When States Think Economic Statecraft and Businesses Think State Capitalism

The world’s geoeconomics has forced state and business to collide. States must adopt a new playbook of economic statecraft, using its economic resources & leverage, including investment policies, as tools of foreign policy to achieve strategic geopolitical objectives. On the other hand, business has to think about state-led capitalism, a situation that blurs the lines between public policy and corporate strategy. In terms of investment reality, the old liberal investment order’s foundation, that investment and tax frameworks operate under predictable, market-neutral rules, has been rendered obsolete by the collision between state economic statecraft and the realities of global state capitalism, commanding a price that businesses can no longer avoid.

Today’s global economy has shifted from globalization to the geoeconomic era. During the era of globalization, the control of global investment and FDI flows was largely concentrated in the hands of developed and Western economies, which dominated both as sources and destinations of cross-border capital. That structural reality is now fundamentally shifting in this period of structural transition. By 2012, emerging market economies had become a major source of global foreign investment, and their role in international capital flows has continued to expand since then.

In other words, this transition era to geoeconomics fragmentation has accelerated a structural rebalancing of global capital power; large emerging economies, through their sovereign wealth funds (SWFs), state-owned enterprises (SOEs), and configurational investment strategies, have assumed the role of significant global capital exporters. And then, the crucial thing about investment issues related with emerging economies is the direct or indirect role of governments behind some investments, SOEs and SWFs conducting M&A (merger & acquisitions) that blurs commercial and geopolitical motives.

Through this transition, foreign investment screening regimes become one of the prominent tools in the age of geoeconomic fragmentation and economic statecraft. Foreign investment screening regulation has currently dominated the world’s investment practice, with inward investment screening  being  established, while outbound counterparts are gaining traction. According to UNCTAD, investment screening mechanisms (ISMs) can be grouped into three main categories: sector‑specific, cross‑sectoral, and entity‑specific.

By nature, the investment screening regime can be called as a domestic layer of international investment law under state-led capitalism. Moreover, politically speaking, foreign investment screening regulation is an executive political instrument, since it is primarily about the degree of trust placed in a state‑controlled entity and its home state, particularly in the context of critical infrastructure projects.

Basic Investment Rules and Mechanisms

Returning to basic investment rules, International Investment Agreements (IIAs) typically govern the post-establishment treatment of foreign investments rather than the initial right of entry. They defer market access conditions, screening processes, and establishment authorizations to the host state’s domestic legislation. However, a significant contention emerges when investment screening mechanisms collide with a specific subset of IIAs known as liberalization BITs, which unlike the classical post-establishment model, extend treaty protection into the pre-establishment phase by granting foreign investors national treatment rights with respect to the establishment and acquisition of investments before entry has occurred.

Looking again through the lens of basic investment mechanisms, in practice, the focus is predominantly on takeovers and M&A. From a global political economy perspective, the rise in M&A activity since the early 2000s reflects uneven geographical development and varying speeds of capital accumulation across sectors. Strategic M&A is necessary for corporate profit strategy, including to expand production, reach new potential customers, dominate markets, secure supplies, and obtain critical technology and expertise. So, centralization of capital through takeovers and M&A is the answer.

Systemic Tax Regulation

In relation to systemic tax regulation, as investment screening mechanisms increasingly apply to M&A, corporate tax governance has currently become an indispensable dimension of M&A due diligence, deal structuring, and post-merger integration. Within the tax management architecture of cross-border M&A, corporate tax strategies, particularly transfer pricing arrangements and responses to the OECD’s global minimum tax framework, have assumed new strategic significance in global tax practices.

For example, despite both greenfield FDI and M&A being central to cross-border capital movement, late evidence demonstrates considerable heterogeneity in the ways these different types of cross‑border investment adapt to the realities of geopolitical and economic fragmentation. Greenfield FDI exhibits a tendency toward reallocation, becoming increasingly concentrated among geopolitically aligned partners through what scholars now term friendshoring, as investors redirect capital flows within rather than across geopolitical blocs. At the same time, cross-border M&A, by contrast, displays a pattern of selective pullback, reflecting derisking behavior that is particularly pronounced where geopolitical distance is greatest and ideological divergence is most significant, rather than a uniform decline in deal activity across all markets.

From this reality, it can be said that Western investment patterns have pointed to a structural change,  both reallocation and pullback, and then opening for a new route to more de-risking countries. In terms of supply chain reallocation, rather than absolute decoupling, China +1 strategy, which is to diversify production reducing exclusive dependence on China, has become a major investment strategy.

What’s especially interesting is the reallocation of FDI toward emerging economies. While transatlantic capital flows still follow a kind of friendshoring logic, some western countries are rethinking and even rebuilding their capital positions in large emerging economies. These host countries may not be full political allies or part of democratic alliances, many of which operate under hybrid or openly state-led capitalism framework.

This position brings an awareness among capital investors and corporations that the governance architecture of tax and investment, especially in emerging economies, is no longer shaped by market logic alone. Large emerging economies, operating within hybrid or state-led capitalism frameworks, deploy particular tax incentives, investment screening mechanisms, and trade regulations not merely as economic instruments but as tools of their own strategic statecraft. They attract capital selectively, condition market access on technology transfer or local partnership requirements, and reserve the right to reprioritize national interest over investor protection.

For businesses, from foreign investors to multinational corporations, this implies that the legal frameworks governing their investments, including bilateral investment treaties and double taxation agreements, offer only incomplete and less predictable protection than they once did under the old liberal investment order. Moving from yesterday’s globalization into today’s geoeconomic world economy, understanding tax and investment regulation demands a more sophisticated, geoeconomically informed approach to cross‑border investment structuring.

Bibliography

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