Who Can Control Our Firms? National Security and Foreign Ownership Regulation

Abstract

Governments invoke national security to regulate foreign acquisitions of domestic firms. Why is ownership regulation a distinct policy margin beyond standard tools, like production subsidies and trade taxes? We show that contractual frictions make multinational firm boundaries central to geoeconomic policy. Within firms, ownership allocates residual control that affects outcomes through non-contractible decisions. Between governments, the absence of enforceable agreements makes the economic costs of conflict shape geopolitical bargaining. Foreign ownership depends on private returns to foreign control, but also determines national exposure to geopolitical conflict. It can increase foreign dependence, technology transfer, or sabotage scope. If such margins were contractible, the government could regulate them directly. When they are not, ownership regulation is the second-best tool that changes control rights and, thus, geopolitical outcomes. Consistent with our mechanism, U.S. regulation emphasizes the national-security risks of foreign control over firm decisions, has tightened with rising geopolitical tensions, and is tighter in sectors with higher exposure to defense demand and contractual frictions.