Scrutinizing Foreign Investment: How Much Congressional Involvement Is Too Much?

• Author: Jonathan C. Stagg
• Position: J.D. Candidate, The University of Iowa College of Law, 2008; B.S., Finance, Brigham Young University, 2004.
• Pages: 327-359

Page 327

I Introduction

Foreign direct investment is vital to the continued growth and vitality of the U.S. economy.¹ Through a net influx of nearly $3 trillion in foreign capital over the last twenty-five years, foreign investment has been particularly important in sustaining cash-poor industries like the U.S. automotive industry.² Except for transactions affecting national security, foreign investment receives little scrutiny from the U.S. government.³

The United States has long been a world leader in liberalizing foreign- investment regulations and policies.⁴ Although foreign investment is an important element of our economic growth, critics of liberal foreign- investment policies have often voiced national-security concerns. These debates have regained vitality in the aftermath of September 11, 2001. A recent example is Dubai Ports World's acquisition of a company controlling port operations at several major U.S. ports.⁵ Although this deal could possibly have gone unnoticed before the events of September 11, 2001, it nonetheless became a hot political issue.⁶ Both Democrats and Republicans attempted to block the deal.⁷ In response to political pressure, Congress passed a broad and sweeping amendment to the statutes covering the investigation of proposed foreign-investment deals having national-security implications.⁸

This Note attempts to define the appropriate level of congressional influence in the review of foreign-investment transactions. In regulating foreign investment, Congress must delicately balance the competing interests of national security and an open investment policy. Congressional Page 328 action in this area must serve domestic national-security interests while maintaining open and consistent foreign-investment policies.⁹

Part II of this Note addresses the current state of foreign investment in the United States. It begins with an analysis of the developments leading to the current U.S. policy relating to foreign investment and is followed by an analysis of the extent of foreign investment and its effect on the U.S. economy. Finally, Part II analyzes the ramifications of either allowing or restricting foreign investment, discussing the possible effects on both national security and the economy.

Part III addresses the development of the U.S. regulatory structure relating to foreign investment and its state prior to the enactment of the most recent amendment. Following the enactment of measures allowing leaders to block certain transactions in the case of a national emergency, Congress enacted the Exon-Florio provision to provide the government with more authority to scrutinize proposed transactions. Later, Congress passed the Byrd Amendment in an effort to adapt Exon-Florio to deal with transactions involving foreign-government-owned companies and to provide for increased congressional oversight.¹⁰ Part III concludes by describing how the President oversees the application of Exon-Florio through the Committee for Foreign Investment in the United States ("CFIUS").¹¹

Part IV addresses Congress's role and authority in regulating foreign investment.¹² Congress has the important duty to oversee the CFIUS review process in order to ensure that current regulations are sufficient to allow the government to block transactions that pose a threat to national security. However, Congress must be mindful of the unintended consequences of excessive congressional involvement in the details of the CFIUS review process.

Part V introduces the latest amendment to Exon-Florio: the Foreign Investment and National Security Act of 2007 ("FINSA").¹³ FINSA calls for meaningful improvements to the regulation of foreign investment, including clarifying the process by which CFIUS identifies transactions that require investigations, the inclusion of additional factors for review, the ability to place conditions on a transaction, the authority to appoint an Page 329 agency to monitor the fulfillment of those conditions, an independent analysis by the Director of National Intelligence, and finally, the formal, statutory creation of CFIUS.¹⁴ However, FINSA also significantly increases congressional involvement in the CFIUS review process. This inappropriate change will encourage the politicization of foreign-investment transactions and discourage investment in the United States by threatening to compromise corporate confidentiality.¹⁵

Finally, Part VI discusses the amendments Congress should make to FINSA in order to appropriately balance the competing interests of protecting national security and encouraging foreign investment in the United States.¹⁶

II Foreign Investment in the United States

A U.S. Policy Relating to Foreign Investment

CFIUS, the group the President has designated to investigate foreign- investment transactions,¹⁷ characterizes U.S. policy in this area as follows: "The United States has traditionally welcomed Foreign Direct Investment . . . and provided foreign investors fair, equitable and nondiscriminatory treatment with few limited exceptions designed to protect national security. [U.S. government regulations are] implemented within the context of this open investment policy."¹⁸

U.S. government leaders have advocated an open foreign-investment policy since the time of the Founding Fathers.¹⁹ President Reagan, however, can be credited for shaping modern U.S. policy in this area. He emphasized the domestic benefits of foreign investment and enticed foreign capital to the United States by highlighting the benefits this country provides to foreign investors.²⁰ After the end of the Cold War, with the resulting Page 330 creation of a global environment conducive to international trade and investment, the U.S. government increased its efforts to promote democratic and capitalist ideologies, including a liberal conception of the international movement of capital.²¹ The United States continues to encourage other nations to reduce investment barriers through participation in multilateral negotiations such as the Uruguay Round of trade negotiations and the North American Free Trade Agreement ("NAFTA").²²

Even state governments have made individual efforts to entice foreign investors.²³ Many states open foreign offices that serve as initial contacts for foreign individuals and companies.²⁴ In addition to these efforts, states often offer significant economic incentives to invest within their borders.²⁵ These efforts appear to be paying off. In Kentucky, for example, statistics show that every dollar committed to developing foreign-capital sources results in a sixteen-dollar return.²⁶

As a result of this liberal policy toward foreign investment, the United States has led a modern revolution toward globalization and the free movement of capital.²⁷ This policy has led to an unprecedented level of international trade and has exponentially increased the amount of foreign capital imported into the United States.²⁸

B Extent and Effect of Foreign Investment in the United States

Foreign investors choose to invest in the United States for many reasons, including its market size, per-capita buying power, well-developed transportation networks and infrastructure, and the declining value of the Page 331 dollar relative to appreciating foreign currencies.²⁹ Experts also cite the country's favorable regulatory structure, as well as its political stability with regard to trade policy, as major incentives for foreign investors.³⁰

Foreign investment is a vital source of job creation, innovation, research and development, and the strength of the U.S. manufacturing sector.³¹Foreign-owned companies employ approximately one in twenty U.S. workers.³² On average, these jobs pay thirty-four percent higher than the national averages for the respective industries.³³ In addition to these benefits, other advantages include "heightened real estate values, the preservation of agricultural land, an increase in the pool of venture capital, lowered home mortgage rates, [and] improved local economies."³⁴ The domestic benefits of foreign investment cannot be overstated; infusions of foreign capital have rescued many faltering U.S. companies.³⁵ Foreign investment is also a method of combating the current U.S. trade deficit by increasing exports.³⁶ Foreign investment led to exportation of goods worth over $150 billion in 2003.³⁷ Commenting on this figure, economist David Marchick argues that "[f]oreign investment drives trade, and more foreign investment will lead to more exports."³⁸

Foreign investment, which has grown from "$185 billion in 1985 to more than...