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The Coin of the Realm: Foreign Investment Screening & Trust in International Relations
Abstract
Investment screening mechanisms (“ISMs”) have been in a state of flux, both in practice and design, with a notable recent increase in new regulatory frameworks and significant amendments to existing screening systems that can be observed globally. Trust, or the lack of it, has been at the heart of the recent cluster of state activity related to ISMs. Accepting foreign investment proposals, especially in critical sectors and/or involving state-controlled entities, naturally increases the host state’s potential vulnerability and thus requires a higher level of trust toward both the investor and its governing home state. ISMs are therefore a manifestation of mistrust in their legislative form and a test of trust in their individual decisions. Despite being elusive empirically, as a distinct concept in international relations (“IR”) theory, trust is multidimensional in its abstract form and defies being easily captured within a singular definition. Nonetheless, taking this contribution poses two key questions. First, within the prominent schools of thought that provide alternative explanations of the concept in IR theory, how can we define trust and identify its role in foreign investment policy for the purpose of ISMs? Second, what are the appropriate legal tools that may be adopted to either build trust itself or at least to help mitigate the security threats that inward foreign investment may entail thus allowing for investment flows to safely continue despite the general presence of mistrust?
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Contrary to expectations, economic interdependence has not tempered security conflict between China and the United States. In response to perceived domestic and external threats, the Chinese Communist Party's actions to ensure regime security have generated insecurity in other states, causing them to adopt measures to constrain Chinese firms. Security dilemma dynamics best explain the subsequent reactions from many advanced industrialized countries to the evolution of China's political economy into party-state capitalism. Party-state capitalism manifests in two signature ways: (1) expansion of party-state authority in firms through changes in corporate governance and state-led financial instruments; and (2) enforcement of political fealty among various economic actors. Together, these trends have blurred the distinction between state and private capital in China and resulted in backlash, including intensified investment reviews, campaigns to exclude Chinese firms from strategic sectors, and the creation of novel domestic and international institutions to address perceived threats from Chinese actors. The uniqueness of China's model has prompted significant reorganization of the rules governing capitalism, both nationally and globally.
What determines national preferences for institutionalizing foreign direct investment (FDI) screening? Over the past decade, advanced economies worldwide have tightened their national investment screening mechanisms (ISMs). In March 2019, the European Union (EU) adopted its first common FDI screening framework. This article explores variations in Member State preferences for the creation and nature of a pan-European screening framework. Based on extensive interviews with high-level EU and country officials involved in the negotiation process, and using a unique measure of national support for the EU-wide ISM created through the first-ever elite survey on this subject matter, we find that countries with higher technological levels were more supportive of FDI screening due to concerns over unreciprocated technological transfer. We also show the effects of Chinese FDI on country-level support for FDI screening sector-dependent. We found no evidence that total Chinese FDI predicts preferences for ISM. Instead, countries with high levels of Chinese FDI in strategic sectors are more likely to support the ISM, while those with high levels of Chinese investment in low-tech sectors tend to oppose screening. Our overall findings suggest that EU investment screening, and national-level screening in general, might become more restrictive in the future, especially in light of the COVID-19 pandemic.
Supplementary information:
The online version contains supplementary material available at 10.1007/s11558-021-09436-y.
The paper aims to address the development of China’s narrative power during the COVID-19 pandemic and its impact on world order. It argues that in the post-pandemic world, the emergence of the authoritarian sub-order would be prompted by China’s more proactive narrative power, given that the climate of opinion is ambiguous when faced with the uncertainty of the pandemic. (This does not imply the end of the existing liberal order; instead, it features the coexistence of both orders.) To understand how China’s narrative power has encouraged the emergence of the authoritarian sub-order to coexist in parallel with the dominant constitutional order, the article first reviews the existing literature concerning the changing world order. In this section, it also briefly defines and differentiates between the constitutional and authoritarian orders, what defines world order, and what distinguishes authoritarian from constitutional liberal order. Second it looks at the theoretical grounding. The nature, role and power of narratives are explored. Ideas about strategic narratives and the economics of attention are discussed. This theoretical background paves the way to examine China’s narrative power during a pandemic. Lastly, it switches to the Chinese perspective to address its support for the plurality of orders and its awareness of the strength of narrative in influencing dominant ideas. It looks at how China’s narrative power has been exercised from three perspectives (formation, projection and reception). Here, it mainly tackles how China has used its narrative power to spin the pandemic to its advantage in the reorganization of world order: improving its international image and advocating the authoritarian order as an alternative. China has been building its narrative along with its changing strategic diplomacy – from restrained and low-profile to proactive and assertive. In the conclusion, some reflections on China’s narrative power and the implications for world order are considered.
