Foreign direct investment screening in Australia, the United States, the United Kingdom, Japan and the European Union: recent reforms

Introduction

Foreign direct investment (FDI) has come under increasing scrutiny by developed economies in recent years. What was once thought of as an enabling tool for economic growth, innovation and international integration has now been reevaluated as a potential risk to national security, with governments voicing concern over foreign control of critical infrastructure, over-dependence on foreign-controlled suppliers, technology transfer and data risks. As a result, Australia, the United States and their partners are pivoting away from an open investment regime to one that is more risk-based.

A notable example is the Australian Government’s recent efforts to regain ownership of Darwin Port on national security grounds, following the controversial 2015 decision to lease it to Chinese-owned company Landbridge for 99 years. The Australian Government’s concerns focus on the port’s proximity to US and Australian military operations in Darwin, coupled with the growing belief that Australian entities should maintain control of critical infrastructure. Similarly, the United States has adopted a more cautious stance toward Chinese investments, particularly in strategic sectors such as technology, critical infrastructure and energy. This shift in approach to FDI reflects a broader trend of economic security, where economic policy is leveraged as a tool to safeguard national interests, offering a clear lens through which to examine how countries are recalibrating the balance between economic openness and national security.

Figure 1. Timeline of key updates to foreign direct investment regulations
Australia, the United States, the United Kingdom, Japan, and the European Union

How have countries adapted their approach to FDI?

In recent years, countries have enacted reforms to tighten their FDI regimes due to escalating geopolitical tensions and uncertainty. While the core objective of striking a balance between openness to foreign investment and national security remains consistent, the design and scope of these reforms vary widely. Some governments have introduced mandatory notification regimes targeting sensitive industries, while others have expanded the scope of review to include assets like land or intellectual property. In several cases, governments have granted retrospective powers to review past transactions or broadened the definition of foreign control to include minority stakes or influence over strategic decisions, such as senior management appointments and mergers and acquisitions decisions. Notably, there has been an uptick in outbound investment screening by the United States and others, fuelled by concerns about enabling foreign adversaries in areas of strategic risk as well as fears about technology leakage.

As countries move to assess FDI more heavily by strategic implications rather than economic prospects, there is the potential for serious repercussions on foreign investment flows. A June 2025 United Nations report highlighted that global FDI levels are falling for the second year in a row, confirming a slowdown in capital flows.A decrease in foreign investment flows has potential global ramifications, including job loss, decreased flexibility for governments reliant on capital from FDI inflow, and reduced global interconnectivity.While it is impossible to attribute broader trends in foreign investment solely to legislation changes—particularly given current macroeconomic uncertainty — it is worth noting that longer review timelines and a more cautious regulatory approach are making the FDI process significantly more burdensome and time-consuming.

This explainer assesses the recent changes in FDI regimes across Australia, the US, the United Kingdom, Japan and the European Union to provide a tangible understanding of how economic security is being operationalised in practice and what this means for the future of global investment.

Figure 2. FDI as a percentage of total GDP
By country, as of 2024

Australia

FDI contributes significantly to Australia’s GDP, with net FDI inflows comprising 3.2% of total GDP in 2024, more than twice as much as FDI contributes to the US or EU GDPs.

The United States and Australia have a strong FDI relationship, with the United States having the highest stock of FDI in Australia (A$235 billion in 2024) by a wide margin, and the United States being Australia’s top country for outbound direct investment (A$243 billion in 2024). In fact, Australia invests more in United States than vice versa. Australia has also received high levels of FDI stock from Japan (A$159 billion in 2024), the United Kingdom (A$156 billion in 2024), and the European Union (A$132 billion in 2024). Australia is a net recipient rather than a net investor, with Australia’s top destinations for outbound investments including the United States, the United Kingdom (A$210 billion in 2024) and New Zealand (A$126 billion in 2024).

