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US NATIONAL SECURITY
AND FOREIGN DIRECT INVESTMENT
INSTITUTE FOR INTERNATIONAL ECONOMICS

US NATIONAL SECURITY
AND FOREIGN DIRECT INVESTMENT

E D W A R D M. G R A H A M AND D A V I D M. M A R C H I C K

Washington, DC
May 2006
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page iv

Edward M. Graham, senior fellow since C. Fred Bergsten, Director

1990, has been an adjunct professor at Valerie Norville, Director of Publications
Columbia University since 2002. He was and Web Development
associate professor in the Fuqua School of Edward Tureen, Director of Marketing
Business at Duke University (1988–90), asso-
ciate professor at the University of North Typesetting by BMWW
Carolina (1983–88), principal administrator Printing by United Book Press, Inc.
of the Planning and Evaluation Unit at the Cover photo: Getty Images
OECD (1981–82), international economist in
the Office of International Investment Copyright © 2006 by the Institute for
International Economics. All rights
Affairs at the US Treasury (1979–80), and
reserved. No part of this book may be
assistant professor at the Massachusetts
reproduced or utilized in any form or by
Institute of Technology (1974–78). He is the
any means, electronic or mechanical,
author, coauthor, or coeditor of numerous
including photocopying, recording, or by
studies, including Does Foreign Direct
information storage or retrieval system,
Investment Promote Development? (2005),
without permission from the Institute.
Fighting the Wrong Enemy: Antiglobal
Activists and Multinational Enterprises (2000), For reprints/permission to photocopy
Global Corporations and National Governments please contact the APS customer service
(1996), and Foreign Direct Investment in the department at Copyright Clearance Center,
United States (3d ed. 1995). Inc., 222 Rosewood Drive, Danvers, MA
01923; or email requests to:
David M. Marchick is a partner with [email protected]
Covington & Burling, where he advises US
and foreign companies on foreign invest- Printed in the United States of America
ment and international trade issues. He is 08 07 06 5 4 3 2 1
widely recognized as an expert on the
Exon-Florio Amendment. He served in the Library of Congress Cataloging-in-
State Department during the Clinton Publication Data
administration (1993–99) as deputy assis-
tant secretary of state for transportation Graham, Edward M. (Edward Montgomery),
affairs, deputy assistant secretary for trade 1944–
policy, and principal deputy assistant secre- National security and foreign direct
tary of commerce for trade development. investment / Edward M. Graham and
He also held trade policy positions David Marchick.
at the White House and the Office of the p. cm.
Includes bibliographical references and
US Trade Representative and is a senior
index.
adviser to Kissinger McLarty Associates.
ISBN 0-88132-391-8 (alk. paper)
978-0-88132-391-7
1. Investments, Foreign—United States—
INSTITUTE FOR
Political aspects. 2. National security—
INTERNATIONAL ECONOMICS United States. I. Marchick, David.
1750 Massachusetts Avenue, NW II. Title.
Washington, DC 20036-1903
(202) 328-9000 FAX: (202) 659-3225 HG4910.G745 2006
www.iie.com 332.67⬘30973—dc22 2006009285

The views expressed in this publication are those of the authors. This publication is
part of the overall program of the Institute, as endorsed by its Board of Directors, but
does not necessarily reflect the views of individual members of the Board or the
Advisory Committee.
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page v

To my wife, Kathryn,
and to all the nurses, physician assistants,
technicians, and physicians on the seventh floor
of Georgetown University Hospital
who ensured that this book would be finished
and that more could follow.

— EMG

To my wonderful wife, Pamela Kurland,

and my father, Richard Marchick,
who has inspired me since I was a child.

