MysteriousFaith

Book Review: US National Security and Foreign Direct Investment

Among the most common metrics people point towards when arguing for the relative significance, vitality and legitimacy of any economy is its foreign direct investment (FDI). Over the last five years, within the US the discussion over FDI has taken on a profoundly different import than in the past, due largely to the aftermath of 9/11, and the increasing role of China as a competing alternative to FDI which would otherwise have made its way to the US. As the adage says, “no man is an island”; similarly, few growing economies are wholly self-sustaining, so awash in capital that FDI is un-necessary. Into the post-9/11 world of heightened scrutiny of FDI coming into the US, in conjunction with a global investment community still in the honeymooner’s stage of infatuation with FDI in China, and the first signs that China may be a source of FDI for the US, step Graham and Marchick in their new book US National Security and Foreign Direct Investment.

Deliberately using Lenovo’s attempt to acquire the US laptop assets of IBM and the Congressionally blocked effort by the Dubai Ports World to purchase several US port terminals as examples, the authors are able to illustrate how a reactionary use of the Exon-Florio Amendment (which provides for presidential powers to block acquisitions of US assets deemed contrary to national security) could be potentially damaging to the US. Pulsing beneath the authors’ comprehensive and detailed analysis of the reciprocal flow of FDI between the US and China is a cautionary tale about the destructive role politics could have on national economic policy, specifically our engagement with China, if we adopt a one-dimensional position regarding China’s attempt to put FDI back into the US.
The authors’ perspective will be discouraging to those more hawkish American policy makers who believe that Chinese FDI into the US should be largely limited due to an overpowering worry that if FDI were accommodated, America would begin the slippery slope of ceding superiority and autonomy to a country whose political ideas are still very different from our own. In anticipation of these criticisms, the authors propose detailed changes to the oversight which comes from the Committee on Foreign Investment in the United States (CFIUS). The authors’ proposed changes are specifically focused on mechanisms that will discourage politicizing FDI analysis, instead exposing the proposed FDI to pre-established standards which are easily articulated and reasonable.

While the book’s authors are very much in favor of welcoming Chinese FDI, the book does a good job of candidly presenting why FDI from China into the US is potentially problematic: citing Pieter Bottelier’s testimony from the US-China Economic and Security Commission, the authors remind the readers 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.” (Page xix). This statistic takes on additional significance when we appreciate that China, for all its positive changes and adaptation towards free-market initiatives, is still a Communist country. The authors, whose recommendation is very much to encourage Chinese FDI in China and to view such engagement as one of the primary mechanisms that will subtly change China’s leadership and political construct more efficaciously than most other policies, do acknowledge that the US must be aware of the possibility that a Chinese State-Owned-Entity (SOE) may look to acquire a US company because in doing so, the Chinese government can access technology it requires for its own national security agenda. Rather than allow this possibility to cripple US willingness to accept FDI from China, the authors propose a means of managing the necessary internal questions US policymakers must ask with a realism that encourages engagement and receptiveness with China.

Policy scholars will undoubtedly dissect this book for its recommendations on how to compose a consistent policy regarding FDI from Chinese companies into the US, and it should be said that the book succeeds at articulating such a policy. For the business person picking this book up in an attempt to learn more about China’s flow of FDI into the US, the book has several benefits, not least of which is re-energizing our thoughts about the over-arching trajectory of the Chinese economy and the implications to American business strategy.

For too long, the business community has seen China either as a source for low-cost exports or the most lucrative un-developed domestic economy the world has to offer. While neither is wrong, to be successful China’s business will have to mature, and in the act of maturing challenge many US firms on ground once thought impenetrable. This book is just one part of the more complex set of questions which are evolving and must be understood regarding how China’s regional champions are re-vamping their strategies and looking for more mature mechanisms for accessing North American markets. To the extent a discussion over Chinese FDI into the US serves the purposes of stimulating such a discussion, this book becomes more than an analysis of policy and suggests business people working in China would do well to anticipate a more assertive Chinese business climate, one no longer content to be separated by several layers between their manufacturing capacities and the export markets they service.

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• January 29, 2007

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