Figure 3. Foreign direct investment stock in Australia
By country/country group, 2021–2024

Figure 4. Australian foreign direct investment stock abroad
By country/country group, 2021–2024

Established in 1975, Australia’s Foreign Investment Review Board (FIRB) was created to assess foreign investment proposals and advise the Treasurer and Government on national interest and national security implications of the proposals. The final decision-making power is held by the Treasurer.

Recent reforms to Australia’s FDI regime

In 2021, Australia enacted significant reforms to its foreign investment framework, citing increased risks from foreign investment. The changes introduced a national security test for foreign investment proposals involving critical industries such as energy and investments into land. In 2024, expanding on 2021 legislative changes, Treasurer Jim Chalmers announced a reform of Australia’s foreign investment framework, pointing to heightened national security threats from “intensifying geopolitical competition.” The reform increases scrutiny of ‘high-risk’ investments while streamlining low-risk investment approvals. This change reflects a shift by the Australian Government to more deliberately integrate national security considerations into economic strategy.

In February 2025, the Australian Government imposed a temporary ban (for a minimum of two years) on foreign purchases of established dwellings, effectively decreasing foreign acquisition of Australian assets in favour of domestic ownership.

How have Australia’s foreign direct investment policy changes affected investment?

Since the 2024 FIRB reform, Australia has increased scrutiny of foreign investments, resulting in slower review processes and blocked investments, primarily from China, in strategic areas such as energy and critical minerals. According to the Treasury’s Quarterly Report on Foreign Investment, between July to September 2024, 23 of 377 foreign investment proposals were subject to government notification due to national security conditions – meaning they involved a critical industry or potential acquisition of land near strategic assets – compared to 13 of 283 proposals screened between July and September 2023 signifying a 2% increase in transaction reviews and oversight on the grounds of national security in just one year. These transactions related to national security conditions would not have been captured prior to the January 2021 reform. This is significant as it demonstrates that the closer integration of national security considerations into foreign investment reviews has provided the government with greater oversight over potentially high-risk transactions. Unlike many other developed economies, Australia has not, however, implemented outbound investment controls.

United States

The United States is the world’s largest foreign investor and largest beneficiary of FDI. In 2024, FDI net inflows made up 1.3% of the US total GDP. US FDI policy is based on attracting investment from allies while restricting investments from adversarial countries. While there are similarities in principle with Australia’s FDI policy, in practice, the United States is more explicit in identifying specific adversary countries, while Australia maintains a country-agnostic approach, conducting reviews on a case-by-case basis.

The United States’ largest overseas destination for FDI stock is the European Union (US$2.66 trillion in 2024), and, in turn, the EU has the highest level of FDI stock in the United States (US$2.47 trillion in 2024) — both by a large margin — signifying a strong reciprocal long-term foreign investment relationship built on economic integration. Other than the European Union, the United States invests primarily in the United Kingdom (US$1.02 trillion in 2024) and Singapore (US$467 billion in 2024). As aforementioned, the United States receives the majority of its FDI from EU countries, followed by Japan (US$754 billion in 2024) and the United Kingdom (US$742 billion in 2024).

Figure 5. Foreign direct investment stock in the United States
By country/country group, 2021–2024

Figure 6. United States foreign direct investment stock abroad
By country/country group, 2021–2024

The Committee on Foreign Investment in the United States (CFIUS) was established in 1975 to review foreign transactions for potential national security risks. Chaired by the Department of the Treasury, CFIUS includes representatives from key national security and economic agencies, such as the Departments of Defense, State, Justice, Commerce, Energy, and Homeland Security. When a transaction is notified to CFIUS, the committee conducts an initial review to determine whether it poses any national security concerns. In some cases, CFIUS may refer the transaction to the President, who has the authority to block or unwind deals.

Recent updates to foreign direct investment policies in the United States

Like other countries, the United States has recently taken action to tighten up investment controls. In 2018, Congress passed the Foreign Investment Risk Review Modernization Act (FIRRMA), which introduced comprehensive reforms to CFIUS. This move was precipitated by growing scrutiny from US policymakers into Chinese acquisitions of US companies. Under FIRRMA, CFIUS was given more power to review a wider range of transactions, including non-controlling investments (less than a 50% stake) in the United States in critical areas such as technology and critical infrastructure.