— DMM
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page vi
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page vii

Contents

Preface xi

Executive Summary xv

Acknowledgments xxv

1 Introduction 1
FDI in the Early 20th Century 2
Postwar Trends in FDI 18
The FDI Expansion of 1985–2003 21
The Impetus for This Book 28

2 The Exon-Florio Amendment 33

Overview of the Exon-Florio Amendment 34
Enactment of the Exon-Florio Amendment 40
The Meaning of “National Security” in Practice 53
Exon-Florio in the Post–September 11 Environment 58

3 The Economic Effects of Foreign Investment

in the United States 75
Importance of FDI to the US Economy 75
FDI’s Effects on US Workers 78
FDI and US Research and Development 84
FDI and Economic Growth 89
FDI and Spillovers 93

vii
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page viii

4 National Security Issues Related to Investments from China 95

China: A New Player in FDI 96
Unique National Security Issues Associated with
Chinese Investment 101
Chinese State Control of Corporations and the
Byrd Amendment 104
Export Controls 110
Espionage 112
Strengthening the Chinese Military 113
State Subsidies 115
Policy Implications for Future CFIUS Reviews
of Chinese Acquisitions 117

5 Politicization of the CFIUS Process 123

BTR-Norton and Global Crossing 124
ASML and Silicon Valley Group 124
VSNL and Tyco Global Network 127
CNOOC’s Proposed Acquisition of Unocal 128
The Dubai Ports World Controversy 136

6 Policy Recommendations: Improving the Implementation

of Exon-Florio 145
Covering Critical Infrastructure 148
Establishing Security Standards for Employment
of Nonnationals in Sensitive Positions 150
Enhancing Disclosure of Information to Congress 152
Improving and Clarifying the “Control” Standard 156
Developing International Standards for National Security
Review Processes 162
Rejecting Proposed Amendments 166
Conclusion 174
Appendix 6A US Critical Infrastructure Sectors 176

References 179
Index 185

Tables
Table 1.1 Worldwide reported inward FDI stock at end of year,
1985–2004 22
Table 1.2 Impact of multinationals on world product and trade,
1990 and 2003 25
Table 1.3 Extent of FDI in the United States, 2000 and 2003 26

viii
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page ix

Table 1.4 Value added by majority-owned affiliates of foreign

investors operating in the United States in major
manufacturing subsectors and by entire domestic
US subsector, 2003 27
Table 2.1 CFIUS notifications and investigations, 1988–2005 57
Table 3.1 Gross capital inflows into the United States, by type
of flow, 2005 77
Table 3.2a Workforce, wages, and salaries of workers by
manufacturing subsector, majority-owned affiliates
of foreign investors in the United States and entire
subsector, 2003 81
Table 3.2b Wages and salaries paid by majority-owned affiliates
of foreign firms operating in the United States
and average wages and salaries, selected
nonmanufacturing sectors, 2003 82
Table 3.2c Compensation per employee, by manufacturing
subsector, US parents of US-controlled multinational
firms versus majority-owned affiliates of foreign
investors operating in the United States, 2003 83
Table 3.3a R&D expenditures by majority-owned affiliates of
foreign investors in the United States, and by US
parents of US-based multinational firms, by sector
or subsector, 2003 85
Table 3.3b R&D expenditures by majority-owned affiliates of
foreign investors in the United States, and by US
parents of US-based multinational firms, by sector
or subsector, divided by value added, 2003 87
Table 3.3c R&D expenditures by majority-owned affiliates of
foreign investors in the United States and by
affiliates of US multinationals abroad, 2003 88
Table 3.4 Imports and exports of majority-owned affiliates
of foreign investors in the United States, 2003 92
Table 4.1 Outward and inward direct investment, China,
1997–2004 102
Table 4.2 Ten largest trading partners of the United States 103
Table 6A.1 US employment in critical infrastructure sectors
and employment by US affiliates of foreign
investors in these sectors, 2002 177