The nature and extent of the role of the Chinese state in the economy is fundamental to many empirical and theoretical debates about that country’s political economy. We document and explain the rise of a novel form of intervention on the part of the Chinese state: the expansion of state capital beyond ownership of state firms. We argue that state investment as a mode of state intervention in the economy is conceptually distinct from both “state capitalism” and the “developmental state” in its introduction of new agents to distribute state capital to firms and new mechanisms through which states, especially authoritarian ones, monitor and influence business actors. We document the growth of the investor state in several ways. Case studies of three high-profile shareholding firms in China demonstrate that state capital can be deployed strategically, for example, to respond to financial crisis or facilitate industrial upgrading, but also generates moral hazard, resulting in corruption and resource misallocation, and international alarm about the intentions of Chinese firms. We further compare the rise of state shareholding firms in China to similar phenomena in Brazil and Malaysia, concluding that the practice has both economic and political logics.
The rapid increase in Chinese outbound foreign direct investment (FDI) in recent years has prompted growing scholarly interest in its economic and political implications for host countries. However, relatively little attention has been directed to how concerns over the rise of China may be shaping public attitudes toward such investment. This paper tests the link between threat perception and preferences for FDI in the United States. We argue that perceptions of the China threat negatively affect how the American public views the impact of incoming Chinese FDI, due to heightened geopolitical concerns and nationalism. Using a survey experiment, we show that respondents are indeed less likely to support Chinese FDI when primed with information that highlights the security and economic threats posed by China than when they receive no such priming. Furthermore, causal mediation analyses reveal that the treatment effects of security and economic threats are mediated by respondents' concerns about the challenges that Chinese FDI poses to national security and American jobs. 2
In this review article we explore the growing body of literature on the subject of trust in the field of international relations. We argue that the international level represents a unique challenge for trust research. This is so because some of the most pressing problems facing the world today require the development of trusting relationships internationally. In addition, the international environment is structurally different from domestic or personal relations on which much of the trust literature has focused so far. We identify three main strands of trust literature in international relations - rationalist, social and psychological. We not only note the contributions these have made to understanding the role of trust internationally, but also highlight areas where more research is needed. Particularly, we argue that this includes theorising processes of trust-building, the identification of trusting relationships and the development of a normative case for trust among states.
Key Words error and bias, tradeoff reasoning, prospect theory, accountability pressures, internalization s Abstract Organized around several major theoretical traditions in international relations, this essay suggests which literature in psychology should be of greatest interest to different kinds of international relations scholars. New work in cognitive social psychology and behavioral decision theory simultaneously expands on and qua-lifies earlier error-and-bias portraits of the foreign policy maker, thereby enriching our understanding of internal divisions within the realist camp. Work on bounded rationality in competitive markets and mixed-motive games, as well as the literature on the power of human emotions to shape judgments of what represents an equitable allocation of scarce resources or a just resolution of conflicts of interest, can inform neo-institutionalist and constructivist theories. Developments in cross-cultural social psychology shed light on constructivist arguments about the creation and maintenance of international social order that typically rest on assumptions about decision making that are qualitatively different from realist and institutionalist approaches to world politics.
This article provides a conceptualization of trust in interstate relations in terms amenable to research. In the field of International Relations trust is often equated with the willingness to take risks on the behavior of others. However, this approach is problematic because it does not provide a basis for distinguishing between trusting and non-trusting relationships. In contrast, I propose that trust implies a willingness to take risks on the behavior of others based on the belief that potential trustees will `do what is right'. Recognizing that trust involves particular beliefs about the motivations of others distinguishes it from the broader category of risk and enables trusting relationships to be identified more precisely. After elaborating my definitional approach, I discuss indicators designed to gauge the presence of trusting interstate relations in empirical settings.
