Balancing Investment Openness and National Security: FDI Screening in Israel and Insights for International Practice
1. INTRODUCTION
Foreign direct investment (FDI) plays a significant role in shaping the economic and strategic landscape of host countries, generating both growth opportunities and potential vulnerabilities. On one hand, it provides capital, facilitates technology transfer, enhances productivity, and integrates domestic markets into global value chains. On the other hand, certain foreign investments may expose host countries to risks such as control over critical infrastructure, access to sensitive data, or potential influence by foreign governments. These concerns have led many states to introduce mechanisms for screening foreign investments to safeguard national security.
National security is inherently a matter of state sovereignty, with each country defining and protecting it according to its policy priorities and geopolitical context. What constitutes a national security threat in one country may not be considered a risk in another. Hence, countries have adopted varying approaches: some have introduced strict legal requirements and comprehensive screening mechanisms, while others rely on more limited measures.[1] Nevertheless, according to the Investment Policy Monitor, in recent years, an increasing number of countries have implemented or strengthened regulatory frameworks, expanding the scope of strategic sectors and sensitive technologies that could pose a threat to national security.
To guide countries in developing coherent and effective screening mechanisms, the OECD issued its Recommendation on Guidelines for Recipient Country Investment Policies Relating to National Security (OECD Guidelines). These Guidelines establish key principles, including non-discrimination, transparency, predictability, accountability, and regulatory proportionality, which aim to help countries establish FDI screening mechanisms that balance investment openness with the protection of national security.
However, in practice, many countries face significant challenges in developing FDI screening mechanisms that achieve such a balance, and Israel provides a clear example. In 2019, it established the Advisory Committee for Assessing National Security Aspects of Foreign Investments (the Committee). However, the Committee lacks binding authority and serves only in an advisory capacity to the relevant authorities. Furthermore, its decisions are not publicly disclosed, and the criteria guiding its assessments remain unclear. Hence, Israel’s current FDI screening mechanism does not fully align with the abovementioned OECD Guidelines.
Against this background, the blog examines Israel’s FDI screening mechanism and the challenges it faces in balancing investment openness with national security. Building on my recent paper, “FDI Screening in Israel: Balancing Investment Openness with National Security”, co-authored with Professor Arie Reich, reforms to the Israeli framework inspired by practices in the United States, the European Union, and the United Kingdom are proposed. The shortcomings observed in Israel’s experience may offer cautionary lessons for other countries. Given this, our paper, as well as this blog, identifies key approaches that could serve as a roadmap for other countries, guiding the establishment of structured, transparent, and effective FDI screening mechanisms in line with the OECD Guidelines.
2. FDI Screening in Israel: Critiquing the Current Mechanism
As it was mentioned above, in 2019, Israel established the Advisory Committee for Assessing National Security Aspects of Foreign Investments (the Committee) pursuant to Government Resolution B/372. The Committee was created to balance economic openness with the protection of the state’s strategic interests, considering the growing participation of foreign companies in critical sectors of the Israeli economy, which created potential geopolitical vulnerabilities. However, does the current mechanism achieve the appropriate balance?
Government Resolution B/372 (the Resolution) defines “interests in national security aspects” as: (1) preventing a foreign investor from acquiring substantial influence that could undermine Israel’s national security or foreign relations, and (2) preventing the disclosure or transfer of confidential information to foreign entities. The Resolution further provides that the Committee, chaired by the Chief Economist of the Ministry of Finance, may issue reasoned recommendations to the relevant authorities, including the Bank of Israel, the Israel Securities Authority, the Capital Market, Insurance and Savings Authority, and other sectoral ministries and agencies.
However, its opinions remain merely advisory. The competent authorities retain the discretion to independently restrict or reject foreign investments, yet the legal basis for such decisions often lacks transparency and clarity. The Committee, in turn, may initiate reviews either on its own initiative or at the request of regulators. However, issuing a recommendation requires the unanimous consent of all members; if even one member disagrees, the Committee cannot provide guidance. This unanimity requirement can create institutional deadlock, allowing investments with potential security implications to proceed without thorough screening. Additionally, meetings are held only upon request, which can result in irregular oversight and leave important investments unreviewed.
