For decades, official U.S. policy toward foreign direct investment was one of the most open in the world. With very few exceptions, most Presidents, often soon after they took occupancy of the Oval Office, issued formal statements proclaiming America welcomes foreign direct investment. The raison d’être underlying such proclamations was twofold: to assure investors abroad their capital was welcome in the U.S. and to declare that investment of foreign capital can boost the growth of the U.S. economy, create jobs for Americans and stimulate innovation on our shores.
The tenet underlying how such outcomes are engendered by U.S. receptivity to capital from abroad is that, in the aggregate, entry of foreign firms and inflows of other forms of cross-border investment can enhance competition among businesses operating in the U.S., which in turn can bolster the global competitiveness of the U.S. economy. Conversely, a national policy that shields U.S. markets by erecting high barriers to entry of foreign capital can jeopardize the ability of competitive forces to work, placing at risk economic growth, business ingenuity, and the dynamism of, and mobility within, U.S. labor markets.
We economists who focus on antitrust, foreign investment, and international technology flows fully understand these arguments. Indeed, inbound foreign direct investment can be seen as a “three-fer”: providing a source of growth capital, introducing new ways of commercially applying knowledge, and stimulating competitive forces in the way in which our domestic market operates.
It’s hardly a secret, however, that in the past two decades U.S. public policy towards foreign direct investment has been fundamentally altered. If the three legs of this stool were ever considered of equal importance—there is no reason to believe that is always the case or that it should be—clearly issues related to the cross-border technology flows embedded in foreign investment, especially their impacts on national security, have become more prominent.
This has been driven in large part — though not exclusively — by the significant rise of China, whose Communist-led, state-dominated economy is second in size only to the U.S., and has become the “world’s factory”. It is a well-deserved moniker, especially in light of the global supply chain disruptions emanating from China over the course of the COVID pandemic. But China’s role in this regard certainly predated the pandemic and remains so today.
The result is that while foreign investment writ large is still welcome in the U.S., it now depends more significantly than heretofore has been the case on what is the source country of such capital. The principle of foreign investment’s competition-inducing effects is still acknowledged. But of equal, if not greater, significance in certain camps in Washington are the risks to national security that the US may be exposed to from foreign investment from certain geographies. In essence, not all foreign direct investment is the same.
Symbolic of this shift is the fact that Barrack Obama was the last President to issue a formal statement on U.S. policy welcoming foreign investment — in 2011. While not issuing a similarly focused statement, in an Executive Order related to national security, President Biden did state an analogous position.
At the same time, as a result of Congress’s bipartisan passage of the Foreign Investment Risk Review Modernization Act (“FIRRMA”) in 2018, the authority of the executive branch’s interagency Committee on Foreign Investment in the United States (“CFIUS”) — the entity which reviews national security impacts of foreign investment — has been significantly enlarged. (For full disclosure, I was a member of CFIUS during my tenure in the White House a number of years ago.)
This stance is understandable. But U.S. policymakers, companies, and investors would do well to understand that the impacts of foreign direct investment on the national economy—whether from a national security or competition perspective—are neither static or instantaneous. To fully gauge the benefits and costs, a dynamic framework that assesses these impacts over time is necessary.
We are now in a world where U.S. pursuit of antitrust objectives through a policy of encouraging foreign direct investment is far more complex. On the one hand, public policy toward foreign direct investment increasingly must carefully balance significant tradeoffs: the potential benefits of greater competition with the heightened risks to national security.
On the other hand, Washington has been moving in a direction where such tradeoffs are seen as illusory: that is, some U.S. policy makers judge the loss of competition, itself, as constituting a threat to national security. In part, this was the case when Japan was in the sights of U.S. international economic policy in the 1980s as a result of Tokyo’s stance vis a vis the country’s electronic industry.
Today, however, Washington is dealing with a far more combustible mixture: unlike Japan, a liberal democracy, China is neither liberal nor a democracy. The challenge now before U.S. policy makers is thus how to deal with foreign direct investment from a country that is viewed as presenting a combination of threats to both U.S. competition and national security.
Assessment of Impacts on Competition
It’s helpful to first unbundle the effects of foreign direct investment on competition in the market from those on national security. Doing so requires an analytical framework that provides a decision-making calculus to maximize the chances of achieving a balance by distinguishing between new domestic entrants versus new foreign entrants as stimuli for U.S. competition. As in the case of new domestic investors in the U.S., the impact on market competition from foreign direct investment depends on the mode of entry.
All other things being equal, foreign direct investment that establishes wholly new business operations (whether on the supply- or buy-side of a market) is, with relatively few exceptions, pro-competitive. Investment from abroad, however, that takes the form of acquisition or merger of existing domestic firms could be competitively neutral—if it results solely in change of ownership—or serve to reduce competition—if the transaction reduces the number of independent suppliers or buyers.
Entry by Domestic Firms. Competition policy traditionally has taken a presumptive view that the entry of a new domestic seller or buyer into most product or service markets through greenfield investment in the U.S. is to be applauded. Strictly speaking, the presence of such additional suppliers or purchasers should enhance the degree of inter-firm competition, which, in turn, is expected to result in lower prices and broaden consumer choice. An important exception are markets that are generically characterized by large economies of scale and/or scope. In such sectors—such as utilities—entry and exit are generally subject to some form of government regulation.
The competitive effects of greenfield entry by domestic firms are also assumed to include the stimulation of product or process innovation in the marketplace. Indeed, one of the factors that often enables new domestic enterprises to enter markets successfully — even if they are small in scale relative to incumbents — is the competitive advantage they possess arising from innovation they’ve undertaken. Such dynamic effects on competition by small upstarts are, of course, pronounced in advanced technology industries.
