Governments restrict foreign acquisitions of critical domestic technologies to maintain technological leadership. However, such policies create uncertainty for domestic technological entrepreneurial firms who rely on foreign funding as an exit strategy, reducing the market value of targeted technologies and discouraging innovation. We examine this hypothesis using the impact of the blockage of foreign acquisitions of U.S firms by the Committee on Foreign Investment in the United States (CFIUS). We find that U.S. entrepreneurial firms within the same sector where CFIUS blocked foreign acquisition deals—including firms that did not directly experience such blockages themselves—experienced a significant decline in their overall patented innovation output, with a more pronounced drop in their core technological domains. Innovation quality also declined. Furthermore, these firms altered their technological trajectory, shifting away from their core competencies and entering new technological domains. However, the decline in quality of innovation within their prior core technological domain was not immediately accompanied by an increase in quality of innovation within their newly entered domains. Therefore, the costs of screening and restricting foreign acquisitions extend beyond the directly blocked firms and include two additional impacts: a reduction in overall innovation among industry peers, and the “switching costs” incurred by these firms as they attempt to shift to new technological domains where they are not immediately innovative.

He Qing is a PhD candidate in Industrial Systems Engineering and Management at the National University of Singapore, advised by Prof. Kenneth G. Huang. Her research focuses on innovation and technology management, science and technology policy, and non-market strategy. She holds a Bachelor’s degree in Economics from Peking University and a Master’s in Public Policy from the University of Chicago.