More FDI Than Any Other Country

As TradeVistas wrote in its Essential on foreign direct investment (FDI), the United States is home to the largest stock of FDI of any single country. (On the flip side, the United States is also one of the world’s most important sources of direct investment, with more than $5 trillion worth of assets abroad.)

The attractiveness of the U.S. market for FDI reflects the size and strength of the U.S. economy as well as the longstanding U.S. commitment to open markets and the rule of law. The vast majority of FDI occurs on a regular basis in every U.S. state across sectors including manufacturing, financial, and information technologies. But there are cases when foreign investment might carry security implications.

Enter CFIUS

CFIUS is short for the Committee on Foreign Investment in the United States, an executive branch committee chaired by the Secretary of the Treasury. Its membership includes the heads of various departments such as Defense, Homeland Security, State, and Energy (full member list here). The committee’s mandate, derived from Section 721 of the 1950 Defense Production Act (and subsequent amendments and executive orders) is to review investments in the United States by foreign persons or entities for national security concerns.

Reviews can be launched at the discretion of the committee, but they are often initiated when private entities involved in the investment provide notice of the transaction to the committee, an action they can take voluntarily. On the basis of CFIUS reviews, the committee can recommend that the President block an investment the committee deems threatening to national security. However, in the first instance, the committee often recommends ways in which the assets involved in a transaction or the transaction’s structure might be adjusted to mitigate the threat and allow it to proceed.

The History of CFIUS

From its inception, the CFIUS process has evolved to respond to changes in the global investment and security environment. First established in 1975 by the Ford administration, the committee served a largely advisory role to assess and manage the implications of growing volumes of FDI from oil-producing countries. By the 1980s, concerns over increased investments from abroad, particularly in the form of mergers and acquisitions by Japanese firms, prompted the 1988 Exon-Florio provision. This legislation formalized the CFIUS process, and empowered the president to block transactions the committee deems threatening to national security when no other laws prove sufficient to address the concern.

Further reforms were made following the September 11th attacks and the rise of China as a strategic and economic power, as new concerns arose about security vulnerabilities, particularly with respect to control of advanced technologies and physical infrastructure. In 2007, Congress instituted the second round of CFIUS reforms with the Foreign Investment and National Security Act, or FINSA. The FINSA act was a reaction to concerns with some high profile investments, in particular the control of several U.S. ports by a Dubai-based global investor (to be acquired from another foreign company), and acquisitions of micro-processor and telecommunications companies by investors with ties to the government of China. The legislation expanded the CFIUS mandate to include “critical infrastructure,” such as communications, energy and transportation systems.

How Should CFIUS Define National Security?

The Defense Production Act outlines a range of factors that CFIUS may consider in reviewing a transaction. One of those key considerations is maintaining U.S. technological leadership.

Technological change is occurring globally at an extremely rapid pace. The growth of start-up culture and decentralized innovation has increasingly shifted the development of emergent technologies into private hands. Much like global value chains in production, large multinational companies increasingly spread their R&D around the world in a non-stop development cycle. U.S. defense procurement increasingly relies on “off the shelf” products developed in the private sector. The scope of what might be considered “dual-use” technologies — technologies ranging from material sciences to micro-processors that have both civil and military applications — is expanding, further complicating CFIUS analysis.

Another issue is how narrowly to define national security. For example, when American pork producer, Smithfield, was acquired by a Chinese producer, some members of Congress raised concerns about the security of the U.S. food system and public health. This prompted debate over the inclusion of food security in the definition of national security, and whether agencies such as the Department of Agriculture and Health and Human Services should be added to the committee’s membership. The subsequent involvement of Smithfield in a Department of Defense-funded project on tissue engineering further demonstrates the complexity of the issues at stake in CFIUS reviews.

Striking a Balance

Although it has broad authorities, CFIUS ultimately reviews only a very small percentage of the FDI that enters the United States, averaging about 120 transactions per year from 2012-2014 (the latest years for which data is available). And there are often no bright lines in CFIUS assessments. Trying to draw those lines would be tricky. How, for example, could the committee understand the economic opportunity costs of restricting an investment or require the benefits be quantified? Should the committee take into account broader military and security relations with another country in determining which private transactions to review? Is environmental security an element to be considered? Should “greenfield” investments, joint ventures, and other types of transactions become subject to review?

CFIUS has provided a tool for reviewing the security implications of specific and individual foreign direct investments to prevent problematic transactions from undermining U.S. national security, while at the same time allowing our economy to secure the benefits of foreign investment such as job creation, growth, and innovation. But continual changes to the global economic and security environment are already prompting more debate over how CFIUS is equipped to deal with tomorrow’s challenges while maintaining an open investment climate.

Additional Reading:
Congressional Research Service report dated June 13, 2017