The U.S. Congress is currently considering legislation that would tap the brakes on foreign direct investment in the United States, particularly on investments in sensitive industries like artificial intelligence, robotics, and semiconductors. We know: you’re saying we already have that in the form of the Committee on Foreign Investment in the United States (known as CFIUS).
But now, just as we thought we were overdue for another mellifluous acronym from Washington, U.S. Rep. Robert Pettinger (R-NC) has introduced FIRRMA, the Foreign Investment Risk Review Modernization Act. Senator John Cornyn (R-TX) has introduced companion legislation in the Senate. The bill has been endorsed by U.S. Secretary of the Treasury Steven Mnuchin and Attorney General Jeff Sessions, among others.
The bill is one prominent response to U.S. government concerns that China is structuring its U.S. investments to avoid CFIUS oversight. The bill may create a special cause for worry in Silicon Valley: California is the number one destination for Chinese foreign direct investment, according to Forbes.
How to police (China’s) small bets on U.S. tech?
One stated purpose of the bill is that current law does not protect against small foreign investments that may result in foreign access to critical U.S. technologies. At its most basic level, the concern with foreign access to U.S. technology is real: all nations (including America’s foreign adversaries) are constantly looking for new technologies that will give them economic and military advantages. And some countries (such as China) have government-directed national industrial policies that emphasize acquisition of new foreign technologies. Moreover, China’s central policy goes even further, by requiring technology transfer from its own inbound foreign investors. Together, those policies essentially attempt to make technology transfer a one-way street into China.
Current U.S. law authorizes CFIUS (an interagency committee of the U.S. government, chaired by the Department of Treasury) to review foreign investments that may harm U.S. national security. That law also authorizes the President of the United States to suspend or unwind any transaction that is determined to pose a threat to U.S. national security, upon the recommendation of CFIUS. The problem, according to FIRRMA’s sponsors, is that the current law only authorizes CFIUS review if the investment results in foreign “control” of a U.S. business. Non-controlling minority investments and joint ventures are not covered. The concern is that small investments in the right kind of tech companies could allow China to fly in under the CFIUS radar and gain access to new technologies.
FIRRMA attempts to cure that flaw by adding non-controlling minority and joint venture investments to the types of deals CFIUS can review. But it is not clear whether that is the right answer, even assuming that the underlying premise (that a non-controlling investment today could give China control over the technology tomorrow) is correct. We haven’t run the numbers, but our informal survey suggests this small change could expand the number of deals subject to review by an order of magnitude. It’s unclear if CFIUS has the capability to find the needles in a haystack that big.
Missing the marks.
Aside from looking at the minority investment threat, the new bill spends most of the rest of its 97 pages fixing problems that don’t exist, according to witnesses testifying at a recent House hearing on the subject. For example, the bill authorizes review of investments in “critical technologies,” which is already well within the range of CFIUS’s authority: current law defines the scope of CFIUS review to include investments in “critical infrastructure.” This authority has already been applied to review dozens of deals in the semiconductor, telecommunications, scientific services, utilities, mining, and food sectors (even rejecting a recent Chinese investment in a payment processing company). FIRRMA also allows review of investments that would result in a foreign company owning land near U.S. strategic locations, but CFIUS already considers the location of facilities as a national security factor under current law (and CFIUS blocked a 2012 Chinese wind farm investment because of its proximity to U.S. strategic assets, and a 2015). In this way, most of the provisions of the new bill are dubious.
Additionally, the new bill would increase scrutiny for investments originating from any jurisdiction deemed to be a “country of special concern,” defined in the bill to mean “a country that poses a significant threat to the national security interests of the United States.” As a seller or promoter of investment shares, joint venture opportunities, or financing for a U.S. enterprise, it might be useful to know what countries the government thinks are of “special concern.” (For that matter, as a foreign investor, you may want to know if your country is “special” in this way). But you will search FIRRMA in vain for such a list. The bill deliberately declines to list the countries from which investments will receive such extra scrutiny. Moreover, the bill by its terms states that the new law “shall not be construed to require the Committee to maintain a list of countries of special concern.” This means either that CFIUS is supposed to know a concerning country when they see it, or to make a list of concerning countries and keep the list a secret. Either way, this provision is a classic recipe for arbitrary enforcement, not good for legitimate foreign investment.
Also in the category of dubious achievements, the bill would increase the initial review timeline from 30 days to 45 (and keep the additional 45 day “investigation” option open). That’s in addition to the two weeks CFIUS staff like to have to review the draft notification before the clock even starts. Imagine adding 100 days to your standard M&A timeline, and you’ll get an idea why this proposal has us a bit concerned. Clearly, the cost of foreign investment transactions would significantly increase. And naturally, there would be an incentive to shift the cost of the transaction to the investor. This would certainly tend to inhibit some investments.
One nice feature, unlikely to be implemented: a higher fence around fewer investments
The bill does have one great idea going for it: it would permit CFIUS to declare certain countries as exempt from CFIUS review; sort of the inverse of the dubious “country of special concern” concept. This idea is analogous to one of the central tenets of a very successful but somewhat different government reform effort, the President’s Export Control Reform initiative: build a higher fence around fewer assets. Factors for the Committee to consider in exempting certain countries from review include whether the country is a treaty ally of the United States, and whether the country’s own national security review process for inbound foreign investment is consistent with U.S. interests. But it is a little hard imagining CFIUS (or any government body, really) acting to decrease its own jurisdictional reach. This is true not least because all investments carry with them some risk, and CFIUS is not likely to affirmatively let more investments in without scrutiny. As one former CFIUS staff member told us years ago, “nobody ever got a medal for saying yes.”
As a whole, we’re not sure the security promise of FIRRMA is worth the increased layers of bureaucracy it portends. We’ll keep an eye on developments in the effort to reform CFIUS, and report here as events warrant.