Figures
Figure 1.1 US outward and inward investment, 1976–2004 23
Figure 2.1 CFIUS process 36

ix
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page x

Boxes
Box 2.1 Members of CFIUS 35
Box 3.1 The macroeconomic basis for the US balance of
payments deficit on current account 76
Box 3.2 Selection bias in wage averaging and the distortions
it can create 80

x
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page xi

Preface

A perennial issue in US policy has been whether foreign ownership and

control of productive assets in the United States poses a risk to national
security. This issue first arose in 1914, the year World War I began in
Europe. New laws were passed, most notably the Trading with the
Enemy Act, giving the US government the right to effectively nationalize
foreign-controlled assets in times of national emergency. The immediate
issue was extensive control of US industry by German interests, especially
in chemicals, the high-tech sector of the day. During the early 1920s,
Congress passed a number of laws to shield other US sectors from foreign
control, notably broadcasting, telecommunications, aviation, and petro-
leum, where again the main issue was national security. The same issue
arose following the outbreak of World War II.
US economic predominance led to a fading of concern with foreign own-
ership during the 1950s and 1960s, but concerns reemerged following the
first oil crisis of 1973–74 and then again during the second oil crisis of 1979.
The specific issue at that time was rising investment in the United States
from the members of the Organization of Petroleum Exporting Countries
(OPEC). Because of these concerns, the interagency Committee on Foreign
Investment in the United States (CFIUS) was created by executive order in
1975, and the International Emergency Economic Powers Act (IEEPA) was
passed in 1977. I personally served as the second chairman of the CFIUS
during 1977–81 and led the administration team that worked out the IEEPA
legislation with Congress.
Concern with OPEC control of the US economy faded somewhat after
it became clear that most foreign direct investment (FDI) in the United
States came from Europe and Canada rather than from OPEC nations. But
rising FDI from Japan and other nations during the mid-1980s sparked
another round of concern. A number of measures to regulate or curtail this

xi
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page xii

investment were proposed, and a major outcome was passage of the Exon-
Florio Amendment to the Omnibus Trade and Competitiveness Act of 1988,
which enabled the president to block any foreign acquisition of a US firm
that impaired, or even threatened to impair, US national security. This book
is largely about the Exon-Florio Amendment, how it has been used, and
how it might be modified in light of recent concerns.
In 1988 the Institute for International Economics published a major
study of foreign investment in the United States by Edward M. Graham
and Paul Krugman entitled Foreign Direct Investment in the United States.
A second edition was released in 1992 and a third in 1994. This analysis
showed that, in terms of its economic effects, FDI was overwhelmingly
positive for the United States and that virtually none of the negative ef-
fects then being suggested could actually be observed. We believe that
this analysis contributed significantly to the debate on FDI at the time
and, in particular, that the strong findings of positive economic effects
helped to counter a number of proposals for regulation of such invest-
ment that would have proven counterproductive.
Since 2005 a new round of concern with the national security implica-
tions of FDI in the United States has taken hold. This round has largely
focused on investment from China, beginning with the takeover of the
personal computer operations of IBM by Chinese firm Lenovo and reach-
ing a crescendo with the (subsequently withdrawn) bid by the China
National Offshore Oil Corporation (CNOOC) to buy US oil firm Unocal.
The furor within Congress died down after CNOOC withdrew its offer
but then again reached fever pitch when the United Arab Emirates–based
Dubai Customs and Free Zone Corporation (Dubai Ports World) bought
the port operations of the UK-based Peninsular and Oriental Steam Nav-
igation Company (P&O), which would have given Dubai Ports World
control of operations at six US ports. Although this transaction easily
passed a CFIUS review, many members of Congress deemed the transac-
tion unacceptable. The upshot has been that Dubai Ports World agreed to
sell its interest in the six US ports, and a number of bills (at last count
about 20) have been introduced into Congress that would modify Exon-
Florio, the CFIUS process, or broader foreign investment laws.
This book is directed to this latest surge of concern over FDI in the
United States and its national security implications. It is coauthored by
Edward M. Graham, a senior fellow at the Institute and coauthor of our
previous study, and David Marchick, a partner in the law firm Covington
& Burling, who served as deputy assistant secretary of state for transpor-
tation affairs and for trade policy and worked on CFIUS issues. It exam-
ines FDI in the United States and the Exon-Florio law in the current policy
context of post–9/11, a worldwide “war on terrorism,” and new concerns
over the economic and political rise of China.
The book examines these issues in historical context and updates the
economic analysis contained in the earlier study by Graham and Krug-

