The political dimensions of foreign investments – Harry Broadman

Harry Broadman

Chinese investments into the US have increasingly gotten into the crosshairs of the CFIUS, the organization checking foreign investments into the US for security risks. Private equity investor and former CFIUS employee Harry Broadman tried to shed some light on this often murky process, and its political dimensions for Forbes.

Harry Broadman:

Notwithstanding my own experience, it should be abundantly clear from CFIUS’ public track record over all these years, that like other countries’ inbound investment decision-making calculus, the organization hardly operates in a domestic political vacuum. It may—though not always—be subject to various pressures both within the Executive Branch as well as from Capitol Hill. 

While one might wish that not to be the case, that is the universal reality. This make all the more surprising the sometimes-sheer naiveté of potential foreign investors pursuing deals in the U.S.—not to mention that of the advisors inside the U.S. from which they seek counsel—about how to structure a strategy to deal with the CFIUS process. 

The truth is that every economy in the world has a policy regime specifying in varying degrees the regulation of inflows of FDI. In statutory terms, the restrictiveness of U.S. regulation of FDI is about average for the 62 countries routinely assessed by the Organization of Economic Cooperation and Development (OECD)—the group of the world’s wealthiest countries. (The OECD’s assessment includes all of its 35-member countries, all the G20 countries, and a number of other countries that are less wealthy.) Moreover, as a matter of practice, there are exemptions granted by the U.S. from these formal regulations, particularly at the state level. 

That CFIUS decisions blocking or demanding the restructuring of inbound transactions—which are actually few in number—may be subject to political pressures, sometimes based on quite spurious reasons, as politicians the world over are wont to do, overall, U.S. regulatory constraints on inbound FDI are effectively benign. 

The most compelling proof of this are official data that the U.S. is the world’s largest recipient of FDI flows in absolute terms, and it has been so ever since 2006 (except for the brief 2010-2014 period, when comparable inflows to China were slightly larger). Some professional services firms like to cite their surveys of foreign business executives’ perceptions of the U.S. investment climate and aspirations for prospective transactions here—for which the U.S. is often ranked highest in the world—as evidence of the country’s hospitable environment. While such findings may be heart-warming, these measures are not data-driven. Their economic meaningfulness is not robust nor can they be used to make systematic cross-country comparisons. Perception indices are ‘old-school’. In a nutshell, they do not reflect investment decisions actually undertaken, which really is the only meaningful basis on which a country’s policy stance can be assessed and on which policy reforms should be formulated. 

Some readers will be surprised to learn that today U.S. inflows of FDI are the highest in the world, believing that China surely would have been a larger recipient. In 2016, China’s inflows of FDI were US$171 billion, while those of the U.S. were US$468 billion, about 2¾ times greater. It is true that China does take in a huge amount of foreign direct investment; it’s of course the largest nation in the world. Taking into account the relative sizes of countries would thus make sense in making such judgments. On this basis, FDI inflows in 2016 for China were US$97 per capita; for the U.S. they were US$1193 per capita. It is also the case that annual flows of FDI for any country can fluctuate greatly, especially for a year when one-time, large foreign acquisitions of domestic firms take place. For these reasons, cross-country comparisons are best made on the basis of cumulative inflows—or the ‘stock’—of FDI. In this context, as of year-end 2016, the stock of FDI per capita in the U.S. was US$19,491; in China it was $980.

The full story in Forbes, here republished with the kind permission of the author.

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