In 2022, Government Resolution B/41 replaced Government Resolution B/372, preserving the core national security elements while refining the procedure for evaluating foreign investments. Key amendments included an expanded definition of “foreign entity”, a reduction of the ownership threshold for mandatory review from 25% to 20%, the inclusion of representatives from the Ministry of Foreign Affairs and the National Cyber Directorate in the Committee, and the establishment of specific deadlines for issuing recommendations – 30 days, with a possible 15-day extension. Nevertheless, the Committee’s recommendations remain non-binding for regulators, leaving legal uncertainty unresolved and limiting the effectiveness of the screening process.
In 2024, the Committee approved the Methodology for Foreign Investment Screening in Israel (the Methodology), designed to clarify national security criteria and structure the analysis of potential risks. The Methodology broadens the concept of national security to encompass not only traditional military considerations but also critical economic sectors, including energy, climate, healthcare, high-tech, and cybersecurity. It introduces a systematic assessment of the criticality, sensitivity, and vulnerability of foreign investment targets. However, neither Government Resolution B/41 nor the Methodology constitutes law and therefore does not grant government authorities the power to reject or restrict foreign investments on national security grounds. Hence, the legal basis for such decisions derives from sector-specific legislation.
Indeed, while certain provisions of these laws may serve as legal tools to screen or restrict specific foreign investments, not all strategic sectors are covered by dedicated legislation or such measures. Moreover, existing sectoral laws governing strategic sectors lack clear legal definitions of “national security”, “critical infrastructure”, and “critical technologies”. This results in legal uncertainty for decision-making, as regulators retain broad discretion to restrict or reject investments without clearly defined criteria. In addition, when the Committee seeks input or clarification from the regulator, it may not receive a binding response, which undermines its effectiveness and allows economic priorities to prevail over national security considerations.
In practice, the advisory nature of the Committee’s role was evident in Administrative Petition 30356-04-22 Urbanics LRT v. NTA.[2] The case concerned Tel Aviv’s Green and Purple light-rail lines, in which the Chinese state-owned company CRCC participated. Urbanics challenged the tender, alleging that the disqualification of certain bidders, including CRCC, was influenced by political or national security considerations. The Court’s review showed that the Committee had proactively examined the tender as early as January 2020, before specific concerns about foreign participation arose. The Committee held multiple discussions, taking into account political, foreign relations, security, national security, strategic, and economic considerations, including competition and maintaining a favorable business environment. However, it maintained a strictly advisory role. The tender committee independently rejected CRCC for economic reasons, citing an abnormally low bid and doubts about the company’s ability to deliver the project. The Court upheld this decision, dismissing claims of political or security influence.
The case illustrates several limitations of Israel’s FDI screening framework. First, the Committee’s lack of binding authority meant that even if national security concerns were identified, it could not compel the tender committee to act. Second, the Court treated potential foreign policy considerations, such as alleged U.S. pressure regarding Chinese participation, as “invalid considerations”, highlighting the unclear legal scope of the Committee’s mandate. Third, while the Court reviewed confidential Committee minutes, limited transparency and deletion of certain tender committee records raised accountability concerns. These factors demonstrate that the Committee’s advisory function, combined with the absence of a clearly-defined legal authority, constrains its ability to address national security risks, particularly in projects with long-term strategic implications.
Another notable shortcoming is the limited scope of the Committee’s authority. Its purview is restricted to investments requiring regulatory approval, leaving certain investments in non-regulated sectors potentially unscreened. For example, the high-technology sector is largely composed of private entities, and FDI in these companies often does not require prior regulatory approval, even though such investments could relate to dual-use products or have strategic significance in the future. As a result, these transactions fall outside the Committee’s authority and may proceed without review.
Thus, Israel’s experience highlights challenges that may be instructive for other countries seeking to balance investment openness with national security in their FDI screening mechanisms. These challenges undermine investor confidence and create vulnerabilities in the screening process. As a result, the current mechanism does not fully safeguard national security, leaving certain sectors potentially exposed to various risks and creating an uncertain investment environment.