xii
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page xiii

man. It includes a detailed legislative history of Exon-Florio, an analysis

of how it has been implemented, a chapter addressing the special con-
cerns being expressed over investment from China, a detailed examina-
tion of a number of Exon-Florio cases that have become politicized, and
the authors’ recommendations on how to, and how not to, “reform” Exon-
Florio and the CFIUS process.
The Institute for International Economics is a private, nonprofit institu-
tion for the study and discussion of international economic policy. Its pur-
pose is to analyze important issues in that area and to develop and com-
municate practical new approaches for dealing with them. The Institute is
completely nonpartisan.
The Institute is funded by a highly diversified group of philanthropic
foundations, private corporations, and interested individuals. Major insti-
tutional grants are now being received from the William M. Keck, Jr.
Foundation and the Starr Foundation. About 33 percent of the Institute’s
resources in our latest fiscal year were provided by contributors outside
the United States, including about 16 percent from Japan.
The Institute’s Board of Directors bears overall responsibilities for the
Institute and gives general guidance and approval to its research program,
including the identification of topics that are likely to become important
over the medium run (one to three years) and that should be addressed
by the Institute. The director, working closely with the staff and outside
Advisory Committee, is responsible for the development of particular
projects and makes the final decision to publish an individual study.
The Institute hopes that its studies and other activities will contribute
to building a stronger foundation for international economic policy around
the world. We invite readers of these publications to let us know how they
think we can best accomplish this objective.

C. Fred Bergsten
Director
April 2006

xiii
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page xiv

INSTITUTE FOR INTERNATIONAL ECONOMICS

1750 Massachusetts Avenue, NW, Washington, DC 20036-1903
(202) 328-9000 Fax: (202) 659-3225

*C. Fred Bergsten, Director

BOARD OF DIRECTORS ADVISORY COMMITTEE

*Peter G. Peterson, Chairman Richard N. Cooper, Chairman

*Reynold Levy, Chairman,
Executive Committee Isher Judge Ahluwalia
*George David, Vice Chairman Robert Baldwin
Barry P. Bosworth
Leszek Balcerowicz Menzie Chinn
Bill Bradley Susan M. Collins
The Lord Browne of Madingley Wendy Dobson
Chen Yuan Juergen B. Donges
*Jessica Einhorn Barry Eichengreen
Stanley Fischer Kristin Forbes
Jacob Frenkel Jeffrey A. Frankel
Maurice R. Greenberg Daniel Gros
*Carla A. Hills Stephan Haggard
Nobuyuki Idei David D. Hale
Karen Katen Gordon H. Hanson
W. M. Keck II Takatoshi Ito
Caio Koch-Weser John Jackson
Lee Kuan Yew Peter B. Kenen
Donald F. McHenry Anne O. Krueger
Mario Monti Paul R. Krugman
Minoru Murofushi Roger M. Kubarych
Hutham Olayan Jessica T. Mathews
Paul O’Neill Rachel McCulloch
David O’Reilly Thierry de Montbrial
*James W. Owens Sylvia Ostry
Frank H. Pearl Tommaso Padoa-Schioppa
*Joseph E. Robert, Jr. Raghuram Rajan
David Rockefeller Dani Rodrik
David M. Rubenstein Kenneth Rogoff
Renato Ruggiero Jeffrey D. Sachs
Edward W. Scott, Jr. Nicholas H.Stern
*Adam Solomon Joseph E. Stiglitz
Lawrence H. Summers William White
Jean Claude Trichet Alan Wm. Wolff
Laura D’Andrea Tyson Daniel Yergin
Paul A. Volcker
*Dennis Weatherstone
Edward E. Whitacre, Jr.
Marina v.N. Whitman
Ernesto Zedillo
Ex officio
*C. Fred Bergsten
Nancy Birdsall
Richard N. Cooper
Honorary Directors
Alan Greenspan
Frank E. Loy
George P. Shultz
Honorary Chairman,
Executive Committee
*Anthony M. Solomon *Member of the Executive Committee
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page xv

