Strange as it may seem, as the Trump administration begins its first experience with a divided US Congress following the Democrats gaining significant control of the House of Representatives in the November 2018 elections.
There’s one policy area where a strong commonality of interests will emerge — toughing up restrictions on the acquisition of US businesses by foreign enterprises.
It’s hardly a secret that firms from abroad are clamouring to invest directly in US companies.
Historically, the US has had one of the most open policies toward foreign direct investment (FDI) — the ownership or control by a foreign entity of 10 per cent or more of a domestic enterprise. Indeed, FDI has played an increasingly important role in propelling US economic growth.
In absolute terms, the US is the world’s largest recipient of flows of FDI, and it has been so ever since 2006 (except for the brief 2010-14 period, when comparable inflows to China were slightly larger).
The shared concern of both the Trump White House and the Democratic House, however, is that an increasing number of these foreign investors are from nations where there is significant involvement in business decisions by governments whose agendas are perceived — indeed known — to go way beyond commercial objectives.
China, while hardly alone in not having effective separation between government and business, including in its FDI pursuits in the US, epitomises the case.
The understandable response by the US — as well as by other advanced countries, for example, Germany — is to intensify its scrutiny of the national security risks such inbound transactions might pose domestically, particularly in sectors considered sensitive. The US inter-agency body with the authority to make these national security assessments, The Committee on Foreign Investment in the US (CFIUS) — pronounced “syfius” — was established in 1975 by Executive Order by President Gerald Ford.
CFIUS is empowered to review acquisitions of US businesses by foreign persons — termed “covered transactions” — to evaluate whether foreign control of such businesses will have adverse impacts. If a covered transaction is not cleared by the committee, CFIUS has the authority to unwind the transaction or impose mitigation measures (such as divestiture) on the foreign buyer.
If members of CFIUS are unable to come to an agreement on these issues, the President can prohibit the consummation of the deal.
One of the most recent well-known cases of this sort was the blockage by President Trump of Broadcom’s purchase of Qualcomm in March 2018. Such high-profile actions suddenly moved CFIUS into news headlines. Before then, few people had ever heard of the agency and it was routinely referred to by reporters as a “secretive group” — frankly a far more provocative labelling than the reality.
With full disclosure, I sat on CFIUS during my time in the White House — in the 1990s. Occupying that position has given me a well-trained eye subsequently observing from the outside both how the CFIUS process has evolved and how it appears to operate today (with of course my not being privy to any inside knowledge of the body’s workings and deliberations whatsoever).
Notwithstanding my own experience, it should be abundantly clear to any observer of CFIUS’ track record over all these years, that like other countries’ inbound investment decision-making calculus, the organisation hardly operates in a domestic political vacuum. Such an environment almost always results in a tougher stance towards allowing foreign investors to operate as freely as they would if politics were out of the equation.
While one might wish that not to be so, that is the universal reality. This make all the more surprising the sometimes sheer naïveté of potential foreign investors pursuing deals in the US — not to mention that of the advisers inside the US from which they seek counsel — about how to proactively structure a winning approach to manage the CFIUS process.
Two recent events all but guarantee that increased politicisation and thus more restrictiveness towards inbound US FDI will be the case from here on out. The result is that more agility towards developing and executing a strategy for dealing with CFIUS will be required.
The Democrats regaining control of the House is the most visible of these events. Unless something drastically changes from the historical norm, the Democratic leadership of that body has rarely been the champion of a liberalised policy framework towards foreign investment — unless, of course, the investment in question takes place in the Representative’s home district.
The more important change, however, was the enactment in August 2018 by President Trump of The Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”). FIRRMA introduces the most significant changes into CFIUS’ mandates and procedures since its establishment.
The most important of these are: a greatly expanded scope of CFIUS to review transactions where foreigners have either controlling or non-controlling interests; the new law specifies 15 industries deemed to be related to “critical technologies”; and the criteria for investors to make mandatory filings with CFIUS are more expansive.
While FIRRMA will certainly make the US policy stance toward inbound foreign investment more restrictive, there is a silver lining: the law will result in a CFIUS that operates in a far more transparent fashion. Foreign investors should at least be thankful for that.
— Harry Broadman is CEO and Managing Partner of Proa Global Partners llc and a faculty member at Johns Hopkins University.