been in effect since 1966 and is considered the leading institution for FDI-related arbitration.

The Transatlantic Trade and Investment Partnership between the U.S. and the European Union includes a method for settling disputes between nations and investors in which claims can be brought against governments that breach standards of investment protection. Similar agreements include the North American Free Trade Agreement (NAFTA), the Comprehensive Economic and Trade Agreement, and the Central American Free Trade Agreement.

Emerging Risks in Global FDI

While traditional risks such as expropriation or political instability remain, modern FDI law highlights new challenges:

  • Geopolitical tensions: Sanctions and trade wars can disrupt investment flows and complicate compliance.
  • Data and cybersecurity: Many governments now treat data security as a national interest, limiting foreign control of data-heavy businesses.
  • Supply chain resilience: Post-pandemic policies encourage domestic production of critical goods, potentially limiting foreign investment opportunities.
  • Climate and sustainability regulations: FDI projects are increasingly assessed for environmental impact and ESG compliance.

To manage these risks, investors should conduct rigorous due diligence, consider political risk insurance, and consult legal counsel familiar with both local law and international arbitration frameworks.

Sample FDI Laws

These FDI laws are reprinted from those established by the Embassy of the Kingdom of Saudi Arabia.

Article 1:

The following expressions and terms shall have the meaning ascribed beside each, unless the context deems otherwise:

* The Council: The Supreme Economic Council.

* Board of Directors: The Board of Directors of the General Investment Authority.

* The Authority: The General Investment Authority.

* The Governor: The Governor of the General Investment Authority and Chairman of the Board of Directors.

* Foreign Investor: The natural person of non-Saudi nationality or otherwise the body corporate, where all partners are non- Saudi nationals.

* Foreign Investment: Investment of Foreign Capital in a licensed activity under this Act.

* Foreign Capital: The Foreign Capital in this Act shall mean, for example but not limited to, the following funds and rights as long as they are possessed by a Foreign Investor:

1. Money, securities and commercial instruments.

2. Foreign investment profits if they are invested to increase the capital, expansion of existing projects or establishment of new projects.

3. Machinery, equipment, supplies, spare-parts, means of transportation and production requirements relevant to the investment.

4. Legal rights, i.e., licenses, intellectual properties, technical know-how, administrative skills, and production techniques.

* Production Facilities: Projects for the production of industrial and agricultural products (plant and animal).

* Service Facilities: Service and construction projects.

* The Act: The Foreign Investment Act.

International Arbitration and Dispute Resolution Trends

Disputes under FDI law frequently involve claims of unfair treatment, indirect expropriation, or discrimination. Arbitration remains the primary mechanism for resolution, with the International Centre for Settlement of Investment Disputes (ICSID) and UNCITRAL rules widely used.

Recent trends show governments trying to rebalance investor protections with regulatory autonomy. For example:

  • Some states have terminated or renegotiated bilateral investment treaties to avoid excessive liability.
  • Newer treaties increasingly carve out exceptions for public policy, environmental, and public health regulations.
  • Arbitration awards are subject to scrutiny, with debates around transparency and consistency of outcomes.

This evolving landscape requires investors to structure transactions with dispute resolution in mind, ensuring contracts specify governing law, jurisdiction, and available remedies.

Frequently Asked Questions

  1. What does FDI law regulate?
    FDI law regulates how foreign investors can acquire control or significant influence in businesses operating in another country, balancing investor rights and national interests.
  2. Why do governments restrict FDI?
    Governments restrict FDI in sensitive sectors like defense, energy, or technology to protect national security and economic sovereignty.
  3. How does CFIUS impact foreign investment in the U.S.?
    CFIUS reviews transactions involving foreign investors in U.S. companies and can block deals that pose national security risks.
  4. What protections exist for foreign investors under FDI law?
    Protections include bilateral investment treaties, international arbitration mechanisms like ICSID, and insurance through agencies such as MIGA.
  5. What are the emerging risks in FDI?
    Emerging risks include cybersecurity concerns, geopolitical tensions, stricter environmental regulations, and global supply chain policies.

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