3. Key Frameworks for Balancing Investment Openness and National Security: Lessons from International Practice
Drawing on a comparative analysis of international best practices from the United States, the European Union, and the United Kingdom, several key approaches useful for balancing investment openness with national security can be identified. Although no existing FDI screening mechanism fully achieves this balance, based on our findings, integrating selective measures from different jurisdictions can provide a roadmap for establishing more structured, transparent, and effective screening mechanisms in line with the OECD Guidelines.
First, the adoption of a unified legal framework significantly enhances legal predictability and institutional coherence. Such a framework clarifies institutional responsibilities and ensures consistent regulatory application across strategic sectors. This approach is exemplified by the U.S. Foreign Investment Risk Review Modernization Act (FIRRMA), as well as comparable frameworks in other jurisdictions such as the United Kingdom’s National Security and Investment Act (NSIA), Canada’s Investment Canada Act and other comparable frameworks.
Second, the inclusion of statutory definitions for key terms such as “national security”, “critical technologies”, “critical infrastructure”, and others is essential. As demonstrated by the U.S., UK and Italian legislation, precise legal definitions provide a foundation for consistent risk assessment and facilitate the enforcement of screening decisions, including potential judicial reviews. The absence of such definitions contributes to regulatory uncertainty and might undermine investor’s confidence.
Third, the unified law should clearly define the strategic sectors subject to mandatory screening. Each sector could be further supported by an annex outlining sector-specific criteria and requirements. To enhance transparency and predictability, investors should be required to submit a mandatory declaration to the relevant authority containing all necessary information and receive a timely response regarding their transaction. This would strengthen procedural transparency and ensure systematic review of high-risk investments. Such an approach, adopted under both the U.S.’s FIRRMA and the UK’s NSIA, enables early regulatory intervention and supports legal proportionality by limiting obligations to sectors most relevant to national security. Furthermore, it is essential to grant mandatory decision-making powers and define explicit criteria for decision-making.
Fourth, introducing a digital notification platform, modeled on the UK’s Notification Service, would enhance administrative efficiency and procedural transparency. Such a platform could enable investors to submit declarations, track the progress of reviews, and access clear guidance on sector-specific criteria, thereby aligning with the OECD Guidelines. In addition, FDI screening mechanisms could impose an annual reporting obligation on the government, including data on the number of notifications received, sectors reviewed, and decisions made, similar to the UK approach. This would strengthen public trust, enhance legal certainty, and promote institutional accountability.
Finally, our research, “FDI Screening in Israel: Balancing Investment Openness with National Security”, proposes an innovation currently not implemented in any of the major jurisdictions. Countries with specialized authorities overseeing FDI screening, such as Israel’s Advisory Committee or the Committee on Foreign Investment in the United States (CFIUS), could establish a formal appeals mechanism within these bodies to resolve disagreements and enhance procedural fairness. This mechanism would allow investors to contest decisions and submit additional information supporting their transactions, thereby reinforcing transparency and legal predictability. Although it may introduce some administrative burden, the procedure has the potential to promote clarity and fairness, facilitate the approval of beneficial investments, and help achieve consensus between investors and regulators.
These key approaches offer a coherent and adaptable roadmap for countries seeking to safeguard national security while maintaining openness to foreign investments, in alignment with the OECD Guidelines.
[1] On a separate note, the European Union has faced a unique challenge in this regard. While Regulation (EU) 2019/452 was adopted to coordinate national screening mechanisms in alignment with EU interests, the absence of a binding obligation for Member States to establish such mechanisms has led to fragmented national practices, leaving the EU market vulnerable to foreign influence in strategic sectors. To address these shortcomings, the European Commission introduced in 2024 a draft regulation aimed at making screening mandatory across all Member States, extending its scope to indirect investments, broadening the list of strategic sectors, and strengthening the coordinating powers of the Commission.
[2] See Administrative Petition 30356-04-22, Urbanics LRT Ltd. v. NTA – Metropolitan Mass Transit System Ltd., Tel Aviv District Court (2022) (Israel) (in Hebrew).
