Defense globalization: foreign investors in U.S. corporations navigate sea of regulations.

• Author: Grammas, George N.
• Position: VIEWPOINT

Investment in the U.S. defense industry is attractive to European and Asian companies simply because the federal government is the largest customer in the world by an order of magnitude.

The United States spends far more on national defense and homeland security than any other nation in the world. Reasons for increased spending in the United States include the need to replace equipment used in ongoing wars, the Defense Department's initiatives to ensure the military remains a technologically superior force, the growing requirements to protect transportation, energy, communications and other critical infrastructure, and the government's desire to acquire new capabilities to protect troops in the field and citizens at home from terrorist attacks.

European and Asian companies understand that they need to have a presence in the United States in order to earn U.S. government business. Some foreign firms have concluded that the best way to compete against large, home-grown defense contractors is to buy them.

Some opportunities cannot be effectively pursued unless a U.S. subsidiary is facilitating the paperwork required to respond to a government solicitation. Other business opportunities can only be pursued with a cleared U.S. facility. Non-U.S. companies that have realized the benefits of direct investment in the United States include BAE, EADS, Airbus, Smiths, Thales and Rolls-Royce. British companies alone have invested more than $1.6 billion in acquiring U.S. defense, aerospace and homeland security companies.

The Defense Department's policy, generally, is to support the military with the best technology and equipment at the lowest price. For these and other reasons, the Defense Department will buy European or Asian items, or U.S.-made items with foreign components. As the Pentagon moves toward network-centric war-fare, some of the best and lowest-cost equipment will come from Europe and Asia.

Although members of Congress have proposed legislation that is aimed at limiting foreign participation in U.S. defense procurement, most policymakers understand that contracts with foreign firms help maintain and build relationships with allies. It would be more difficult to obtain the support of our allies in a military effort if we excluded their contractors. In addition, cooperation with other countries facilitates interoperability of forces and assets.

American companies considering selling to foreign owners should examine the application of the...