In 2022, President Biden signed Executive Order 14083, which, for the first time since the creation of CFIUS, articulated specific risks that CFIUS must take into account when evaluating proposals. The articulated risks extend beyond traditional military concerns to include areas such as supply chain resilience, signalling a more strategic use of CFIUS to safeguard national security.

In January 2025, the Treasury established the Outbound Investment Security Program, dubbed the ‘reverse CFIUS’. Under this rule, US citizens are prohibited from making certain types of outbound investments in areas such as semiconductors and microelectronics, quantum information technologies and artificial intelligence (AI) in regions of concern, namely China, Hong Kong and Macau. This legislation is significant as it pointedly seeks to protect US technological leadership — a key economic security priority — through expanding the governmental toolkit to include outbound investment controls. Notably, this legislation marks the first formal implementation of an outbound investment security program in the United States.

In February 2025, President Trump released the America First Investment Policy (AFIP). AFIP seeks to maintain an open foreign investment environment through fast-tracking investment from allied and partner countries, while simultaneously restricting investments linked to adversaries to protect national security interests.

How have policy changes impacted foreign direct investment in the United States?

US policy changes in FDI have led to closer scrutiny of sector-specific investments, particularly those linked with Chinese investors. Between 2022-2024, Chinese investors accounted for the highest number of notices (13% of all notices) submitted to CFIUS, reflecting the fact that Chinese proposals most frequently require national security review of investment proposals. In addition, there has been an uptick in presidential actions related to FDI proposals, withtwo Chinese-linked foreign investment proposals blocked by presidential order in 2024. One blocked a proposed real estate acquisitiondue to its proximity to an Air Force base and the other blocked investment into an audiovisual company. This is notable as presidential actions on FDI remain somewhat rare, with zero between 2021 and 2023, and only one annually from 2016 to 2020, signalling an increase in presidential involvement in investment decisions.

Japan

FDI flows into Japan are lower than other developed nations due to regulatory barriers and procedural complexity, with FDI accounting for just 0.4% of Japan’s GDP in 2024. Japan is aiming to boost investment, with the Japan External Trade Organization (JETRO) announcing the ‘Action Plan for Attracting Human and Financial Resources from Overseas’, in August 2023, which raises the inward target of FDI to ¥100 trillion (US$680 billion) by 2030. However, these efforts are balanced by a tightening regulatory framework designed to protect national security.

FDI into Japan remains significantly lower than outward FDI. Top foreign investors into Japan include the European Union (US$69 billion in 2024), the United States (US$67 billion in 2024) and the United Kingdom (US$57 billion in 2024). Despite low FDI inflows, Japan invests heavily externally, with the United States receiving the largest amounts of Japanese FDI by a large margin (US$786 billion in 2024), followed by the European Union (US$373 billion in 2024), then the United Kingdom (US$169 billion in 2024). Compared to Australia and the United States, Japan invests significantly more in China (US$132 billion in 2024), with a strong focus on the manufacturing sector.

Figure 7. Foreign direct investment stock in Japan
By country/country group, 2021–2024

Figure 8. Japanese foreign direct investment stock abroad
By country/country group, 2021–2024

Originally enacted in 1949, the Foreign Exchange and Foreign Trade Act (FEFTA) is the principal law that governs FDI in Japan. Under FEFTA, the Japanese Ministry of Finance (MOF) and the Ministry of Economy, Trade, and Industry (METI), alongside ministers from the relevant industry (for example, the Minister of Agriculture, Forestry and Fisheries for agriculture-related investments), review FDI proposals with an emphasis on national security and public welfare.

Japan’s recent reforms to foreign direct investment policy

In 2019, Japan amended FEFTA to expand the scope of foreign investment under review. This amendment lowered the threshold for requiring prior approval from owning 10% of shares of a Japanese company to just 1%, greatly expanding Japan’s oversight of foreign acquisitions. Furthermore, the scope of business sectors considered relevant to national security and public welfare was expanded to include industries such as information processing-related equipment and software-related information processing.

