Washington’s executive branch interagency Committee on Foreign Investment in the U.S., “CFIUS”, the entity that oversees the country’s national economic security screening of inbound foreign direct investment is required by statute to submit to Congress and publish an annual report cataloging decisions it took the preceding calendar year.
Since the Committee’s operations are confidential, the published reports are pored over by companies, investors, policymakers, and other economic stakeholders both in the U.S. and abroad trying to glean insights from the treasure trove of data contained in the reports about Washington’s disposition toward foreign capital inflows.
CFIUS’ Annual Reports to Congress
The Committee’s recently released 2022 Annual Report to Congress is no exception.
However, as has been the case for previous reports, the data presented by CFIUS and the agency’s “analysis” of them provide scant economically meaningful financial information about the true nature of U.S. policy towards foreign direct investment, including how the regime has evolved over the years (since the report contains historical information), especially if it has become more restrictive.
Indeed, the report lacks credible data upon which investors make decisions. As such, it likely conveys a distorted and perhaps even an erroneous portrait of the stance of U.S. foreign investment policy.
In a very real sense even if CFIUS’ decisions amount to U.S. policy becoming more welcoming to foreign direct investment—whether in certain sectors or even writ large—the lack of clarity in policy per se as evidenced in CFIUS’ annual reports can amount to engendering a chilling effect.
CFIUS’ Decisions Are The Leading Edge of U.S. Foreign Investment Policy
The United States has long been the global champion for “open” inflows of foreign investment. Over the last two decades, however, amidst the intensification of national economic security threats from other nation-states—notably China and other authoritarian countries—and more recently following the enactment of the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), designed to help inoculate the country from these threats, the U.S. has shifted to a “conditionally open” foreign investment regulatory regime.
FIRRMA notably enhanced the power of CFIUS. Established in 1975, today CFIUS has become the envy of the world’s other major democracies also intent on mitigating national economic security threats. Several have established CFIUS-like bodies and have enacted laws and regulations to underpin their authority or are in the process of doing so.
Whether that envy is fully deserved, however, is an open question—literally. This is because most of the data submitted to CFIUS by the parties to the transactions it reviews are not publicly disclosed. This practice is driven by obvious proprietary, confidential, and financial security reasons.
Even taking into account such constraints, however, the annual reports CFIUS submits to Congress and publishes comprise “blinded” data that not only overly summarize the Committee’s decisions and other activities it undertook for the preceding calendar year, but actually serve to obfuscate generating clarity in U.S. policy toward foreign direct investment.
Number of Deals Reviewed Versus Transactions’ Financial Value
Most telling in this regard is the reports focus on CFIUS’s disposition by number of transactions it annually reviews—whether voluntarily submitted to CFIUS by the involved parties or proactively assessed by the Committee. Not surprisingly, such data do not contain information about the financial value of the transactions in question—suitably blinded. For example, what percentage of the total dollar value of inbound foreign direct investment in the U.S. was cleared? Blocked? Or subject to CFIUS mitigation measures?
By the same token, CFIUS does not provide an assessment of the nature of the risks it mitigated through its decisions, and perhaps even a rough monetary assessment of the risks averted.
The result? There is little information systematically available on which economically meaningful judgments can be made as to the risks CFIUS’ actions have mitigated; or conversely, to evaluate whether CFIUS’ actions mitigating or blocking a foreign investment have prevented the realization of otherwise additional value within the U.S. economy, such as the production of goods and services and/or the creation of new jobs, and if so, enable a determination of the scale and composition of such outcomes.
CFIUS’ tabulations of its actions by number of deals regardless of their financial value prevents economically meaningful assessments of:
· the extent to which CFIUS’ actions per se have been making U.S. policy toward foreign investment more stringent or less restrictive year to year;
· whether particular sectors in the U.S. have been easier or more difficult for foreign investors to participate, and if so, to what degree, on what basis, and an estimate of the relative magnitude of the value of national economic security risks mitigated;
· whether firms from various source countries versus others have had an easier or more difficult time entering the U.S. market in particular sectors; and
· the extent to which the U.S. foreign investment policy regime has become more or less inviting than those of competitor nations—presumably a key performance indicator for policymakers who believe cross-border capital investment is source of domestic economic growth.
CFIUS’ Key Highlights of Its 2022 Annual Report
Among the several headline findings highlighted by CFIUS in its the new annual report, two deserve attention as being problematic for interpretation owing to the paucity of causal explanation.
The first is that CFIUS indicates that in 2022 it “reviewed a record number of covered transactions,” where “covered” refers to transactions subject to assessment by the Committee as defined by U.S. foreign investment law and regulations. But was this “record” driven because the U.S. policy regime toward foreign investment has become more restrictive? Or more lenient?
Governmental entities charged with mitigating foreign investment risks may well have a natural inclination to tout the number of deals they had to review. Conversely, a “record” may have been set because the overall level of U.S. foreign direct investment inflows rose significantly. By the same token, was the record set due to a change in the sectoral composition of foreign investment toward more sensitive sectors?
CFIUS gives little, if any, insight on the answers to such questions. Yet they are fundamental in understanding what factors in the U.S. foreign investment policy framework are most potent in affecting foreign investors’ decisions on whether to deploy capital in the U.S. economy.
The second is that the annual report notes that “CFIUS continues to clear a majority—58 percent of distinct transactions.” Frankly, it is hard to determine the economic meaning of this figure and what it indicates about the nature of the judgments made by CFIUS and hence the stance of U.S. policy toward foreign direct investment.
Would the alternative but equally valid formulation—“42 percent of distinct transactions were not cleared”—convey a different message?
Regrettably, the Committee’s portrayal of these two statistics is not an academic matter. Like other economies, the U.S. competes with other countries to attract capital from abroad. You can be sure investors will struggle trying to decipher the value of this CFIUS report.
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