The authors report results from 5 experiments that describe the influence of emotional states on trust. They found that incidental emotions significantly influence trust in unrelated settings. Happiness and gratitude--emotions with positive valence--increase trust, and anger--an emotion with negative valence--decreases trust. Specifically, they found that emotions characterized by other-person control (anger and gratitude) and weak control appraisals (happiness) influence trust significantly more than emotions characterized by personal control (pride and guilt) or situational control (sadness). These findings suggest that emotions are more likely to be misattributed when the appraisals of the emotion are consistent with the judgment task than when the appraisals of the emotion are inconsistent with the judgment task. Emotions do not influence trust when individuals are aware of the source of their emotions or when individuals are very familiar with the trustee.
This analysis contributes to a fast-growing body of literature on Sino-Western relations and the tension between economic and security interests. It takes Britain's China policy as a case study considering the Integrated Review 2021. It argues that London's stance towards Beijing has shifted – officially – from the so-called “golden era” to a complex phase of diplomatic–military tensions and scrutinised economic relations, principally because of US pressure. However, this shift de facto has not had a structural impact on the economic side of the relationship between London and Beijing. The article reaches this conclusion by framing its narrative through the lens of the economy-security conundrum at the heart of the Liberal International Order and through the lens of the New Cold War between the US and China. These two factors are crucial for understanding the change between Britain's China policy pre- and post-2016.
Investment screening mechanisms are proliferating, especially in the global North, apparently in direct reaction to China’s global rise and what is perceived to be its ‘weaponized investments’. Given the lack of clear shared objectives and coordination between screening mechanisms, which remain a core prerogative of each sovereign State’s self-judgment on national security, and the possible negative repercussions on the international economy and cooperation, this article looks at the increase of screening mechanisms for foreign direct investments in Europe and the USA in relation to China’s global rise. What does it entail for Chinese outward foreign direct investments and for the international economic legal order more broadly? In discussing the strengths and limitations of screening mechanisms, this article argues that, while the concerns for Chinese commercial investments aimed at acquiring technology and critical assets are legitimate, at the same time, Western States can disproportionally discriminate against Chinese investments by creating an investment regime that is overly protectionist. The article, adopting the recent screening mechanism of the European Union as a model, proposes how screening mechanisms could be improved through harmonization and cooperation among States, alongside the setting of clear objectives to limit their discriminatory, unjustified, and overly discretionary use.
The classic political economy of trade models state behavior on the international plane by reference to the formation of domestic interests. Voters, interest groups, and politicians are rational actors in this model, pursuing their economic preferences without cognitive or motivational distortions. This article questions the sufficiency of the rational choice model in the formation of contemporary trade policy. Starting from the classic political economy story, this article explores real-world deviations from rationally expected outcomes by drawing on cognitive psychology. Using both theoretical and empirical analysis, we seek to identify key distortions that can better explain voter and politician behavior in the current trade wars. We begin with loss aversion in that individuals have asymmetrical attitudes towards gains and losses. Rising inequality within the rich world amounts to a perceived relative loss particularly for middle-class citizens. Combined with the absolute rise of equality between countries, this can trigger a double loss frame—both as an individual loss and a national loss—that can profoundly shape anti-trade preferences in certain countries. Framing trade as a security threat also invokes powerful hawkish biases. Lastly, the availability bias can be provoked by social media mechanisms making people tend to focus on particular risks and overweight their import.
Chinese Investment Oversea often face legitimacy crisis, and media plays a central role in staging legitimacy struggle. This research attempts to apply Proximization theory and the construals of Cognitive Linguistics to account for the discursive legitimation process in business discourse. The comparative analysis of two reports on a case of Chinese investment in America has shown how different discursive strategies can construe distinct conceptualizations of the same event, influencing the judgment among readership on the legitimacy of the deal. The analysis of this study shows that drawing on the construals of Cognitive Linguistics, the application of Proximization theory can be extended to legitimacy discourse in wider social domains.
