We Need the Money! Don’t Politicize Foreign Investment

by on February 29, 2008 · 2 comments

There’s a lot of hoopla surrounding Bain Capital’s buyout of beleaguered 3Com Corporation, due to the fact that one of the buyers is Huawei, a company from China. Or “communist China” (gasp!) according to today’s press release from Rep. McCotter:

News circulated today Bain Capital and communist China’s Huawei plan to resubmit an application seeking U.S. approval for a planned buyout of American 3Com Corporation within the next several weeks. Congressman Thaddeus McCotter (R-MI) made the following comments on the possible new merger:

“No business can sufficiently structure such deals to protect America from this stealth assault on America’s national security.  It is the solemn duty of the United States government to protect our liberty from all threats; and CFIUS must again do its job and reject this latest threat to our cyber-security.”

It’s nice that members of Congress are looking after our national security, but they don’t have to when it comes to foreign direct investment. We have CIFIUS. And in a paper I co-authored with my colleague Nora von Ingersleben, we assert that when CIFIUS gets politicized, American innovation will suffer.

Of course it’s understandable that there will be some transactions involving foreign firms that can raise legitimate security concerns. To make sure that no foreign investments posing a threat to national security would be allowed, the President in 1975 established the Committee on Foreign Investment in the United States (CFIUS). In 1988, CFIUS was tasked with determining whether particular foreign acquisitions of U.S. companies have national security issues sufficient to warrant a review and to undertake an investigation, if necessary, under the Exon-Florio provision.

Significantly, the CFIUS process was a way to provide nonpartisan and depoliticized assessments of the impact that certain foreign acquisitions of U.S. companies would have on national security. Yet in July 2007, Congress passed the Foreign Investment and National Security Act of 2007, amending the CFIUS review procedure in a way that offers more avenues for political wrangling. The Act’s reforms of the CFIUS review process include enhanced congressional reporting requirements. The Act also established stricter, more formal review procedures, such as a full 45-day national security investigation whenever a transaction involves a foreign government-controlled buyer or whenever a transaction would result in unmitigated foreign control of critical infrastructure.

Reform of the CFIUS process – and the increased politicization that goes hand-in-hand with it – happened even though there is evidence that CFIUS has handled its tasks in a responsible and efficient manner in the past.

The reality is that our economy needs the cash, so we should be careful to not dissuade foreign direct investment. FDI has a positive effect on jobs and wages in the U.S., it is an essential source of capital for innovative SMEs in the technology sector, and it allows smaller firms to internationalize and capture opportunities in foreign markets.

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