Building Resilience in Investment Screening and Economic Security: Lessons from India

Strategies and balancing of priorities in economic security

No nation can proliferate without foreign direct investment. Even so, in certain sectors, such as military or network technologies, FDI may raise national security concerns. In the face of globalization and increasing economic integration, countries need to build resilience and capacity in their FDI screening and economic security systems. Since 2017, we have been witnessing a global trend of tightening FDI screening processes, for instance in major economies like India, the United States, Germany, France, the European Union, and the United Kingdom.

India has been actively working towards building resilience in this area, as the country continues to be a major destination of foreign direct investment (with a FDI inflow of US$83.57 billion in 2021/2022). New Delhi has adopted a two-pronged approach to balance fostering an open investment climate and safeguarding economic security. On the one hand, it implemented several reforms to make doing business easier and attract foreign investment. For instance, the introduction of a Goods and Services Tax to streamline the taxation system, the Insolvency and Bankruptcy Code to facilitate easier resolution of insolvency cases and regulatory simplification. On the other hand, it has introduced a decentralized investment screening mechanism through the Foreign Investment Facilitation Portal to ensure that foreign investments are in line with national security interests.

This delicate balancing requires a comprehensive national security strategy that clearly outlines their priorities and concerns. In other words, a guiding framework for investment screening to ensure that the screening process is aligned with the country’s overall security objectives. Additionally, countries should establish clear and transparent guidelines for investment screening, outlining the criteria and the process of review, and approving or rejecting investment proposals.

Furthermore, countries should consider international cooperation and information sharing (alliance mechanisms to promote the economic security of a group of countries) as an important aspect of ensuring strategic alignment in investment screening. Collaborative agreements and partnerships with other countries can facilitate the exchange of best practices, information, and intelligence related to potential security risks posed by foreign investments. This can help create a more comprehensive and cohesive approach to investment screening on a global scale. These strategies should be complemented by the development of robust legal frameworks to adapt economic security legislation to its new challenges.

The new challenges of economic security

In the era of digitalization, cybersecurity has emerged as a paramount concern for all organizations, as data devices have become pervasive and vulnerable to cyber-attacks. Protecting sensitive data, financial systems, and critical infrastructure from cyber attackers has become imperative for ensuring economic security. For governments, this entails a relevant effort to upgrade digital infrastructure and sectoral legislation. India has implemented several initiatives to protect its critical infrastructure from cyber threats such as the Know Your Client (KYC) protocol, the National Cyber Security Strategy 2020, and the Digital Personal Data Protection Act of 2023 (DPDP).

Geopolitical tensions and territorial disputes can also pose challenging issues in the field of economic security since they may disrupt trade and investment flows, create uncertainty in regional markets, and lead to potential economic sanctions or restrictions on the movement of goods and services. One good example is the current trade war between the United States and China. To address this challenge, nations must prioritize peaceful resolutions to political and territorial disputes, promote regional cooperation and integration, and uphold international law, respecting the sovereignty of other nations.

Moving to purely economic concerns, high dependence on foreign investors also raises concerns and should be addressed. This can be done in many ways: implementing legal restrictions on the ownership or acquisition of certain assets by foreigners, conducting risk assessments for foreign investments, and promoting domestic investment and economic diversification. A good example of this approach is the Indian campaign Atmanirbhar Bharat Abhiyaan or Self-reliant India, which aims to make the country and its citizens independent and self-reliant, also from an economic perspective. Finally, foreign companies’ decisions may become an extension of their governments’ policy choices, and not be driven by the undertakings’ commercial interests. This happens especially with State-owned enterprises. For example, in 2006 Russian energy giant Gazprom decided to cut gas supplies to Ukraine. Nations must promote transparency in the relationship between companies and governments, establish clear guidelines on the separation of business and political interests, and encourage fair competition and non-discriminatory practices in international trade and investment.

Lessons from the Indian FDI screening legislation

In India, FDI screening is regulated through the 2020 FDI Policy and the guidelines issued by the Ministry of Commerce and Industry, along with the Foreign Exchange Management Act (FEMA) Regulations. These domestic rules interact with the clauses in the Bilateral Investment Treaties (BITs) stipulated by the country. Older BITs provide for an exception clause on the basis of security interest, while more recent BITs have a dedicated clause providing for security exceptions under the Model BIT.[i] The bodies dedicated to investment screening approvals also changed over time, moving from a sole body, the Foreign Investment Promotion Board (FIPB), to a decentralized system: competent for each decision is the relevant Ministry or Department based on the specific industry or sector interested by the foreign investment. Still, the system is a single-point interface for companies, the Foreign Investment Facilitation Portal (FIFP), operated by the Ministry of Commerce & Industry.