Executive Summary

Foreign acquisitions of American companies and assets have long been a

controversial and hotly debated subject in the United States. Americans
take pride in the words “made in America” and, to a lesser extent, “owned
by Americans.” A March 2006 poll by The Pew Research Center for the
People and the Press found that 53 percent of Americans believed that
foreign ownership of US companies was “bad for America.”1 Similarly, 58
percent agreed that Congress acted “appropriately” when it blocked the
acquisition of six US port terminal operations by Dubai Ports World, a
company owned by the government of the United Arab Emirates, in the
spring of 2006. The subject attracted intense interest far beyond Wash-
ington and New York elites: 41 percent of Americans said that they tracked
the Dubai Ports World transaction “closely,” only 2 percentage points
lower than interest in the war in Iraq (43 percent). The same poll showed
that the Dubai Ports World transaction ranked seventh among political
stories that generated the most news interest in the last two decades, just
below the 1996 federal government shutdown and the 1993 controversy
over whether to allow gays in the military.
It is partly encouraging that 53 percent of Americans believed that for-
eign ownership of US companies was “bad for America”: In 1989 that fig-
ure stood at 70 percent. The 1989 poll was taken at a time of great uncer-
tainty about the competitiveness of the US economy, at the height of US
concerns about mergers and acquisitions from Japan, and shortly after
Congress passed the Exon-Florio Amendment to the Defense Production
Act in the Omnibus Trade and Competitiveness Act of 1988. The Exon-

1. The Pew Research Center for the People and the Press, Survey Reports, March 15, 2006,
available at www.people-press.org.

xv
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page xvi

Florio Amendment gave the president broad powers to block a foreign ac-
quisition or takeover of a US company if that transaction threatened to
impair US national security. That amendment and the national security
implications of foreign direct investment (FDI) in the United States are
the subjects of this book.
Chapter 1 traces the history of the impact of FDI on the US economy
and the US reaction to FDI, particularly during World War I and II and in
the late 1980s, when Exon-Florio was enacted. FDI played a significant
role in the development of the US economy in the late 19th and early 20th
centuries, particularly in the chemical, radio broadcasting, telecommuni-
cations, and transport machinery sectors. FDI in the United States—most
of which was new, or “greenfield” investment, as opposed to an acquisi-
tion—grew to $7.1 billion by 1914. As the United States moved toward
entering the war, national security concerns arose about FDI, particularly
investment from Germany. These concerns led to the passage of the Trad-
ing with the Enemy Act (TWEA) in 1917, which authorized the president
to seize assets owned by foreign persons. President Woodrow Wilson in-
voked the TWEA in 1917 and 1918, seizing virtually all US assets owned
by German companies, as well as assets owned by US citizens of German
origin. The US government subsequently transferred or sold these assets,
including patents for chemical products, to US companies, such as Du-
Pont and General Electric. After World War I, Congress, encouraged by
the US Navy, passed sector-specific prohibitions on FDI in radio broad-
casting, telecommunications, air transport, shipping, and oil. Except for
FDI in telecommunications, which was liberalized in 1996, these laws re-
main on the books.
President Franklin Delano Roosevelt invoked the TWEA again in 1941,
though this time there were very few German assets to seize since Ger-
man investment in the United States after World War I was very little. The
low level of postwar German investment stemmed not only from the poor
health of the German economy but also from foreign investors’ lack of
confidence in US willingness to allow them to keep their holdings. Post-
war FDI in the United States grew modestly, to $2.5 billion in 1946, and in-
vestments flowed primarily from the United Kingdom and Canada. The
stock of US investment abroad stood at $7.2 billion in the same year.
By contrast, FDI in the United States grew quickly between 1956 and
1977, particularly as European economies rebounded. It grew even faster
in the late 1970s and 1980s, reflecting a worldwide trend. Between 1977
and 1984, FDI in the United States grew almost thrice as fast as US in-
vestment abroad. From 1985 to 2004, the stock of FDI in the United States
increased more than eightfold, from about $185 billion in 1985 to almost
$1.7 trillion at the end of 2005.
The specific security concerns over FDI in the United States have changed
since World War I. At that time the main concern was that foreign com-
panies would dominate new, strategically important technologies. This

