US National Security and Foreign Direct Investment

US National Security and Foreign Direct Investment By Edward M. Graham and David M. Marchick. 2006. Washington, DC: Institute for International Economics. Pp. 190, $23.95

It seems a lot longer than just a decade has passed since I studied, or more accurately sweated over, Edward (Monty) Graham's

The uproar over the Dubai Ports World P&O acquisition earlier this year demonstrated the intensity of American sentiment toward, or indeed against, FDI into the United States. Heightened consciousness post 9/11 and a growing awareness of the increasing strength of Asia, particularly China, have created a need for improved understanding of the link between national security and FDI.

The authors of this book trace America's concern over the kind, nature, and source of FDI in the United States back to the early 20th century when most FDI into the United States was greenfield1 in nature and the main concern "was that foreign-controlled operations might dominate U.S. markets for strategic products and services.... This was a relevant concern at a time when, in many sectors (e.g., chemicals in 1917), foreign firms held technologies that were not available to their U.S.-owned competitors."

Apathy describes America's feeling toward foreign investment "during the 1970s because, despite the fast growth of FDI into the United States, the percentage of U.S. business activity under foreign control remained quite low. Also, many large foreign investors had come to be recognized by Americans, and even accepted as household names. Many Americans likely did not recognize such names as Shell, Lever Brothers, and Philips Norelco as those of foreign-owned firms."

During the 1980s, as foreign investment increased worldwide, Americans became wary of FDI, especially Japanese investment in the United States, fearing it could diminish U.S. technological capabilities. "By the late 1980s, the extent of foreign ownership of U.S. business activity had grown to the point that it was much more visible than it had been in previous years. ...Japanese economic growth considerably outpaced that of the United States, which stoked U.S. anxieties that it might soon overtake the United States as the world's largest economy."

America's anxiety with foreign investment "waned during the early 1990s, as the rate of growth of FDI into the United States slowed and the economic growth of Japan came to a virtual halt."

Today, China's rapid economic growth and increasing military power is a catalyst for U.S. security concerns. 'This fear persists even though Chinese direct investment in the United States has been to date quite limited." The authors provide a brief history of China's position in international trade, describe how the national security concerns surrounding FDI from China are more complex than from most other nations, and discuss how the United States should deal with the unique national security issues surrounding Chinese investments.

Graham and Marchick believe that FDI, and especially FDI into the United States, is a good thing. The authors substantiate this position with an in-depth examination of industrial sector statistics, examples, and case study analysis.

But what I come away with after digesting this book is that, although security-related concerns over FDI in the United States have quite a long history in America, it is the perception of the competitive threat of foreign nations that really drives the pushback against FDI. According to the authors, "national security issues do not rise from increased levels of FDI generally, but rather when it comes from specific countries or companies that already raise concerns for the U.S. government."

The authors distinguish today's national security concerns from those that existed a century ago. The regulatory tools that have been enacted to restrict FDI and thereby protect America are detailed, including the 1988 Exon-Florio Amendment, which gives the U.S. president the authority to block a foreign acquisition of a U.S. entity if it is perceived to be a threat to U.S. national security upon review by the Committee on Foreign Investments in the United States (CFIUS). Graham and Marchick review current public policy and regulatory tools and suggest that amendments are required to: (1) ensure adequate foreign investment going forward especially pertinent given that the data suggest the United States will require even more foreign investment to service its burgeoning trade deficit; and (2) keep America safe. More specifically, the authors "believe that, proceeding on a transaction-by-transaction basis, CFIUS should focus solely on the incremental risk associated with particular investments."

Although I found some repetition and unnecessary cross referencing in this book, it is refreshingly devoid of politics and finger pointing. It is a thought-provoking and comprehensive discussion of foreign investment in the United States and the national security concerns that have been and are at the forefront of American politics.

US National Security and Foreign Direct Investment is timely, important and coherent. The language used is both coolly analytic and disconcertingly ardent when the authors discuss America's anxiety and uncertainty about foreign control of U.S. assets. "Active debate continues," they write, "over the role of foreign investment in the United States and its effect on U.S. national security, despite the relatively low level of foreign investment in the United States and notwithstanding strong empirical and anecdotal evidence that foreign investment benefits the U.S. economy, even in industries considered sensitive to national security." Hovering, like an eagle, over all their arguments is America's fear of a loss of power and control.