Using cross-country panel data and employing the instrumental variable generalized method of moments (GMM) method, this article examines the effect of social trust on economic exchange between China and its major trading partners over the period 2005–2013. Social trust significantly increases bilateral trade and foreign direct investment (FDI) between China and its partners, and this effect is much stronger in nonmember countries of the Organization for Economic Cooperation and Development (OECD) than OECD member countries. Further exploration suggests that the heterogeneity could be explained by the substitution relationship between social trust and the rule of law: social trust matters more in countries where the rule of law is weaker. We also .find that the impact of trust on trade and FDI is weaker in countries that have greater language similarity to China, are adjacent to China, or are common-law-origin countries. Based on these results, in implementing the Belt and Road Initiative, the Chinese government and companies should not only focus on each country’s legal norms but also attach importance to the role of social capital in international economic exchange.
Prior international political economy public opinion research has primarily examined how economic and socio-cultural factors shape individuals’ views on the flows of goods, people and capital. This research has largely ignored whether individuals also care about rewarding or punishing foreign countries for their policies on these issues. We tested this possibility by administering a series of conjoint and traditional survey experiments in the United States and China that examined how reciprocity influences opposition to foreign acquisitions of domestic companies. We find that reciprocity is an important determinant of public opinion on the regulation of foreign investments. This suggests the need to consider the policies that other countries adopt when trying to explain public attitudes toward global economic integration.
Chinese companies were singled out among major investors seeking farmland in Brazil, but my own and other emerging research reveals that China still lags far behind investors from the Global North, and there is evidence that the differences between them are far less significant than was presumed. Why then have Chinese agribusinesses been singled out, even as the size and amount of their investments in Brazil – particularly when compared with those form the US, EU, Argentina, and Japan – are in fact relatively small? Who are the actors in Brazil that have contributed to this apparent sinophobia, and who has challenged it? Who benefits? And how have Chinese investments themselves been affected by this disproportionate negative attention? I argue that challenges to national and food sovereignty arise, ultimately, from the transnational soybean production system regardless of the national character of any particular companies or their cross-border relations.
Building on recent studies that focus on institutional variation among authoritarian regimes, this paper asks whether this variation leads to meaningful differences in the tendencies to reach and comply with international agreements. The results suggest that previous evidence regarding the democratic credibility advantage over autocracies may have been driven by a lack of a more refined authoritarian regime typology. Employing such a typology, I find that the institutional constraints that generate credibility and compliance may not be unique to democracies. In fact, the only authoritarian regime that seems to lack such features is bossism, a personalist party-based regime. Bosses are more likely than democracies to enter into international agreements, but are less likely than democracies to comply with the agreements they sign. This result is remarkably robust. Results associated with other types of autocracies suggest minor or no differences between autocracies and democracies, relating to reaching and complying with international treaties. Finally, I find evidence of strategic behavior, as all regime types are more likely to sign agreements and less likely to comply when the other negotiating party is a boss, compared with a democracy.
The positive impact of trust on the willingness to cooperate has been widely recognised within social sciences. Trust, however, has not been adequately incorporated into the dominant paradigms on explaining international cooperation in international relations. This paper argues that in situations of uncertainty, trusting or mistrusting a cooperation partner influences the negotiating behaviour of state actors. Trusting behaviour is understood to be based on a non-rational mode of reasoning, which shapes negotiating behaviour beyond the cognitive calculation of risks in a given situation. Whether or not the other actor is considered as trustworthy depends to a large extent on the conception of the identity relationship between the cooperation partners. This is suggestive of a constructivist understanding of trust as a relational, identity-based concept that is difficult to capture using a measurable, calculative notion of trust employed in a game-theoretical, strictly rationalist framework. The article presents two conceptual lenses: benevolence-based trust and identification-based trust. The empirical analysis covers evidence from two of the six regions that were negotiating an Economic Partnership Agreement with the European Union: West Africa and the Caribbean region.
This article will engage with the growing literature on the subject of trust in international politics by pointing out remaining problems and contradictions in recent critiques against the rationalist mainstream. Although it finds itself in agreement with these critiques it will argue that despite its more nuanced appreciation of trust, this critical scholarship does not quite succeed in either leaving the rationalist conceptions behind or in achieving a more substantial account of the concept of trust. In order to do so the article will first challenge the remaining methodological framework in which trust scholarship is couched. Second, the article will proceed to show how the emotive element in acts of trust can be highlighted when approached through a phronetic lens and how the introduction of emotion into trust scholarship in IR will allow a richer and thicker study of the phenomenon of trust in international politics. Centrally, the article will claim that any study of trust which ignores the elementary emotional component will remain incomplete.