xvi
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dominance was reflected in the fact that most FDI in the United States was
of a “greenfield” nature). But since then, US firms have come to be at the
cutting edge of such technologies. FDI thus has shifted away from green-
field investments and toward mergers and acquisitions, so that the mod-
ern concern is more acquisition by foreign firms of US-developed tech-
nologies than foreign-firm dominance of these technologies. Even so, in
all its forms, FDI has become critical to the vibrancy and vitality of the US
economy. Moreover, with rising levels of FDI in the United States have
come rising concerns over its national security implications.
In chapter 2, we analyze the legislative history that led to the adoption
and implemention of the Exon-Florio Amendment. As originally intro-
duced, the amendment would have allowed the president to block in-
vestments that affected not only US national security but also essential
commerce and economic welfare. The latter two provisions became the
focus of intense debate and brought a threat of veto by President Ronald
Reagan. President Reagan and Congress eventually agreed to narrow the
bill to allow the president to block a transaction only on “credible evi-
dence” that the foreign acquirer might take action that “threatens to im-
pair the national security” and only if no other provision of law allowed
the president to protect national interests. Congress did not define the
words “national security,” and the Committee on Foreign Investment in
the United States (CFIUS), the 12-agency body that reviews foreign in-
vestments, interprets this term as broadly as possible.
On multiple occasions, Congress has attempted to amend, broaden, and
deepen Exon-Florio. As we go to print, the Senate Banking Committee,
led by Senators Richard Shelby (R-AL) and Paul Sarbanes (D-MD), passed
a bill by a 20-0 vote that would require greater scrutiny of certain acquisi-
tions, lengthen reviews, and create much more congressional involve-
ment in and oversight of the CFIUS process. More than 20 similar bills
have been introduced in both the House and the Senate. These efforts mir-
ror many earlier attempts to amend Exon-Florio, although at the time of
this writing, it appears almost inevitable that Congress will pass legisla-
tion to amend Exon-Florio.
That Congress never defined “national security” has had important con-
sequences, particularly after the terrorist attacks of September 11, 2001.
Since then, and along with the addition of the Department of Homeland
Security to CFIUS, CFIUS has more heavily scrutinized foreign invest-
ments, imposed tougher requirements before approval, and enhanced
enforcement of security agreements negotiated through the Exon-Florio
process. Chapter 2 discusses the security agreements CFIUS used to miti-
gate national security concerns in the telecommunications and defense sec-
tors. These agreements have become increasingly intrusive and restrictive,
particularly in the telecommunications sector, and have evolved according
to CFIUS’s expanding view of national security. Today, CFIUS’s focus on
protecting “critical infrastructure” is a high priority.

xvii
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Chapter 3 examines the effects of FDI on the US economy—in particular,

