Heady investments in distressed assets and cutthroat global competition to secure new drugs and vaccines to combat the coronavirus are drawing headlines—and attention from governments. Travel restrictions and export controls on high-demand medical supplies were the first wave of the “protect what is ours” response globally. Now, governments are ramping up reviews of foreign direct investment in the midst of a financial crisis that is depressing stock values and driving desperate businesses to find available cash—accelerating a trend towards increasing scrutiny of foreign investment. These regimes, however, not a panacea, and more is needed to protect critical assets and businesses effectively.
The pandemic and financial crisis—which the International Monetary Fund has called the worst downturn since the Great Depression—means that many companies have seen their value plunge. Others are struggling to find cash to maintain operations, or face restructuring or bankruptcy. In particular, the healthcare sector has been hard hit as it struggles with supply chain dependencies that limit access or ability to innovate in order to meet demand for ventilators, gowns and masks, and vaccines or other medicines—raising questions about investment behavior, chokepoints in supply chains, and concentration risk.
Countries—seemingly unified only by their unilateralism and protectionist impulses—have announced greater vigilance around foreign investment. Officials in the United States, the United Kingdom, the European Union, Australia, Italy, India, and elsewhere have expressed anxiety about predatory investments—particularly strategic investments funded by the Chinese government under its Made in China 2025 initiative—that take advantage of struggling businesses.
In a March 25th briefing on the U.S. Department of Defense’s response efforts, Under Secretary Ellen Lord raised the alarm about the use of “adversarial capital” that could erode the defense industrial base. A group of Republican senators urged President Trump in an April 10 letter to aggressively use CFIUS’s authority against adversaries capitalizing on the crisis. Treasury, which chairs CFIUS, has to date remained silent, but its interagency deliberations are sure to consider the implications of the coronavirus outbreak to U.S. national security. The European Commission has warned EU members of risks stemming from the acquisition of healthcare capacities and sale of critical assets as a consequence of the financial crisis. Australia and India have acted as well, to prevent fire sales of distressed assets and to curb opportunistic takeovers by Chinese companies.
CFIUS and other regimes serve important functions. They are designed to protect national security, including innovation and the supply of sensitive technologies and prevent their proliferation; maintain the integrity of critical infrastructure such as electrical grids, air and seaports, and hospitals; and protect the privacy of our citizens and their data.
But herein lies the rub. If not wielded in a targeted manner, these regimes can starve business innovation and impair resiliency. Where government efforts to prohibit or limit investment are done for economic, policy, or protectionist reasons, especially to protect national champions, they will be perceived as discriminatory and can invite or justify retaliatory or unilateral action by other countries. Screening regimes can impose compliance frameworks and supply requirements, carve out sensitive assets, or direct U.S. businesses to find domestic investors that do not present national security concerns. But they cannot implement new industrial policy: they cannot effectively maintain or protect supply chains, meet the capital needs of businesses, or provide loans. CFIUS needs help to protect U.S. national security in this pandemic.
Businesses will need cash and investors—to innovate and grow, support workers, business lines, and pay debts. This is especially true as they try to transform their business models and supply chains to respond to the pandemic. In order to avoid a great takeover, governments will need to take effective action to respond to the health crisis, stabilize the economy, and ramp up government aid that is targeted to support companies that are in dire financial straits and in a way that is designed to avoid insolvencies and hostile takeovers and complements CFIUS’s ongoing posture.
The CARES Act provides a great starting place. It allocates $17 billion for businesses critical to maintaining national security and billions more for small- and medium-sized businesses and states and localities. As Treasury implements these programs, it should work with CFIUS and its constituent agency members, like the Departments of Defense, Commerce, and Homeland Security, to identify companies or vulnerable sectors that present national security risks stemming from foreign investment.
Once identified, the federal government should provide funding through existing programs such as the DoD Trusted Foundry program. The administration will also need to identify ways to prevent exfiltration of emerging or critical technologies or assets that are for sale in restructurings and bankruptcy proceedings. Treasury already has the authority under FIRRMA to proactively identify M&A and investment targets. It can take a broader programmatic approach to identifying risks and providing support or advice to sustain these businesses through the crisis.