Tightening foreign investment screening undermines national security

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A century ago, in the wake of World War I, the U.S. Navy identified the most likely country to be our next adversary — a country that dominated global shipping, communications, and aviation industries. In response, Congress adopted foreign investment limitations in those sectors to protect U.S. national security. 

The adversary that threatened the United States? The United Kingdom.

In the 1980s, investment from Japan led members of Congress to take sledgehammers to Japanese electronic equipment on U.S. Capitol grounds and, again, to pass new foreign investment restrictions.

Fortunately, the impulse to use investment restrictions to solve every national security concern has not prevailed. With most U.S. administrations espousing an “open investment” policy that welcomes foreign investors, the United States is the largest recipient of investment from abroad. 

This ability to attract foreign investment strengthens the U.S. economy and its national security, helping to grow U.S. capabilities in areas such as semiconductor manufacturing, artificial intelligence, and quantum computing, all important security technologies. Some foreign companies even help to protect our borders — a U.S. subsidiary of the French company IDEMIA, for example, provides identity verification machines used in airport security screening lines.

Moves to restrict investment in an overly broad fashion, though, now threaten to undermine this comparative advantage. The Trump administration gave new authorities and resources to the Committee on Foreign Investment in the United States, and with these new powers — and dark government warnings about “adversarial capital” — the committee has become an impediment to investments from around the globe.

The United States should address national security threats from wherever they arise, including China, Iran and Russia — the brutal, illegal and unprovoked assault on Ukraine justifies every action taken against Russia — but requiring scrutiny of all foreign investment hurts the United States.

Tucked into the 4,000-page spending bill President Biden signed right before the new year is a requirement that the Treasury and Commerce departments consider establishing a program to screen outbound investments that trigger national security concerns. The Biden administration should return the investment screening committee to its more limited role that characterized administrations from Reagan through Obama, with a lean toward permitting foreign investment and consideration of the costs of deterring it. Thus far, though, the committee has continued the Trump-era trajectory of enhanced foreign investment screening, reducing the appeal of the United States as a global business and investment center — and undermining national security in the long run. 

The Trump-era screening rules do not designate specific technology or information that must be protected against theft or misuse. Other laws exist to criminalize intellectual property theft and control exports of sensitive technology. If those laws are under-enforced, then hiring hundreds more FBI agents to improve enforcement seems warranted. 

The new investment screening rules instead create broad uncertainty about which investments are proper, with committee approval as the mechanism to resolve that uncertainty. Screening of foreign investors often is required even when the recipient companies and technology are of foreign origin. The new rules unnecessarily require lawyerly reviews of thousands of transactions each year, including from investors in Europe, Japan, and other close U.S. allies. 

These investment screening rules often keep talent and capital outside the United States, rather than protecting what is inside. Consider, for example, a German software company contemplating moving its headquarters to the United States. If that company anticipates relying on investments from around the globe, the costs and limitations of the screening rules might deter the relocation.    

The potential long-term consequences are worrisome. Talent is globally dispersed and technology has enabled collaboration to occur virtually everywhere. Investors find exciting business ideas wherever they originate. The share of venture capital dollars flowing to U.S. start-ups accordingly has fallen from over 80 percent to about 50 percent in less than two decades. Our economy benefits from the dynamism created by venture capital; we should want more, not less.

Fortunately, for companies founded abroad, there still are incentives to establish a U.S. footprint. America provides laws with predictable enforcement, deep pools of world-class talent and technology, and strong consumer demand. 

Rather than cultivating America’s ability to entice foreign investments and foreign companies, though, the U.S. government continues tightening foreign investment screening, weakening U.S. comparative advantages. It will be ironic and tragic if the next great semiconductor, artificial intelligence, or quantum computing companies — merely illustrative of technologies that can make significant contributions to national security — are deterred from growing roots in the United States because of tightened investment screening rules.

David Marchick is dean of the Kogod School of Business at American University and co-author of “U.S. National Security and Foreign Direct Investment.”

Stephen Heifetz is a Washington-based lawyer who advises on foreign investment rules and previously served as a foreign investment screening official under administrations of both political parties. 

The views expressed here are their own.