on US workers, research and development (R&D), long-run US economic
growth, and positive or negative externalities or “spillovers.” The United
States depends heavily on continued inflows of FDI, because US savings,
net of the drain of public-sector deficits on these savings, are insufficient
to finance domestic investment. In 2005 the current account deficit was
slightly more than $800 billion and growing, implying that the United
States needed to import in excess of $2 billion each day to close the gap
between domestic investment and saving.
In 2003 US affiliates of foreign investors employed 5.3 million workers
in the United States. On average, particularly within major manufactur-
ing subsectors with significant numbers of foreign-controlled firms, US
affiliates of foreign firms pay higher annual wages and salaries than US
firms. Similarly, foreign-controlled firms employ at least 100,000 workers
in the United States in eight manufacturing subsectors; in seven out of
the eight, foreign firms pay more than the overall US average wage and
salary within those subsectors. There may be some selection bias in the
data, but while the extent of the wage differential can be debated, it is
clear that FDI creates desirable US jobs at higher-than-average wages.
Our analysis also shows that while US parents of US-based multina-
tional firms invest slightly more in R&D as a percentage of overall contri-
bution to US GDP than do US affiliates of foreign-owned firms, the differ-
ence is rather small. It is rather surprising that foreign investors’ R&D
spending as a percentage of value added approximates R&D spending by
the parents of US-based multinationals, given that most firms tend to con-
centrate their R&D activities close to their worldwide headquarters, typi-
cally located in a company’s home country. In some subsectors, including
computer manufacturing and communications equipment, affiliates of
foreign firms spend a greater portion of value added on R&D than US par-
ents do. While it is hard to pinpoint the precise impact of FDI on economic
growth, it is closely correlated with the amount of international trade, and
studies have clearly shown that increased international trade aids eco-
nomic growth. Microstudies also indicate that, in some sectors at least, FDI
has generated positive spillovers: For example, in the auto industry, rising
productivity and improved product quality both have almost surely been
stimulated by the greater competition in the United States created by the
local operations of foreign-owned automobile producers.
Chapter 4 discusses the national security implications of FDI from China,
which became an important issue in 2005 with the sale of IBM’s personal
computing division to Lenovo and the failed attempt by the China Na-
tional Offshore Oil Corporation to acquire Unocal. In less than 30 years,
China has transformed itself from one of the most isolated and autarkic
economies in the world to the second-largest recipient of FDI, but out-
ward investment flows from China remain small. China’s central govern-
ment, which controls significant parts of the Chinese economy, began en-

xviii
00--Front Matter--iv-xxvi 4/19/06 2:25 PM Page xix

couraging Chinese enterprises to invest abroad only less than five years
ago. Chinese outward investment is growing, reaching $44.8 billion in
2004, but it pales compared with the total stock of FDI in China, which
was $562 billion in the same year.
From a broad, strategic perspective, Chinese acquisitions present CFIUS
with different issues and concerns than do acquisitions by companies
of other major trading partners. Of the United States’ 10 largest trading
partners, China is the only one not considered a strategic or political ally.
Similarly, more than any other major trading or investment partner, the
Chinese government owns or controls most Chinese companies with the
resources and size to invest abroad. A recent study2 estimates that only
about 20 of approximately 1,300 publicly listed companies in China in 2004
were genuinely private; the rest were all ultimately controlled by the state.
A Chinese company seeking CFIUS approval will likely have a heavy bur-
den of convincing the committee that it is not government-controlled, and
under the Byrd Amendment to Exon-Florio, CFIUS can more closely scru-
tinize companies owned or controlled by foreign governments.
Other factors can also lead to extra scrutiny by CFIUS of Chinese invest-
ments in the United States. The possibility of sensitive, export-controlled
technology being transferred to other countries is a factor in virtually all
CFIUS reviews, regardless of the home country of the acquirer. It is a par-
ticular concern for acquisitions by Chinese companies largely because of a
series of high-profile breaches of US export control laws and regulations
by Chinese companies in the late 1990s and early 2000s. China’s espionage
activities have also become a concern and a higher priority at US counter-
intelligence agencies, including the Departments of Justice, Defense, and
Homeland Security, as well as the Federal Bureau of Investigation. So long
as the Pentagon views China suspiciously, CFIUS will likely assess Chi-
nese acquisitions of US companies in part by their impact on China’s mil-
itary strength.
Notwithstanding concerns associated with Chinese investment in the
United States, we believe that the Exon-Florio Amendment gives the pres-
ident and CFIUS ample authority and power to scrutinize investments and
mitigate national security concerns—and if such concerns cannot be miti-
gated, the president has ample authority to block individual transactions.
The United States should continue to support China’s integration into
the global economy, and Chinese outward foreign investment should be
viewed as a natural and positive step in China’s economic development.
For close to two decades, through Republican and Democratic administra-
tions, the United States has encouraged China to lower tariffs, eliminate
nontariff barriers to trade, privatize state-owned enterprises, allow inward
investment, and participate in—and play by the rules of—the global econ-

2. See testimony of Pieter Bottelier before the US-China Economic and Security Com-
mission, April 16, 2004.

xix
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