In 2023, under FEFTA, Japan expanded its list of ‘core business sectors’ due to concerns about national security and technology leakage. Under this amendment, foreign investors are required to obtain advance approval from the Japanese Government before making direct investments or acquisitions within these sectors. This amendment moves to align Japan’s foreign investment regime with its 2022 Economic Security Promotion Act, which aims to promote national security through economic policies.

In May 2025, Japan revised its foreign investment screening system to focus on high-risk investments and require prior notification from investors looking to cooperate with foreign governments on information-gathering activities. This helps prevent sensitive information from being leaked abroad and aligns Japan’s FDI regime with global practices in economic security.

What has been the impact of recent foreign direct investment reforms in Japan?

Japan’s recent FDI policies have resulted in enhanced scrutiny and stricter approval processes in sensitive sectors; however, there have not been widely reported instances of outright FDI blocks. There has been an increase in the number of cases screened, with MOF reporting in 2024 that the number of pre-filings in the 2024 financial year reached a record high, with 2,903 mandatory pre-screenings taking place from April 2024 to May 2025, up 1% from the prior year. Sectors related to cybersecurity, including data processing and software services, accounted for 56% of the pre-filings. Japan’s screening regime remains significantly more comprehensive than other developed economies, meaning that a higher number of cases are subject to scrutiny. For example, over the same period of April 2024 to May 2025, the United Kingdom recorded 753 mandatory pre-screenings — approximately a quarter of the number that Japan recorded — and the United States recorded just 342 in 2023.

European Union

The European Union plays a leading role in shaping FDI policy across the Union by setting common parameters for national review mechanisms and fostering coordination among member states. However, individual member states remain responsible for reviewing and approving foreign direct investment and retain ultimate decision-making authority.

The European Union is one of the largest providers and recipients of FDI worldwide. In 2024, FDI made up 1.3% of the European Union’s GDP. The EU invests primarily in the United States (€2.4 trillion in 2023), the United Kingdom (€1.8 trillion in 2023) and Switzerland (€754 billion in 2023). The European Union receives the most FDI from the United States (€2.3 trillion in 2023), the United Kingdom (€1.3 trillion in 2023) and Switzerland (€620 billion in 2023).

Figure 9. Foreign direct investment stock in the European Union
By country/country group, 2020–2023

Figure 10. European Union foreign direct investment stock abroad
By country/country group, 2020–2023

Recent changes in European Union foreign direct investment legislation

In 2019, the European Union adopted Regulation (EU) 2019/452 to address the lack of coordination among member states regarding FDI. The regulation establishes a framework for enhanced cooperation and information sharing between member states and the EU’s governing body, the European Commission. This move was driven by concerns that FDI in one member state could have security or strategic implications for the Union as a whole. While member states retain the authority to screen FDI, the reform grants the European Commission greater oversight into transactions that may pose potential security risks.

In 2024, the European Commission published the European Economic Security Package, which included a proposal to reform the FDI screening regulation, citing “growing geopolitical tensions and profound technological risks.” The proposal aims to strengthen the European Union’s ability to detect and mitigate security-related risks associated with FDI, improve cooperation and information sharing among member states, and enhance the European Commission’s role in coordinating national screening efforts. The reform forms part of a broader EU agenda on economic security which seeks to maintain the European Union’s resilience, reduce strategic dependencies and safeguard its economic interests.

To address emerging concerns around outbound investments, the European Union released Recommendation (EU) 2025/63 in January 2025. The recommendation is non-binding; however, it urges all member states to review outbound investments into non-EU countries, with a particular focus on technology areas of ‘strategic importance’, i.e. semiconductors, AI and quantum technologies. The recommendation also calls for member states to consider risks to economic security when making investments. This move marks a notable shift in EU policy, signalling a broader, more comprehensive approach to foreign investment that elevates the oversight of outbound investment to a level comparable with existing mechanisms for inward investment screening. In doing so, the European Union is laying the foundation for potential future legislation to formalise outbound investment controls.

