Should Governments Restrict Foreign Investments in Start-Ups?

Fiona Paine, Richard R. Townsend and Ting Xu

Entrepreneurship and Innovation Policy and the Economy, 2026, vol. 5, issue 1, 183 - 210

Abstract: This paper examines the evolving policy landscape surrounding foreign investment restrictions in innovative start-ups. Drawing on recent research, we analyze both the security benefits and the economic costs of policies such as the Foreign Investment Risk Review Modernization Act. Evidence suggests that foreign investments do facilitate measurable cross-border knowledge spillovers that may raise legitimate security concerns. However, restricting these investments imposes significant costs on domestic innovation ecosystems, including reduced capital availability, disrupted investor networks, and potentially diminished innovation outcomes. These effects extend well beyond directly targeted foreign investors to affect domestic venture firms and start-ups. We explore design considerations for more effective investment screening policies, including industry targeting, investor heterogeneity, and implementation approaches, as well as complementary policies that might address security concerns and minimize costs to innovation. We conclude by outlining promising directions for future research on this increasingly important intersection of innovation policy and national security.

Date: 2026
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