The insights of social psychology are not thoroughly integrated into international relations theory, yet social psychology has much to offer. Social psychology provides a conceptualization of a number of varieties of trust – moralistic, strategic, and generalized – and their opposites that implicitly drive the logic of major works of international relations. It also reveals the empirical presence of a number of different types of trusters who make different assumptions about the trustworthiness of others and consequently show markedly different propensities towards cooperation. The rough correspondence between these different ‘social orientations’ and the logics of the three approaches of structural realism, neoliberal institutionalism, and constructivism suggest that individuals carry a crude paradigm in their minds. Metatheoretically, the implication for international relations theory is that scholars capture a part but not the totality of world politics, the behavior of those who trust (or do not trust) in a particular way that matches the logic of their paradigms. Theoretically it suggests a research agenda at multiple levels of analysis, utilizing all of the types of trust and trusters. I review the work of others that offers some preliminary evidence for its plausibility, suggest some hypotheses of my own, and address potential theoretical objections.
I thank John and Val Braithwaite for getting me interested in trust and for giving me some insight into it. I am grateful to a large number of people for the incisive comments that I received when an earlier version of the paper was presented at a workshop on trust in the Australian National University, and at seminars at the University of Colorado, Boulder, and Stanford University. I cannot hope to name them all. I was led to make a number of significant changes by the comments of the editors of Philosophy & Public Affairs.
With the end of the Cold War, we must wonder whether there were missed opportunities to regulate the arms race and global competition, which nearly bankrupted the United States and contributed to the collapse of the Soviet Union. A missed opportunity for agreement is a situation where there was at least one alternative that the parties to a conflict preferred or would have preferred to nonagreement. Hard-core Realists argue that states compete for territory, arms, and influence because they have conflicting national interests. Soft-core Realists maintain that such conflicts are effects of international anarchy and uncertainty, and that states can cooperate contingent on reciprocity. I argue that states often fail to cooperate even when they have compatible preferences because policy-makers make incorrect inferences about the opponent's motives and intentions, a process that can be illuminated by social psychology. I present three alternative explanations of trust and distrust in international relations—rational choice, domestic structures, and social psychology. If policy-makers are prudent, they will assess the other's interests in observing an agreement as well as its reputation. Often, domestic political structures encourage leaders to promote distrust of an external enemy to legitimize their internal rule or foreign policy. Finally, distrust may lead policy-makers to dismiss the other side's cooperative signals or proposals. Distrust can be overcome by making a series of step-by-step agreements in which each side can test the other's good faith at limited cost, or through unilateral concessions as part of a consistent policy.
World politics is commonly referred to as anarchic, meaning that it lacks a common government. Yet a Hobbesian “war of all against all” does not usually ensue: even sovereign governments that recognize no common authority may engage in limited cooperation. The anarchic structure of world politics does mean, however, that the achievement of cooperation can depend neither on deference to hierarchical authority nor on centralized enforcement. On the contrary, if cooperation is to emerge, whatever produces it must be consistent with the principles of sovereignty and self-help.
The ubiquitous yet inaccurate belief in international relations scholarship that cognitive biases and emotion cause only mistakes distorts the field s understanding of the relationship between rationality and psychology in three ways. If psychology explains only mistakes (or deviations from rationality), then (1) rationality must be free of psychology; (2) psychological explanations require rational baselines; and (3) psychology cannot explain accurate judgments. This view of the relationship between rationality and psychology is coherent and logical, but wrong. Although undermining one of these three beliefs is sufficient to undermine the others, I address each belief or myth in turn. The point is not that psychological models should replace rational models, but that no single approach has a lock on understanding rationality. In some important contexts (such as in strategic choice) or when using certain concepts (such as trust, identity, justice, or reputation), an explicitly psychological approach to rationality may beat a rationalist one.I thank Deborah Avant, James Caporaso, James Davis, Bryan Jones, Margaret Levi, Peter Liberman, Lisa Martin, Susan Peterson, Jason Scheideman, Jack Snyder, Michael Taylor, two anonymous reviewers, and especially Robert Jervis and Elizabeth Kier for their thoughtful comments and critiques. Jason Scheideman also helped with research assistance.
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