What has been the impact of reforms to foreign direct investment in the European Union?

Recent changes to the European Union’s FDI framework have led to an increase in screening activity under the cooperation mechanism. In 2023, member states submitted 488 notifications compared to 421 the previous year. These notifications remain concentrated in a few member states, including Austria, Denmark, France, Germany, Italy, Romania and Spain. Notably, while screening of cases has increased, only 1% of FDI cases across the European Union were blocked outright in 2023. Despite this, significant investment proposals have still been blocked, with France blocking US investments in nuclear, Spain prohibiting the Hungarian acquisition of a train manufacturer and Germany blocking Chinese investment in critical infrastructure. Rationale for these blockages focuses on protecting sectors critical to national sovereignty, security and strategic autonomy, namely energy, technology, transportation and infrastructure.

United Kingdom

FDI remains a small component of the United Kingdom’s economy, with net inflows accounting for just 0.1% of GDP in 2024.

Top FDI investors into the United Kingdom include the European Union (£758 billion in 2023), the United States (£692 billion in 2023), and UK Offshore Islands (£225 billion in 2023). The United Kingdom also invests internationally, primarily in the European Union (£808 billion in 2023), the United States (£513 billion in 2023) and Hong Kong (£105 billion in 2023).

Figure 11. Foreign direct investment stock in the United Kingdom
By country/country group, 2020–2023

Figure 12. United Kingdom foreign direct investment stock abroad
By country/country group, 2020–2023

In 2002, the United Kingdom passed the Enterprise Act, which established a framework to scrutinise mergers, acquisitions and FDI to mitigate potential risks to public interest and national security. Under this legislation, the Secretary of State and the Competition and Markets Authority — the UK Government’s competition regulating authority — were empowered to intervene in mergers and acquisitions on public interest grounds, including national security, financial stability and public health.

Changes to UK foreign direct investment policies

In 2022, the UK Government vastly overhauled the FDI process under the National Security and Investment Act (NSI Act), increasing the government’s power to intervene in acquisitions that could threaten national security. This Act significantly expanded the United Kingdom’s oversight of FDI and strengthened the government’s ability to respond to potential security risks. The Act also centralised oversight, establishing the Investment Security Unit within the Cabinet Office as responsible for reviewing transactions and the Secretary of State as the final decision-making authority. Different to many FDI regimes, the NSI Act applies equally to UK and foreign investors, meaning that the UK Government can also block acquisitions by UK-based investors. In May 2024, the United Kingdom issued updated guidance clarifying that certain outbound investments from the United Kingdom may fall within the scope of the NSI. While this did not constitute a formal policy change, it signalled the UK Government’s increasing concern that outward investments — particularly those involving the transfer of sensitive technologies or capabilities — can carry national security implications. The guidance notes that outbound transactions that could undermine critical infrastructure, bolster the capabilities of hostile states, or otherwise pose risks to UK security may be subject to heightened scrutiny and potential intervention.

In May 2024, the United Kingdom issued updated guidance clarifying that certain outbound investments from the United Kingdom may fall within the scope of the NSI. While this did not constitute a formal policy change, it signalled the UK Government’s increasing concern that outward investments — particularly those involving the transfer of sensitive technologies or capabilities — can carry national security implications. The guidance notes that outbound transactions that could undermine critical infrastructure, bolster the capabilities of hostile states, or otherwise pose risks to UK security may be subject to heightened scrutiny and potential intervention.

How has policy reform impacted foreign direct investment in the United Kingdom?

Since NSI came into effect, the UK Government has reviewed significantly more investment proposals, with the highest proportion related to defence (48% of notifications from April 2023 - March 2024). To date, five deals have been blocked or unwound, all of which involve Russian or Chinese buyers, including in fields such as semiconductors and technology. A large focus in these decisions was protecting sensitive technology and intellectual property.