It is a wholly different matter when entry by a domestic entity is not de novo, but rather takes the form of such a party (or parties) acquiring or merging with an established U.S. firm or a set of incumbent U.S. firms since the number of independent sellers or buyers in the market would be effectively reduced. Whether the result is an increase in the exercise of monopoly or monopsony power and/or a forestalling of innovation — and thus an erosion of economic welfare by consumers or buyers — is a matter of evidence-based judgments.
The principles and parameters that guide making such judgments by the U.S. antitrust authorities and courts stem from the nation’s antitrust statutes, especially Section 7 of the Clayton Act, which prohibits mergers and acquisitions when the effect “may be substantially to lessen competition, or to tend to create a monopoly,” as well as the Department of Justice’s and Federal Trade Commission’s “Merger Guidelines,” issued periodically under the authority of the Hart-Scott-Rodino Act. The Biden Administration recently proffered a revision of these merger guidelines with an eye towards adopting a more aggressive approach to restraining anticompetitive horizontal and vertical mergers and acquisitions.
Foreign Entrants. Assessing how entry by foreign firms affects the state of competition in a domestic market is more complex. It has long been a staple of empirical research by antitrust economists. With the risk of making sweeping generalizations, the bulk of such research points to the fact that the intangible asset of “foreignness” does play a role — sometimes a significant one — in the nature and magnitude of these impacts.
As one would expect, if entry by foreign firms is pursued through merger or acquisition of existing domestic businesses, those firms tend to be more sensitive to being exposed to the risk or uncertainty of host nations using antitrust policies to impede or retard entry than are domestic firms largely regardless of the sector in question. To state the obvious, on the margin, that dampens using that form of entry.
In contrast, in cases where foreign firms’ have pursued greenfield entry, historically challenges by domestic antitrust authorities are much less mixed. This is due to the fact that host country policymakers, all other things equal, place greater value on foreign investments that entail generating new productive capacity and jobs in local markets. In fact, like other countries, in the U.S., individual states compete with one another to offer tax credits and other benefits to attract greenfield foreign investment.
Reconciling Antitrust and National Security Impacts
While the policy tools at play assessing the economic welfare impacts of market entry matters were once the sole province of U.S. antitrust authorities — where the shades of “foreignness” were rarely decomposed based on nationality — that is no longer the case. CFIUS introduced gauging the effects on U.S. national security into the mix. Today, where foreign investments in the U.S. are concerned, the public policy assessments of such transactions are a product of the interaction between antitrust and national security policies.
Once a little-known agency, the authority of CFIUS, which dates back to 1975, underwent important embellishments with the enactment of the Exon-Florio Amendment in the Omnibus Trade Act of 1988, and even more so with the passage of FIRRMA.
CFIUS is chaired by the Treasury Department and its standing members include the other principal agencies involved in trade (Office of the U.S. Trade Representative), commerce (Department of Commerce), defense (Department of Defense), foreign policy (State Department) and science and technology matters (Office of Science and Technology Policy), as well as some sectoral agencies, such as the Department of Energy.
Importantly, the Justice Department is also a CFIUS standing member. This means the top U.S. federal Executive Branch line authority that oversees antitrust policy, as well as many other criminal matters, including foreign corruption, is present for all CFIUS deliberations.
Beyond the departments that are standing CFIUS members, depending on the specific transaction under review by the Committee, other agencies participate in its decisions on an as needed basis.
In light of the Justice Department having a seat at the table, some of the balancing between national security and antitrust will take place within the confines of CFIUS deliberations. However, importantly the current legal authority — FIRRMA — under which CFIUS operates and makes judgments about national security, including bringing to the President proposals to suspend or block a transaction if there is “credible evidence” that the transaction threatens to impair U.S. national security, does not explicitly specify assessing the impacts on competition in the U.S. economy.
By the same token, the statutes under which the Justice Department (and the Federal Trade Commission—Justice’s sister antitrust enforcer but an independent agency) are authorized to make decisions on antitrust policy do not specify that consideration of national security impacts are to be taken into account in coming to those judgments.
Yet at the heart of both the U.S. antitrust and national security regimes lies the criterion of “control.”
In the case of antitrust, essentially the fundamental operative question turns on the extent to which an entity (or entities) by dint of its (their) scale or other structural elements within the “relevant market” has sufficient control to engage (or have engaged) in anticompetitive conduct. While this tends to mean firms of large market share are viewed as posing greater risk to competitive behavior, antitrust concerns also can be voiced for smaller firms.
With respect to CFIUS’s judgements, control is considered in more expansive terms: its focus is primarily on the extent to which a prospective transaction (between a domestic and foreign entity(ies)) has the ability to function in such a way that elevates national security risks. In fact, under FIRRMA, even minority shareholders could be seen as having sufficient authority to cause such threats or conversely have enough rights to block actions that would otherwise forestall diminution of such threats.
What Might The Future Hold?
For some, the conclusion that might be drawn from the foregoing is that the U.S. regulatory framework governing the intersection of antitrust enforcement and national security policy needs to be overhauled. Given the Federal Government’s penchant for creating entities or passing new laws, that’s understandable.
As a former official in both the Executive and Legislative Branches, I’d resist the urge. While some clarifying amendments to existing statutes may be in order, and striking the proper balance can be tricky, Washington is not short on the requisite authority or professionals with deep expertise on the most salient issues currently at hand.
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