8 Keys to Developing an Effective Foreign Investment Review Mechanism


The level of foreign direct investment (FDI) in the United States is staggering. The Economic Administration Office reports total inflow of $4.34 trillion for 2018. More than half of the investments come from five countries: United Kingdom, Canada, Japan, Netherlands and Luxembourg. Two-thirds of total investments come from Europe. China accounts for only 1% of FDI, although the level tripled between 2015 and 2016. Foreign investment overwhelmingly went to the manufacturing sector (40%), followed by wholesale and retail trade (13%) and information technology (4%). While most investments are positive for the United States, some carry a security risk. The United States established the Committee on Foreign Investment in the United States (CFIUS) in 1975 to examine the security implications of foreign investment.

The European Union benefits from an even higher total FDI, some 5 trillion dollars per year. The European Parliament Remarks a radical change in the structure and source of FDI to the EU, with a six-fold increase in investment from China and the targeting of high-tech sectors by state-owned or state-affiliated companies. Last year, the European Parliament adopted the first EU-level tool to screen FDI for security, noting concerns over investments made by opaque, non-EU state-owned companies in critical sectors and technologies. The IDE screening feature has taken on increased importance in the wake of COVID19. The European Commission Posted further guidance, urging Member States to preserve critical EU businesses and assets, such as health, medical research, biotechnology and infrastructure critical to security and public order, without undermining the general opening of the EU to foreign investment.

the Intelligence-Security Parliamentary Forum (PI-SF) offers expert advice and policy recommendations to benefit the national security and technology markets. Founded by former Congressman Robert Pittenger, a recent PI-SF webinar”Foreign investments affecting national securityintroduced The Honorable Tom Feddo, Assistant Secretary of the Treasury for Investment Security, who oversees the Treasury’s foreign investment review process through CFIUS. Asst. Second. Feddo described the renewed CFIUS following its recent and extremely bipartisan reform in the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), sponsored by Mr. Pittenger in the House of Representatives and John Cornyn (R-TX) in the Senate.

Asst. Second. Feddo observed that foreign investment promotes economic growth, productivity, competitiveness and job creation, the benefits of which include more resources to be invested in national security. A well-resourced foreign investment review mechanism focused on national security is important for any country. FIRRMA legislation preserves open investing while modernizing processes. It extends jurisdiction to targeted areas and expedites the review of sensitive transactions. In the past, participation in CFIUS was largely voluntary. Now, certain types of transactions involve mandatory review, such as when a foreign government takes a major interest in a U.S. asset and when critical technologies are at stake. As I noted in my recent white paper co-authored with Mr Pittenger, The Growing Power of CFIUS to Protect American Security Against Chinese Tech Threats: A Review of TikTok and Lenovo”, FIRRMA now requires a review of the cybersecurity and personal data implications of foreign investments.

These informational risks are paramount in the current pandemic as Americans use information technology networks to work, learn, and receive health care online, a situation that strategic and adversarial competitors could exploit. Indeed, young American companies that are also struggling with the current financial crisis are the targets of malicious foreign investment.

Fortunately, CFIUS has risen to the national security challenge, with some 230 notices filed in 2018 and 2019. This has been bolstered by increased staffing and IT resources.

Asst. Second. Feddo outlined an important part of CFIUS’ mandate which is to work with allies, and International Engagement has a dedicated office within CFIUS. Over the past two years, CFIUS has interacted 250 times with some 50 peers around the world and shared best practices with many people. Indeed, investment security has its own track among the discussions of the G7 countries (in addition to the United States, Canada, France, Germany, Italy, Japan and the United Kingdom ). It is essential to protect economic security while promoting economic growth.

Asst. Second. describes eight keys to an effective foreign investment review mechanism. He noted that while different systems can achieve effective results and must operate within their own legal and regulatory constructs, there are common elements.

1. Priority to national security. The mechanism must have a single purpose, as the free flow of benign capital will be essential to the resumption of strong and sustainable economic growth worldwide.

2. Wide application. The mechanism should be broadly applicable and cross-sectoral. It should not be limited to defense applications. Indeed, business startups could be the key to a future military advantage.

3. Ability to identify and analyze appropriate transactions.

4. Authority to address national security risks of transactions, to mitigate or block them if necessary.

5. Ability to monitor and enforce conditions imposed on transactions.

6. Maintaining Confidentiality of Parties’ Sensitive Business Information. This ensures trust and transparency in the process.

7. Dedicated resources and personnel.

8. Adaptability to new environments and challenges

Asst. Second. Feddo noted that while different systems can work, they must be bound by the rule of law and have substantive measures.


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