Another shift can be observed in the policy goals pursued by the Indian government. Initially, the focus of Indian economic security legislation was primarily on attracting foreign investment and promoting economic growth. However, in recent years, there has been a shift towards a more cautious approach, with an emphasis on protecting strategic industries and technologies from foreign control or unwanted influence. This shift in policy objectives is driven by the recognition of the potential risks and vulnerabilities associated with advanced technologies, especially those with dual uses that can be weaponized or have implications for national security. For example, the current FDI Policy requires prior authorization for all investments originating from countries that share land borders with India or, in specific sectors, obtaining security clearance from the Ministry of Home Affairs.

The evolution of the Indian FDI screening system was stimulated by two challenges it has encountered. First, the need to guarantee transparency and clarity to reduce uncertainty for investors and make it easier for them to navigate the regulatory landscape. Consequently, India streamlined and consolidated its FDI regulations in order to enhance transparency and established the FIFP, so as to have one single entry point for digital requests of authorization. Second, with the FDI policy constantly evolving, government officials lacked the capacity to efficiently handle FDI screening protocols on certain critical sectors, e.g. in telecommunications and mining. To strengthen its available expertise, the Indian government conducted various training and capacity-building programmes, sometimes with a specific sectoral focus. Additionally, it established a knowledge-sharing platform to facilitate the exchange of information on investment screening and economic security, featuring also the best practices and lessons learned from different countries.

Economic security policies and global implications

India’s economic security policies may also influence its economic relations with other nations. Its current focus on economic self-sufficiency under the ‘Self-reliant India’ doctrine and protection of domestic industries may lead to tensions with countries that rely heavily on exports to India. These tensions can affect bilateral economic cooperation, negotiations of trade agreements, and the overall diplomatic relations between India and its trading partners.

The India-China relationship requires particular attention. Despite cumulative inflows from China accounting for only USD 2.4 billion (0.47%, from April 2000 to December 2020), India imposed restrictions on the FDI inflows from China and neighbouring countries, citing concerns regarding national security and geopolitical tension. In recent years, Beijing’s pursuit of market expansion, resource monopolization, and overall economic influence has led New Delhi to adopt measures aimed at safeguarding its domestic industries while seeking access to specialized sectors within markets abroad. Both nations have reaped the benefits afforded by globalization since their respective openings in the late 1970s and early 1990s. However, as rising powers with ambitious aspirations, yet unresolved disputes, they are acutely aware of factors such as relative gains, dependence levels, vulnerabilities, and even military power. All these factors are intrinsically linked with the two countries’ economic foundations and play a part in investment screening considerations.

Good relations among countries are a solid foundation for regionalism and, potentially, the creation of a mega-regional trade agreement. For example, India and Japan are closely cooperating on both geopolitical and economic matters. New Delhi looks also with interest towards the other rapidly growing economies in East and Southeast Asia. Another aspect to consider is India’s responsibility as one of the world’s largest economies: any significant changes in its economic security policies can ripple across the global economic landscape. If India were to implement protectionist measures or impose stringent regulations on foreign investment, it could discourage international investors and potentially lead to a decrease in foreign direct investment flows domestically and in other countries, as it would disrupt several global supply chains.

At the same time, India is adapting to the diffused realization that globalization conveys risks as well as benefits and some of its tenets, such as the call for a relatively unrestricted flow of capital in the form of FDI across borders. In this context, investment screening law is becoming a much more domestic field of law. National security, as a combination of national defence and economic security, lies at the epicentre of these screening mechanisms. Thus, India is not necessarily advancing towards more foreign investment, but rather towards a new balance between foreign investment and national sovereignty.

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[i] On national security clauses in BITs in general, see the dedicated page. For examples of older BITs, see: India-UK BIT Article 11(2);  India-Russia BIT Article 3; India-Germany BIT Article 12; India-Turkey BIT Article 8; India-Uzbekistan BIT Article 13. An example of newer BITs based on the Model BIT is the India-Belarus BIT, whose national security clause is Art. 33.